August 5, 2024August 5, 2024 by The Daily Shot Editor: Lev Borodovsky

Risk off

The Daily Shot: 05-Aug-24
• Equities
• Credit
• Rates
• Energy
• Commodities
• Cryptocurrency
• Emerging Markets
• China
• Asia-Pacific
• Japan
• Europe
• The Eurozone
• The United States
• Global Developments
• Food for Thought

Equities

1. The market selloff accelerated on Monday morning after Friday’s weak US jobs report reignited recession concerns.

• The Nasdaq 100 futures dropped deep into correction territory.

• The Russell 2000 futures have surrendered their recent gains, experiencing their largest decline over the past three days since the COVID shock.

• VIX futures surged above 30, …

… as the VIX curve moved deep into backwardation.

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2. Options volume hit a new high last week.

3. The 2-day decline (through Friday) in cyclicals vs. defensives hasn’t been this severe in years.

4. Goldman’s sentiment indicator has remained bullish …

Source: Goldman Sachs; @MikeZaccardi

… amid strong fund inflows.

Source: Goldman Sachs; @WallStJesus

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5. The stock/bond correlation has weakened.

Source: @TheTerminal, Bloomberg Finance L.P.

6. Earnings beats have been rewarded in the current earnings season.

Source: BofA Global Research; @AyeshaTariq

However, the market response has been uneven across sectors.

Source: Goldman Sachs; @MikeZaccardi

Moreover, market responses to earnings reports have been volatile.

Source: Goldman Sachs

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7. Hedge funds have been trimming their balance sheets.

Source: Morgan Stanley Research; @dailychartbook

8. Berkshire has been building cash positions amid lofty valuations.

Source: @financialtimes Read full article

9. Next, we have some performance data from last week.

• Sectors:

• Equity factors:

• Macro basket pairs’ relative performance:

• Thematic ETFs:

• Largest US tech firms:

Credit

1. Credit spreads surged on Friday as the weak US jobs report prompted investors to reduce exposure.

2. Index CDS volumes jumped.

Source: @markets Read full article

3. Last week’s credit asset performance got a boost from Treasuries even as spreads widened.

Rates

Trend indicators for the 10-year Treasury yield have deteriorated after breaking below the 4% level. (2 charts)

Source: SentimenTrader

Energy

1. Brent crude dipped to the lowest level since January amid demand concerns.

• Hedge funds have been increasingly bearish.

Source: @markets Read full article

• Speculative bets against gasoline futures hit the highest level since 2010.

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2. Here is a look at US coal shipments.

Source: @EIAgov Read full article

Commodities

1. Hedge funds have turned bearish on commodities.

Source: @markets Read full article

Here is Bloomberg’s broad commodity index.

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2. The selloff in copper has resumed amid risk-off sentiment.

3. The sell-off in spot corn futures is approaching long-term support.

Source: @mantini_r

4. The correlation between agricultural commodities and the S&P 500 has declined significantly over the past year. Generally, commodities have offered diversification benefits during times of rising stock/bond correlations.

Source: Koyfin Read full article

5. Speculative accounts’ bets against cotton futures reached a new record.

6. Here is last week’s performance.

Cryptocurrency

Bitcoin is down sharply, dipping below its 200-day moving average.

Here is last week’s performance.

Emerging Markets

1. EM currencies are down as risk-off sentiment sets in. Here is the Mexican peso (USD/MXN).

• Mexico’s private consumption appears to have peaked for now.

• Mexican remittances hit a record high.

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2. Next, we have some updates on Brazil.

• Industrial production climbed in June.

• Vehicle sales are nearing record highs.

• The unemployment rate continues to trend lower.

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3. Colombia’s central bank delivered another 50 bps rate cut last week.

4. Leading indicators point to an earnings rebound for EM companies.

Source: Oxford Economics

5. Next, we have some performance data from last week.

• Currencies:

• Bond yields:

• Equity ETFs:

China

1. Bond yields continue to sink.

2. The services PMI from S&P Global held in growth territory but was lower than expected.

3. China’s economic imbalances persist.

Source: Reuters Read full article

Asia-Pacific

1. Asian shares are tumbling. Here is KOSPI.

2. Singapore’s business activity has been accelerating.

3. Australia’s inflation tracker dipped below 3%.

• The Aussie dollar has fallen sharply amid risk-off sentiment.

Japan

1. Japan’s stocks registered their largest one-day decline since 1987.

Implied vol surged.

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2. JGB yields tumbled.

3. The yen continues to rally.

4. The number of foreign residents in Japan has been on the rise.

Source: Semafor

Europe

1. The Swiss franc has been rallying as traders bid up safe-haven assets.

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2. GRANOLAS, a group of 11 high-flying European stocks, account for nearly a quarter of the continent’s market cap.

Source: Alpine Macro

3. Here is a look at debt-to-GDP ratios across the EU.

Source: Eurostat Read full article

The Eurozone

1. French and Italian industrial production improved in June.

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2. Italian retail sales are down year-over-year.

3. Germany’s economy has been underperforming in the post-COVID era.

Source: @DanielKral1, @OxfordEconomics

4. A 1% US growth decline could create a substantial drag on the euro-area GDP.

Source: BofA Global Research; @AyeshaTariq

The United States

1. The July US jobs report surprised to the downside, raising concerns of a potential recession.

Here are the contributions to employment growth.

Source: @TheTerminal, Bloomberg Finance L.P.

– This chart shows the US employment diffusion index.

– Some of the weakness was due to seasonal adjustments. Here is a quote from Scotiabank Economics.

If instead of using the BLS SA factor for July 2024 that generated this morning’s +114k print we were to apply the average SA factor for months of July up to and including 2019 before the pandemic struck the next year, then this July’s nonfarm payrolls would have been up by about 200k instead of 114k.

Source: Scotiabank Economics

– Hurricane Beryl also contributed to the weak payroll numbers (2 charts).

Source: Oxford Economics

• The unemployment rate jumped, …

… boosted by temporary (Beryl-related) layoffs as well as more workers entering/re-entering the labor force.

Source: @TheTerminal, Bloomberg Finance L.P.

– The unemployment rate is approaching NAIRU, suggesting that the Fed should be cutting rates.

– The Sahm Rule was triggered after Friday’s jobs report, indicating rising recession risks. However, there is some debate that the rapid increase in the labor force (workers entering or re-entering the workforce) may be overstating the rising unemployment rate, potentially dampening recessionary signals (2 charts).

Source: Deutsche Bank Research

Source: Barron’s Read full article

• What happens after the Sahm Rule is triggered?

Source: Pantheon Macroeconomics

• Prime-age labor force participation surged, adding to the unemployment rate.

Source: @TheTerminal, Bloomberg Finance L.P.

• Wage growth continues to slow.

• Several indicators beyond the headline figures signal a softening labor market.

– Hours worked:

Source: Scotiabank Economics

– Long-term unemployment:

– Multiple jobholders:

– Part-time work for economic reasons:

– Temp help services:

We will have more on the employment report later this week.

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2. Goldman raised the risk of recession after the jobs report.

Source: Goldman Sachs; @MikeZaccardi

Source: @economics Read full article

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3. Bond yields tumbled, with substantial declines continuing into this morning.

• Mortgage rates are sharply lower.

Source: Mortgage News Daily

• The yield curve inversion is about to end.

• The dollar took a hit in response to the employment report.

• Market-based inflation expectations declined.

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4. The market is pricing in almost five 25 bps rate cuts this year.

• Here are the CME market-based probabilities for the fed funds target rate by the end of the year (the last panel is as of Friday).

• September and November increasingly appear likely to see 50 bps rate reductions.

Global Developments

1. Markets are pricing in additional rate cuts across most advanced economies for this year.

Source: Truist Advisory Services

2. Next, we have some performance data from last week.

• Currencies:

• Bond yields:

• Equities:

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Food for Thought

1. Global Big Mac prices compared to the US:

Source: Visual Capitalist Read full article

2. Importance of leisure in life across different countries:

Source: Our World in Data

3. Projected increase in elderly dependency ratios and economic benefits from AI:

Source: Capital Economics

4. Population pyramids for China, India, and the US.

Source: @WSJ Read full article

5. Malaria-related fatalities:

Source: Our World in Data

6. Highest-paid world leaders:

Source: Visual Capitalist Read full article

7. All-time gold medal counts in the Summer Olympics by country:

Source: Visual Capitalist Read full article

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