Weekly Market Recap: July 15-19, 2024
KEY THINGS TO KNOW:
US Equities This week, US equities declined, largely due to underperformance in the semiconductor sector. Small-cap stocks followed the broader market trend, dipping after a mid-week rally. Volatility in equities reached a three-month high, and the 10-year yield saw a slight increase.
China Chinese policymakers discussed economic aid plans during the Third Plenum this week. However, markets reacted negatively due to the lack of detailed execution plans and a significant miss in Q2 GDP. The slowdown in GDP was attributed to a decline in retail sales and a continued contraction in the housing market.
Trump As the probability of a Trump victory increases, markets are focusing on the macroeconomic implications of his proposed policies. A Republican win is projected to strengthen the dollar, raise yields, and slightly boost equities. Conversely, a Democratic win is expected to weaken the dollar, increase yields, and modestly lower equities.
Fed Economic data this week showed continued demand resilience, aligning with the Fed's criteria for potential rate cuts. Fed officials also noted that Q2 inflation data aligns with the disinflation trend they are targeting.
KEY INSIGHTS FROM THE INSTITUTIONS:
Equity Markets
Morgan Stanley: Highlights the importance of profit margins in driving earnings growth amidst low trading volumes and weak pricing power. Small-cap stocks are encountering difficulties due to high financing costs and limited scalability. Margins might stabilize if rate cuts boost small-cap performance.
UBS: Points to the pullback in US equities being driven by tighter restrictions on China's access to semiconductor technology. Advises diversifying exposure across the tech supply chain to manage specific risks.
Fixed Income
Standard Chartered: Recommends a tactical buy on Euro government bonds with currency hedging, expecting yield premiums between German and French government bonds to narrow due to a stabilizing political environment in France and low likelihood of short-term rating downgrades.
Morgan Stanley: Despite the extended period of yield curve inversion, the anticipated rate cut cycle should encourage curve steepening. Suggests balancing duration exposure.
Economic Outlook
J.P. Morgan: Foresees a decline in consumer spending due to income inequality, with wealthier households increasing investments in financial products. This trend could explain the equity rally in the first half of the year despite reduced spending.
UBS: Cautions about potential volatility in currency and local equity markets if voters gravitate towards extreme political parties, which could increase risks of higher inflation, taxes, and interest rates.
More About US Market:
This week saw significant shifts in the US equity markets. The NASDAQ fell nearly 4%, breaking a six-week winning streak as major technology stocks declined for the second consecutive week. The S&P 500 experienced a smaller decline of around 2%, while the Dow Jones Industrial Average gained nearly 1%. A notable market rotation was observed, with a US small-cap stock benchmark outperforming for the second week in a row, achieving a 1.7% total return. In contrast, large-cap counterparts fell by 1.8%. The Russell 2000 Index surged 7.7% over two weeks, highlighting a shift towards segments expected to benefit from potential interest-rate cuts.
US large-cap value stocks continued to outpace growth stocks for the second consecutive week, further eroding the growth style's year-to-date performance lead. Over the past two weeks, the value benchmark rose by 3.5%, while the growth benchmark declined by 4.3%. The quarterly earnings season saw heightened expectations, with analysts now forecasting a 9.7% average earnings increase for S&P 500 companies in Q2 compared to a year earlier, up from a 9.1% growth projection the previous week, according to FactSet.
The week also brought increased volatility, with the Cboe Volatility Index rising 32% to its highest level in nearly three months, reflecting heightened investor expectations for short-term US stock market volatility. Mixed economic signals emerged as US retail sales in June remained unchanged from the previous month, surpassing economists' expectations of a 0.4% decline. However, initial unemployment claims rose to 243,000, matching a recent high from August 2023.
In Europe, the European Central Bank maintained its key interest rate, following an initial rate cut last month. This decision widened the policy gap with the US Federal Reserve, which has yet to lower its key lending rate from its currently high level. Looking ahead, the US government's initial Q2 GDP estimate, scheduled for release on Thursday, is expected to show accelerated economic growth compared to Q1's 1.4% annual rate. A midweek estimate by US Federal Reserve economists projected a 2.7% growth rate for Q2.
CRYPTO MARKET:
Week in Review
Former President Trump survived an assassination attempt at a Pennsylvania rally, which resulted in the death of an audience member and the shooter, a local 20-year-old. In the crypto market, Bitcoin sentiment plunged to “extreme fear” as BTC struggled to break upper resistance. Meanwhile, the US House failed to overturn President Biden’s veto on SEC crypto guidance, and a JPMorgan report predicted a crypto market rebound in August after liquidations conclude in July. The UK Labour Party's victory renewed hopes for the crypto market, with promises to position the UK as a leader in tokenization. Messari CEO Ryan Selkis declared "independence from the SEC and its corrupt chair Gary Gensler" in a bold open letter. Additionally, the German government reportedly sold its final Bitcoin holdings, and the Supreme Court ended the Paxos investigation, opting not to pursue enforcement action.
In broader economic news, US inflation fell to 3%, marking the slowest pace in a year, with Fed Chair Powell noting that the US labor market is balanced. The UK economy showed growth of 0.4% in May, doubling expectations and reflecting a stronger-than-anticipated economic performance.
Technicals & Macro
BTCUSD: A combination of factors led to a favorable market move for BTC. The failed Trump assassination attempt, which is seen as bolstering his candidacy, might spur a longer-term risk rally. With around 50 million crypto holders in the US, many of whom are swing voters, Trump's promises to pardon Ross Ulbricht and support the crypto industry are significant. Key resistance levels to watch are 66,000, with potential for a break higher barring a major retail sales surprise.
Key levels: 53,000 / 59,000 / 66,000 / 72,000 / 73,130 (ATH!)
ETHUSD: ETH mirrored BTC's positive momentum, rebounding from support levels and breaking through trendline resistance, now targeting 3,350 resistance. Despite some volatility ahead, ETH remains bullish. The anticipated ETH ETF approval could drive further gains.
Key levels: 2,700 / 3,350 / 3,600 / 4,000
Spot Desk: BTC regained the crucial 60,000 level, leading to a broader crypto market upturn, with most top 100 coins recording substantial gains. USDT traded above parity for most of the week. The desk observed balanced flows across stablecoins, with a slight buying bias towards BTC and ETH. There was a decrease in BTC and ETH volume compared to last week, with clients trading altcoins like BNB, SOL, and MPC.
Derivatives Desk: With ETH ETF approval likely, there’s a clear preference for ETH volatility over BTC, with ATM implied volatility spread near yearly highs. While approval might boost short-term volatility, a repricing is expected. Ethereum discount notes could be attractive, offering potential high returns on a moderate rally.
Key Events to Watch:
- Empire State manufacturing index and Fed Chair Powell’s speech at the Economic Club of Washington DC, on Monday.
- Canada’s yearly CPI and US monthly retail sales, on Tuesday.
- UK’s yearly CPI and Australia’s employment data, on Wednesday.
- UK’s claimant count change, EU’s monetary policy statement and ECB press conference, US unemployment claims, on Thursday.
- UK’s monthly retail sales, on Friday.
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