Head of Equity Strategy
Summary: S&P 500 was down 5.9% yesterday as the VIX Index exploded above 40 in its biggest daily jump since 16 March. Many explanations have been given but many factors likely contributed and created the right feedback loop. However, the lesson learned yesterday is that the rally the past 10 weeks have not alleviated fragility in financial markets and that sharp declines can come out of the blue. We also touch in today's equity note on earnings from Lululemon and Adobe.
Yesterday’s session was an interesting one for many reasons. S&P 500 was down 5.9%, the VIX Index exploded higher to 40 and US small caps were down 8.2%. Many explanations were given from retail traders getting hit on their margin positions, to the Fed’s dim outlook presented the day before the selloff and uncertainty over a second wave of COVID-19 in the US. Maybe the selloff was a mixture of it all, but the lesson learned here is that this market will continue to be volatile and tight risk controls are important for traders. We have likely hit the ceiling for now and from here on it will be more wobbling as the Q2 earnings releases hit the market in a month’s time. It was also
Regular readers will know we have often highlighted the 22 level in the VIX which is generally in the industry to be the long-term equilibrium in the term structure. In other words, this is the threshold where the market flips from being bullish (positive returns and low volatility) to bearish (negative returns and high volatility). The VIX Index broke above 22 on 24 February and has stayed above this level ever since. While the US equity market recovered the losses from February and March the implied volatility market never really gave investors the signal that the bear market was over.
With the VIX Index settling above 40 yesterday the bears have got new ammunition and the market will stay fragile over the summer with high volatility as the Q2 earnings releases will reveal the damage of the corporate sector. But maybe even more importantly a potential outlook so investors are not flying blind any longer.
Outside yesterday’s carnage in US equities we got terrible earnings from Lululemon which was hit hard in the previous quarter from closed stores. Despite e-commerce sales grew 125% in April it was not enough to avoid revenue declining 17% y/y for the quarter. Adobe on the other hand showed the market why it’s a darling of Wall Street beating earnings estimates and delivering on revenue growth as its pure digital offering was immune to the global lockdowns due to COVID-19. IPOs and other deals have accelerated from March lows in tandem with rising equity sentiment and Palantir just announced that it’s filing for IPO next week. This is one of the most anticipated IPOs as the company is perceived as being the frontier in terms of big data analytics on the application side.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
