Out of the race
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
The week in review
Last week saw a stark contrast between US small-cap and equal-weight indexes on the one hand and generic stock indexes on the other. Seen as especially well placed to benefit from falling inflation and upcoming Fed rate cuts, the small-cap Russell 2000i rose 1.7% on the week (in USD), whereas the less cyclical Nasdaqii declined 3.65%. The rotation to small caps and cyclicals hurt the relative performance of ‘Magnificent Seven’ stocks, resulting in a fall of 1.95% for the S&P 500iii. This rotation comes in the midst of the Q2 reporting season, expected to show a broadening out of earnings growth beyond Big Tech. Stock indexes outside the US were generally on the back foot last week, with the Stoxx Europe 600iv down 2.7% (in euros) and MSCI EM Indexv down 2.95% (in USD). In US Treasuries, the so-called ‘Trump trade’ led to a rise in yields, particularly on the long end of the curve. The Trump trade also resulted in a rise in the USD index, although the yen continued its comeback against the US dollar as a Bank of Japan rate decision later this month looms closer.
Elections
Joe Biden quit the US presidential race and endorsed his vice president, Kamala Harris, who is now the likely Democrat nominee. If she runs or is on the ticket, the campaign funds raised so far by Biden will be available.
Key Data
US industrial production climbed 0.6% in June from the previous month (down from 0.9% in May) and was 1.6% higher than the year before. June retail sales in the US were basically unchanged from May. Over Q2 as a whole, retail sales were 2.5% higher than in Q2 23.
Industrial production in China rose 5.3% year on year in June, down from 5.6% in May, while retail sales were up 2.0% y/y in June, well down from 3.7% in May. Elsewhere in Asia, Japan’s headline consumer price index (CPI) was at an annual rate of 2.8% in June, unchanged from May.
Industrial production in the euro area declined by 0.6% y/y in May. In the UK, CPI remained on target at an annual 2% in June, unchanged from May, and buoyed by the ‘Taylor Swift effect’ pushing up hotel prices.
Market View
Last week’s major outage in IT systems weighed on tech sector sentiment, with semiconductors also hurt by Republican presidential candidate Donald Trump’s intention to tighten up chip deliveries to China. We prefer semis with higher exposure to AI as AI demand remains strong. PCE price data this week should confirm the decline in US inflation.
Strong retail sales – particularly online – suggest Q2 GDP, also due this week, is solid. We expect the Fed’s first rate cut in September. In Europe, we see two more ECB cuts this year, in September and December.
In fresh signs M&A activity is alive, one ‘Magnificent Seven’ company is looking to buy a stake in an eyewear maker to develop smart glasses and another is in talks to buy a cyber security start-up – all against the backdrop of a market enjoying its longest run without a 2% correction since 2007.
In politics, the leader of the powerful Teamsters union crossed partisan lines to address the Republican National Convention. A Republican sweep is our most likely scenario for the US elections in November.
The ‘Trump trade’
Donald Trump’s campaign has been gaining momentum, fuelled by his surviving an assassination attempt and the Republican convention in Milwaukee. The ‘Trump trade’ hinges on the idea that a Trump win in November combined with Republican control of Congress will lead to higher long-term interest rates due to Trump’s fiscal and trade policies. However, Joe Biden’s decision not to seek re-election and to endorse Kamala Harris in his place raises questions over the future of this trade, with investors now having to consider the market implications of a potential Democratic comeback.
