Market weakness continued for a second consecutive week as major indices sold off from their mid-July peaks, with the NASDAQ posting a 9% drawdown – primarily on the back of a lack of incremental capex increases from major tech stocks like Tesla and Google. Falling expectations of a China rebound and a series of weak results by major luxury stocks like Louis Vuitton and Kering also exacerbated the worries for a spillover of the weakness into the broader macro landscape. Meanwhile, the sudden rise in the yen reignited fears of widespread liquidations from the carry trade unwinding.
Putting the recent draw down into context, the median Nasdaq drawn down is c.16%, pointing to further risks of a last capitulation leg down as retail remains in a “buy the dip” mode. This is reflected in renewed retail fund flows into US Equities last week. Meanwhile, long-only funds continue derisking consensus trade positions, lagging the derisking from hedge funds that preceded the market sell off. Following the July OPEX expiry and the recent sell off, gamma has dropped significantly from its peak of c.USD15bn+ to roughly USD2bn and although not yet in negative territory, we expect it to contribute to elevated volatility in the short term. Prior to the sell off, gamma was negative below 5500 for the S&P 500, but has now rolled down to below the 5200. While volatility has spiked, with the VIX surpassing the 18-mark, downside protection as measured by the SDEX remains relatively subdued, and below the Middle East escalation sell off in mid-April.
Looking ahead, this week is one of the most important weeks of the summer as we have a series of central-bank meetings, macroeconomic data releases, earnings and resurfacing geopolitical risks. Roughly 35% of the S&P 500 reports results this week, with four of the MAG 7 stocks reporting 2Q24 earnings and, although one can argue that weak earnings could be potentially already priced in, risks remain should earnings miss materially. As mentioned in our note Optimistic expectations ahead of the US 2Qearnings season, analysts have set a high bar to beat, where we have seen several stocks selling off post results as the lack of raised guidance fails to please the market.
On the economic side, the Fed (31 July), the BOJ (31 July) and the BOE (1 August) meet for decisions of monetary policy and although no rate cuts are expected as early as July for the Fed, the market is pricing in a full Fed rate cut in September, while the BOE is expected to cut rates by 25bp to 5% on Thursday. Following the recent weakness of the yen, the market will also focus on the BoJ, where risks of a rate hike and a reduction in bond buying to strengthen the yen are elevated. Key US economic data are JOLTS (30 July), the ISM manufacturing (1 August), and US jobs data on Friday (2 August), following signs that the US labour market is weakening. Other economic data during the week are the German/French/Italian Q2 GDP (30 July), Eurozone July CPI (31 July) and China PMIs (30 July).
Although the market appears to be rebounding from the recent sell off, given the week’s heavy tech news flow, the significant reduction in market gamma, and risks resurfacing in the Middle East, we maintain our Sep24 440 Puts on the QQQ recommendation.