SUMMARY
As the financial markets were melting down on Monday, I would not have believed it possible that we would end the week virtually flat in equities. Monday was dire:
US stocks got hammered,
the VIX reached 65.7 intraday, and
the Nikkei 225 closed down 12.4% on the day.
Even though the S&P 500 ended the week at nearly the same level as the week before, it was an amazingly stressful week with gobs of volatility that kept investors on the edge of their seats. Looking back, it felt like investors were panicking on Monday even though there was no compelling evidence that anything sinister was on the horizon.
What caused the sudden shift in risk sentiment? Aside from growing fears of a US recession and mixed tech earnings, a stronger Yen on Monday led to a technical unwind of carry trades that battered not only Japanese equities, but also equity markets globally. US Treasuries remained in demand to start the week, as a feared US recession suddenly became the mainstream narrative and investors moved into Treasuries.
Investors came to their senses starting on Tuesday for three reasons:
Economic data was suggesting a gradually slowing US economy, but nowhere near an imminent recession (supported by data releases during the week, including ISM services PMI on Tuesday and first-time jobless claims on Thursday),
Fed officials, along with other prominent market commentators and “smart money” investors, did not seem phased, although scrolling through X and other social media sources, one could have thought differently, and
The Bank of Japan effectively capitulated, with the BoJ deputy governor saying on Wednesday that the BoJ would not increase interest rates or – more broadly – tighten monetary policy so long as markets were unstable. This caused the Yen to (re)weaken, perhaps taking pressure off what was perhaps the largest culprit to start with – the unwind of carry trades.
Equity markets were highly volatile following Monday’s sell off but recovered much of the losses experienced during Monday’s meltdown (and the run in), with the Nikkei 225 ending the week down a mere 2.5% and the S&P 500 ending the week flat. European bourses also clawed back their losses.
The auction of $42 billion of 10-year US Treasuries on Wednesday went poorly, a needed reminder that investors are not willing to pile indiscriminately into the so-called “recession trade” wrapped around lower yields. The 10y UST yield, which closed at 3.78% on Monday, was 18bps higher two days later.
Once credit spreads settled down following the BoJ comments mid-week, corporate issuers rushed to issue USD-denominated debt. 17 investment grade rated issuers issued $31.8 billion of new corporate bonds on Wednesday according to an article on Bloomberg, including META Platforms which issued a $10.5 bln 5-part offering (including a 40-year tranche). Having said this, I also read in the #FT that there were sharp outflows from high yield ETFs during the week (FT subscribers can read here “US junk loan funds suffer biggest outflows in 4 years”).
Mag 7: is this a buying opportunity?
“The bigger they are, the harder they fall”, and the Mag 7 and many other tech stocks have been getting hammered since early July. The reason in retrospect is rather simple: Mag 7 stocks had reached difficult-to-support valuations that required more-than-robust second quarter earnings to support their hefty prices. For various reasons – in spite of exceptional YoY performance (aside from TSLA) – top- and bottom-line growth was very good across the board. But it was not good enough. I published metrics on X mid-week on the Mag 7, and will update these shortly. You can draw your own conclusions, but my view is that with the exception of TSLA and the consumer-sensitive segments of sales of some of the Mag 7 companies (which varies company to company), these stocks remain defensive plays. I like MSFT the best.
Weight-loss players: LLY and NVO
Both Novo Nordisk (NVO) and Eli Lilly (LLY), the two leaders in weight-loss drugs, reported earnings last week with mixed results. NVO released their earnings on Wednesday, and delivered strong trends on an absolute basis with sales +24% and EPS +17% (YoY). However, the growth fell short of consensus analysts’ expectations, and the shares fell 8.4% on the day. LLY, on the other hand, served up very strong results the following day that exceeded analysts’ expectations, and the company also raised its guidance. Investors in LLY loved the results, pushing the shares up 9.5% on Thursday following the earnings release (and even more on Friday). The enthusiasm of LLY as far as its global outlook for weight-loss drugs fortunately then pulled NVO back up. After the dust settled, LLY ended +11% WoW, and NVO ended 4.7% WoW. Similar to the Mag 7 table I published last week on X, you can see these two players compared below.
LLY looks very expensive on a forward P/E basis, but its PEG is reasonable suggesting it will live up to the hype (not unlike NVDA). There is also a good podcast on weight-loss drugs you can check out on Bloomberg Big Take which I believe is available on Spotify and similar streaming services: “Ozempictown, USA isn’t where you think it is.”
MARKETS LAST WEEK
Global equities were highly volatile, with the table below hardly capturing the volatility experienced intraweek. Japanese equities were the most volatile by a wide margin, declining by 12.4% on Monday before increasing by 10.2% the following day.
US equities were also volatile as concerns of a pending US economic slowdown took centre stage. However, several economic data points soothed markets the rest of the week, with the S&P index ending the week flat and the other US indices down only modestly.
US Treasury bonds were also highly volatile, increasing sharply in price at the end of the week before last, but then selling off last week as the recovery in risk assets took hold, and the panic subsided.
Corporate credit spreads gapped wider along with risk assets, then tightened from Tuesday onwards (albeit still well off of late July lows), sparking huge new issue volumes.
The Yen strengthened and the Dollar was more or less flat on the week. Both gold and oil were higher, the latter sharply higher as concerns about a broader Middle East conflict persist. Bitcoin had a wild week last week, too, falling below $50,000 intraday on Monday before clawing back most of its losses by the end of the week.
WHAT’S AHEAD
Given mixed economic news out of the US the last two weeks, there will be a lot of attention this coming week on US PPI and CPI for July, which will be released on Tuesday and Wednesday, respectively. We also get UK July CPI and retail sales next week. 2Q2024 GDP will also be released for the UK, the Eurozone and Japan. On Friday, we get consumer sentiment in the US, along with the all-important US retail sales figure for July. This cycle of earnings is largely complete now, with another nine companies reporting earnings this coming week. You can find the earnings summary for the most recent week from #LSEG I/B/E/S here.
MY TRADES LAST WEEK
I added scraps of ASML and MSFT on Tuesday morning, small bite sizes but reflecting my view that things would normalise (which they subsequently did). In retrospect of course, I wish I had added more risk but I am well long equities as always.
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