Head of Equity Strategy
Summary: In today's equity update we focus on equities in September and what might be coming. We remain negative and believe the rate cuts that are coming will be interpreted as signs of weakness and a potential recession is coming. In equity futures the DAX futures look interesting today with an attempt for the second day to push through the 11,850 resistance level. But in all fairness how much risk is traders willing to take going into a potential volatile Trump tweeting weekend?
Global equities are down 2.5% in August as volatility picked up and US-China trade war worsened with the prospects of more tariffs both ways. In addition, macro fundamentals continued to worsen, and the US yield curve inverted on the 2-10Y spread highlighting that a recession is brewing if the bond market is right. Yesterday’s rally in equities is not something we buy into as the flurry of events dictate a more defensive approach. We expect equities to come under pressure in September as central banks will deliver more easing, but it will eventually be viewed as weakness compared to initial positive reaction.
Our main point is simply that it’s the US-China trade war which is the catalyst in the macro fundamentals and that it cannot be modelled. Dynamics change from recession to recession. This means that when the Fed’s models are picking up enough weakness to warrant rate cuts it could already be too late. That’s why rate cuts typically precede recessions because the Fed is behind the curve in the last stage of the cycle.
DAX opens above resistance level
Investors are buying into the trade war optimism theme although if one looks through the Chinese press little optimism around US trade war is evident. But DAX futures (FDXc1) are a high beta to the global economy and trade war. The 11,850 level in the DAX index is a major resistance level and DAX futures pushed through it yesterday but ended the session below it. However, this morning it opened above it in a signal of strength. If DAX futures cannot push above this level before the weekend it’s a strong sign that investors are nervous and don’t want to put too much risk on the books heading into the weekend.
Watch software and media
As we alluded to yesterday in our equity update S&P 500 profit growth is holding up well at around 5% y/y. Diving below the surface we see the source for strength. The two largest segments in terms of market capitalization are Software & Services and Media & Entertainment. These two industry groups alone are 21% of S&P 500. As the chart shows, profit growth in those two industry groups has not suffered yet from the trade war and thus holding up US equity indices. We urge investors to closely watch companies such as Microsoft (MSFT:xnas) , Facebook (FB:xnas)and Alphabet (GOOGL:xnas) for clues of where this market is going.
Stocks to watch
Very little action in individual stocks as we head into the weekend. The most positive news sentiment is around Dell Technologies (DELL:xnys) that raised its FY profit forecast after strong quarterly result. The new strategy at Dell seems to be paying off as the results look very strong compared to competitors such as HP Enterprise and NetApp. One of the key drivers of performance was the upgrade cycle in Windows 10 driving demand for hardware upgrades by customers. The company’s recent acquisition of VMware also helped on top line growth. Sell-side analysts are extremely positive on the stock with a consensus price target of $63 per share compared to yesterday’s close of $46.77. According to our 13-F scanner Dell Technologies is not a crowded trade with very few hedge funds owning the shares.
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
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
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
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
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
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
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
