The Overnight Report: Tech Out, Value In

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World Overnight
SPI Overnight	7865.00	+ 33.00	0.42%
S&P ASX 200	7861.20	– 102.50	– 1.29%
S&P500	5399.22	– 27.91	– 0.51%
Nasdaq Comp	17181.72	– 160.69	– 0.93%
DJIA	39935.07	+ 81.20	0.20%
S&P500 VIX	18.46	+ 0.42	2.33%
US 10-year yield	4.26	– 0.03	– 0.70%
USD Index	104.39	+ 0.06	0.06%
FTSE100	8186.35	+ 32.66	0.40%
DAX30	18298.72	– 88.74	– 0.48%

By Chris Weston, Head of Research, Pepperstone

Good morning.

US data was skewed on the risk-positive side with Q2 GDP seen at 2.8% and smashing expectations by 80bp, while US weekly jobless claims fell to 235k. Offsetting this on the more bearish side (for risk) was a -6.6% drop in US durable goods, and a higher core PCE price index QoQ at 2.9%, higher than the 2.7% economist consensus.

It’s hard to say the data had any meaningful effect on cross-market movement, as the tape we saw across the market was whippy, to say the least the change in flows meant traders had reacted dynamically and aggressively to intraday swings and reversals. Volatility (vol) can be a welcomed development for many trading strategies, but changes in vol and intraday movement mean evolving one’s time in the market, as it does with one’s approach to risk and position size.

In US equity, the S&P500 initially traded lower in US cash trade, pulling to 5390, where it was looking like we could see another trend day lower and a full bearish tape. However, the buyers stepped in hard, and pushed equity higher, with the index peaking at 5491 a full 100-point high-low range is the third largest of the year, so one would assume that liquidity conditions are changing, although, we’re not seeing that in S&P500 futures bid-offer spread, which remains tight.

The buy-the-dip crowd were momentarily back, and certainly this is true in small caps, where the Russell 2k closed +1.3%. Any positivity at an index level in the S&P500 and NAS100 soon soured though, and the flows turned more towards the sell side, with equity and index implied volatility picking up, with traders using the move higher for exit liquidity and selling into the move for a reversal lower into the close.

Again, consumer services and tech equity names received the lion’s share of attention, where notably we saw Microsoft, Alphabet and Nvidia taking out index points, with many pointing to news that OpenAI is testing its own search called SearchGPT.

The NAS100 closed -1.1%, while the S&P500 closed -0.5%. Rotation was the theme yet again, with the S&P500 energy sector +1.5%, somewhat outpacing the +0.7% rise seen in crude. Industrials, financials, and materials also found love, showing funds switched from growth to value once more.

So, a small win for the bears it seems, and notably with S&P500 futures closing below the 50-day MA. We should also consider that next week we do get earnings from Microsoft, Meta, Apple, QCOM, Amazon, and Intel, so some heavyweights reporting earnings could calm sentiment and lift markets, or conversely add to the progressively bearish trend.

Outside of equity, we saw some buying in the long-end of the US Treasury curve, with UST 10s -4bp to 4.24%. The real moves took place in gold and silver, with gold losing US$33 (or 1.4%) with buyers stepping in at the 50-day MA. 

Tuning to Asia, our opening calls are looking mixed with the ASX200 eyed +0.4% at 7895, the HK50 should also unwind +0.4%, while the NKY225 remains skewed lower, with the index posed to take out the former range lows seen between April and June.

Strange things can happen on Fridays, where increased selloffs or rallies can form out of nowhere an open mind and a willingness to react to the tape will serve traders well.

On the calendar today:

-June retail sales

-Mineral Resources ((MIN)) Quarterly update

-Arcadium Lithium ((LTM)) AGM

Elsewhere:

-NZ ANZ consumer confidence

-US PCE deflator

-US Personal income & personal spending June

Corporate news in Australia:

-Nine Entertainment’s ((NEC)) Paris Olympics coverage at risk of being derailed as journalists persist with their strike

-ASIC accuses Chinese state firm, COFCO, of manipulating wheat prices in lawsuit

-Karoon Energy ((KAR)) announced a $38m share buyback and a revised capital returns policy

-Troubled AMA Group ((AMA)) is selling its ACM Parts unit

-Seek ((SEK)) announced -$141m impairment for its Chinese business, Zhaopin

-Meteoric Resources ((MEI)) raising $30m for its Caldeira rare earths project in Brazil

-Bellevue Gold ((BGL)) communicated a five-year growth plan and $150m equity raising to reduce debt and increase production

Spot Metals,Minerals & Energy Futures
Gold (oz)	2363.80	– 30.70	– 1.28%
Silver (oz)	27.98	– 1.01	– 3.48%
Copper (lb)	4.11	+ 0.03	0.70%
Aluminium (lb)	1.02	– 0.01	– 0.87%
Nickel (lb)	7.12	– 0.02	– 0.34%
Zinc (lb)	1.21	+ 0.01	0.45%
West Texas Crude	78.31	+ 0.81	1.05%
Brent Crude	81.42	– 0.10	– 0.12%
Iron Ore (t)	107.14	– 0.33	– 0.31%

Charlotte Daughtrey, Equity Investment Specialist at Federated Hermes Limited

2024 has again shown us that anything can happen. In the past few weeks, we’ve experienced the world’s largest computer meltdown, an assassination attempt on Trump and a change of the Democratic Party’s presidential nominee. 

The historic decision by Biden to withdraw his re-election bid the first time a sitting President has done so since Lyndon B Johnson in 1968-has resulted in Vice President Harris as the presumptive nominee for the Democratic Party. 

Approval polls prior to the decision on Sunday had had Trump as the clear favourite, but Harris should not be underestimated, and recent surveys show that that gap has narrowed.  Polling from the New York Times and Siena University show Harris closing the gap in the crucial swing state of Pennsylvania and extending the Democratic lead in Virginia.

Whilst Trump’s approval rating did increase following the assassination attempt, memories are short, and the news headlines are now dominated by the changes to the Democratic presidential ticket. As we await Harris’ formal nomination, the announcement of her running mate, it seems likely that Harris’ policies will be a continuation of Biden’s. The next few weeks will be key for the Democratic Party which has suffered since the presidential debate in June. 

Investors should keep in mind that whilst politics can cause volatility, this is often short term and importantly, the economy trumps politics.  Since the Hoover administration, the S&P 500 has delivered an average of 6.2% annualised return in every election year. 

The Russell 2500 doesn’t have data going back to the 1930s, but since its inception in 2003, it has outperformed the S&P 500 in every election year. Ultimately both candidates want a strong economy, and this will benefit US small and mid-cap companies who are the economic backbone of the US.

Linda Duessel, Senior Equity Strategist at Federated Hermes

With better inflation data and near-100% presumptions of a September Fed cut, we’re finally seeing serious broadening of the market, as investors rotate out of mega cap tech and into unloved value and small caps.

Through to July 9 the Russell2000 rose a mere 1% this year, but it’s gone up 8% since then. By contrast, the S&P500 is up about 17% year to date but marginally lower since July 9. This brief period featured the second-biggest week on week outperformance of small cap relative to large on record, a 99th percentile move.

Is this just a short-covering trade, or is it more? Wall Street technicians are torn on the matter. A move like this coming on the heels of long-term underperformance often means the start of something big, and forward returns from such a condition are, historically, well above average.

Can a bull built on the Mag7 really acquire a new identity? And the economic news of late has been mostly bad, not the setup that would prompt a durable run in small caps.

Though anticipation of Fed cuts has lit the fire, small caps don’t always rise during easing cyclesindeed, for the years 1980-2019, they fell -7% on average in such periods.

It depends on whether a recession is in the offing or not (as in 1995). At the moment, the risk of recession is low, and a slew of Fed governors have sounded dovish of late.

Thus, a historically powerful rotation. But what about earnings season?!

The Australian share market over the past thirty days

Index	25 Jul 2024	Week To Date	Month To Date (Jul)	Quarter To Date (Jul-Sep)	Year To Date (2024)
S&P ASX 200 (ex-div)	7861.20	-1.38%	1.21%	1.21%	3.56%

BROKER RECOMMENDATION CHANGES PAST THREE TRADING DAYS
AFG	Australian Finance Group	Upgrade to Neutral from Sell	Citi
ANN	Ansell	Downgrade to Lighten from Hold	Ord Minnett
DRO	DroneShield	Downgrade to Hold from Buy	Bell Potter
		Downgrade to Hold from Buy	Shaw and Partners
EDV	Endeavour Group	Downgrade to Neutral from Outperform	Macquarie
GMD	Genesis Minerals	Downgrade to Hold from Accumulate	Ord Minnett
IFL	Insignia Financial	Upgrade to Neutral from Sell	Citi
PNR	Pantoro	Upgrade to Buy from Hold	Bell Potter
PPT	Perpetual	Upgrade to Buy from Neutral	UBS
S32	South32	Upgrade to Buy from Neutral	Citi
TNE	TechnologyOne	Upgrade to Buy from Neutral	UBS
WOW	Woolworths Group	Downgrade to Neutral from Outperform	Macquarie

For more detail go to FNArena’s Australian Broker Call Report, which is updated each morning, Mon-Fri.

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available on the FNArena website.  Click here. (Subscribers can access prices on the website.)

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