“R” for rotation
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
The week in review
Continuing a recent trend, US small caps and cyclical sectors outperformed large-cap indexes and noncyclical stocks last week. Thus, the Russell 2000i returned 3.5% (in USD), in sharp contrast with the Nasdaq’s -2.1% ii. With the Q2 reporting season in high gear, lacklustre results from a couple of the ‘Magnificent Seven’ names weighed on the S&P 500iii, with the index returning -0.9% (in USD) over the week. Equity volatility remained considerably higher than just a couple of months ago. Unexpected cuts to interest rates in China underlined the country’s continued economic challenges and failed to prevent the MSCI Chinaiv from reporting a -2.3% fall on the week (in USD). Japan’s TOPIXv dropped a notable 5.6% (in yen), in part due to the yen’s rebound as yen-funded carry trade strategies were unwound. With a possible rate hike from the Bank of Japan this week, the yen surged 2.5% against the USD. Ramped-up bets on Fed rate cuts meant that the inversion of the US Treasury yield curve continued to unwind. While the Fed is unlikely to cut rates this week, there are even odds of a Bank of England cut.
Elections
In the first week of her White House bid, Vice President Kamala Harris raised USD200 m, energising Democrats. In Venezuela, the election authority declared incumbent Nicolas Maduro winner of Sunday’s presidential vote.
Key Data
Flash readings for S&P Global purchasing managing indexes (PMI) for July pointed to a listless euro area economy. The composite PMI for the euro area dropped to 50.1 from 5o.9 in June, only slightly above the 50 mark that separates expansion from contraction.
S&P Global’s flash composite for the US rose to 55.0 in July from 54.8 in June. The first estimate for Q2 GDP growth in the US accelerated to an annual 2.8% from 1.4% in Q1, with business investment rising 5.2%. The Fed’s favourite inflation gauge, the personal consumer expenditure index dropped to an annual rate of 2.5% in June from 2.6% in May.
Consumer prices excluding fresh food rose at an annual 2.2% in the Tokyo region in July, up from 2.1% in June, the third consecutive month that core CPI increased. But ‘new core’ inflation moderated to 1.5% from 1.8%.
Market View
In the week that the Olympic Games opened, with breakdancing as a new category, data showed the US economy put in a stellar performance in Q2. This week, we expect the Fed to set the scene for its first rate cut in September, with GDP growth set to moderate in H2 to a below-trend pace.
A rocket attack from Lebanon into Israeli-occupied territory served as a reminder of heightened geopolitical risks. Rail sabotage in France and a tech meltdown caused by a single software update enhanced the risk picture. We like gold as a hedge against geopolitical risk.
In markets, weak results in the luxury, autos and airlines sectors reinforce our theme of moving focus from consumers to producers. A Japanese carmaker’s plan to buy back USD5.2 bn worth of its stock to unwind cross shareholdings chimes with our buyback theme in Japan. We are overweight Japanese equities. More broadly, for the rotation into small caps to persist, there needs to be upward earnings revisions, lower rates and decent growth.
