U.S. equities finished the week lower as all major indices closed in the red. The S&P 500 and Nasdaq both snapped five-week winning streaks after falling 2.31% and 3.27% respectively over the five days. The main theme that emerged was the late-week selloff in growth and momentum names as large Tech was the primary loser, falling 4.15%. Technology was the second worst performing sector as FANG and other higher profile names received most of the attention in the selloff with the following names absorbing much of the blow: Facebook -3.7%, Google, -3.6%, Amazon -3.2%, Apple -3.1%, Microsoft -6.4%, Tesla -5.5%, Salesforce -6.1% and Workday -11.5%. Energy was the worst performing sector as oil closed lower by 7.5% due to ongoing softening demand. Materials was the best performing sector with strength in chemical, paper and packaging- related names, helping offset the weakness seen in precious metals as the Gold Miners ETF (GDX) finished -2.6% and the Silver ETF (SLV) closed -2.06% lower. Financials was another relative outperformer with strength in banks and credit card names which helped offset the weakness in other sub-sectors. Treasuries were mixed as the curve flattened, however yields remained largely unchanged on the week, finishing at 0.7180% on the 10-year which had started at 0.7048%.
The selloff in growth and momentum names emerged later in the week with no true catalyst triggering the selloff, leaving most investors blaming overbought conditions. In recent weeks, fundamental investors have been waiting for a reversal in high-flying names pointing to overstretched valuations, crowded positioning, and an extremely dovish monetary policy that has put trillions into the financial system. Despite the incredible run stocks have seen since the March 23rd lows, some signs started to point to a potential correction occurring including:
- Bullish sentiment hitting the highest level since September 2018
- Low short interest in individual U.S. equities with extreme long positioning by momentum traders according to J.P. Morgan
- As discussed last week, the recent move higher in implied volatility as well as equities
- Bearish bets on NYSE listed equities sitting at a six-year low
- S&P 500 & Nasdaq 100 trading roughly about 15% and 30% above their 200-day moving averages, pointing to overstretched technical levels
Economic data releases continued to surprise to the upside throughout the week. The August employment report continued its recent strength as nonfarm payrolls rose by 1.37M versus expectations of 1.35M. Additionally, initial jobless claims fell back below the 1MM mark, hitting a post pandemic low while the unemployment rate fell much more than anticipated to 8.4%. The August ISM manufacturing index hit its highest levels since November of 2018, and despite the ISM nonmanufacturing missing slightly, the reading was still one of the strongest of the year.
Outside of stretched valuations and crowded positioning, there continues to be other headwinds that remain an overhang on sentiment including:
- The ongoing stalemate over a fifth Coronavirus relief bill as no new progress was made over the course of the week
- After the release of positive economic data illustrating a surprisingly “healthy labor market “, rumblings have emerged that another stimulus bill may not be necessary
- Election uncertainty as the presidential polls continue to tighten in President Trump’s favor (More on this below)
The largest headwind forming appears to revolve around the election. Biden continues to lead President Trump, however, we have seen an uptick in President Trump’s numbers by gaining meaningful ground in swing states. The polls which have moved in Trump’s favor show that he appeared to receive a post- convention bounce, one that former VP Biden did not receive. Additionally, according to RealClear Politics and Trend Macro, Biden continues to poll behind where Hillary Clinton was in the 2016 elections. As poll numbers tighten, both parties appear to be setting the stage for delegitimizing the election based on voting by mail fraud. Global markets could find themselves in another “hanging Chad” election (where one or more corners are still attached to the ballot card), similar to the one that we saw back in 2000. This potential what-if scenario helps explain the uptick in the VIX (which has gained 19.12% since October 1st) and input option volume on the S&P 500 with November and January expirations. According to one of our trading partners, they have seen large institutional buyers of downside S&P 500 puts. Looking out, the implied volatility curve is not expected to return to normalized levels until March 2021.
While history is no indication of future performance, we looked back to the 2000 election and saw that it took more than five weeks to determine the outcome of the elections, and only thanks to a controversial Supreme Court ruling did we have a final result. Over that timeframe, the S&P 500 lost as much as 8.2%, with the election results being largely unknown. With much more stress on the voting system due to COVID-19 and mail-in ballots, this could potentially lead to delays in battleground states. If the election results are as close as expected, this could ultimately cause further delays before a true winner is declared, and may only come after weeks of contested results and litigation.
With markets near all-time highs and elevated implied volatility on S&P 500 futures, market participants appear to be pricing in a Trump win, with little room for error.
Elsewhere, vaccine optimism continued to gain a lot of attention and remained extremely elevated throughout the week. There were multiple reports from the Wall Street Journal, Washington Post, and NY Times outlining how the CDC has notified public health officials across the country to prepare for a distribution of a Coronavirus vaccine to high-risk groups as soon as late October. Furthermore, initial results from the AstraZeneca/Oxford vaccine candidate could come as early as mid-September, while two other potential vaccines currently in Phase 3 trials may also have early data ahead of an FDA meeting scheduled for October 22nd.
It was another ugly day on Wall Street as markets picked up right where they left off. Investors returning from a three-day holiday weekend were greeted with additional selling pressure as U.S. markets all finished more than 2% lower, sinking for a third straight day, their lowest levels in four weeks. The Nasdaq composite was again the biggest laggard, falling 4.11% on the session and is now 11% off its record highs set last Wednesday. The S&P 500 followed suit, losing 2.78% as we continued to see another round of profit-taking amid heightened valuations ahead of the U.S. elections. Major averages touched session lows late in the day on Tuesday, erasing a modest recovery from earlier as there were few pockets to hide in the selloff. 450 members of the S&P 500 were lower, and only five members of the Nasdaq 100 were higher with some of the largest year-to-date winners continuing to experience the heaviest declines. Speculative positions and large bullish bets in options markets that pushed indexes to new highs, have seemingly reversed since the start of September.
Markets were led lower with all 11 sectors finishing in the red as the Tech and Energy sector underperformed broader markets, falling 4.59% and 3.71%, respectively. Tesla suffered the worst rout in company history as shares declined just over 21% after S&P announced they would not add the company to the S&P 500 index, choosing Etsy, Catalent and Teradyne instead. Additionally, weighing on the company was GM’s announcement that they took an 11% stake in the U.S. electric car-maker Nikola, as GM will be the exclusive supplier of fuel sells globally to Nikola for class 7/8 trucks. Another recent high flyer, Apple, dropped 6.9%, leaving it’s three- day decline sitting at 14%, the largest since October 2008. Other FANG-related names, with the exception of Netflix (which fell 1.75%) all fell around ~4%.
Oil prices fell sharply on Monday with WTI crude declining 7.6% amid faltering demand, pulling crude prices to their lowest levels since June. Futures on both Brent and Crude fell on Tuesday as Asia’s stalling demand recovery, the end of the U.S. summer season, and increased supply from OPEC+ gives investors little to be excited about in the short-term. The USD rose to a three-week high with the risk-off tone gripping markets. Treasury yields slipped once again as the 10-year fell just under 4bps to 0.6788%, while the five- year note was the hardest hit, declining 10.60% or just over 3bps.
THIS WEEK INTERNATIONAL
Last week was marked by a slight pullback in global equities as we enter earnings season. The MSCI ACWI Index was down 2.28% last week, with the Technology sector leading the sell-off. All 11 GICS sectors were in the red, while global bonds rallied. Value stocks offered some downside protection and slid 1.51%, whereas growth stocks paid the price for high valuation and lost 2.59%. Looking at the latest economic data, there are reasons to be optimistic about improving fundamentals. In fact, the J.P Morgan Global Composite PMI ticked up to 52.4 in August, which is a 17-month high. New orders as well as input and output prices grew at a faster rate than in July.
Europe – According to the latest IHS Markit PMI release, the Eurozone productivity rose at its fastest pace for a decade in August. Despite a reduction in employment, companies managed to become more efficient using technology to increase their output. The German manufacturing PMI improved to 52.2 in August versus 51.0 previously, while France’s manufacturing PMI slid to 49.8, below the 52.4 July print. French health minister said that the 14-day quarantine for people who have tested positive for COVID-19 is “too long” and the government is exploring the idea of reducing it to five days.
Overall Services PMI declined in the Eurozone due to slow activity in the hotel and restaurants industry and ongoing travel restrictions. The German Services PMI decreased to 52.5 in August, versus 55.6 in July. France’s Services PMI declined to 51.5 from 57.3 previously. Based upon the soft data, consumer confidence improved in France, Italy and Germany, but continued to erode for Spain, which still is in the top 10 nations of COVID-19 cases.
The Euro STOXX Index was down 1.8% last week despite the 4.4% rally in basic resources, and 1.6% gain for auto & parts. Travel & leisure and Technology stocks lagged the index, down 4.9% and 4.3%, respectively. The CAC 40 index was down 0.76%, while the DAX Index was down 1.46%, and Spanish stocks down 2.01%.
In Switzerland, a governing board member of the Swiss National Bank said that negative interest rate policy was “important” for Switzerland and Liechtenstein. He also confirmed that the Central Bank is currently exploring the creation of a Central Bank digital currency. In March, Sygnum Bank, a Swiss digital asset bank, launched a digital version of the Swiss Franc to speed up transactions. The Swiss market index was down 0.11% last week.
APAC – In China, the latest Caixin Manufacturing PMI data showed evidences of stabilization in the economy. Indeed, for the first time in 2020, firms reported an increase in export sales due to an increase in demand. The General manufacturing PMI expanded to 53.1 in August, versus 52.8 previously. However, Services PMI slightly decreased to 54.0 from 54.1. Last week, direct international flights to Beijing resumed after several countries including Sweden and Canada were greenlighted by the regulator. The Shanghai Composite Index was down 1.42% last week, with real estate down 2.15%. The Hang Seng index was down 2.86% during the same period, with financials down 3.02%.
In Japan, the manufacturing PMI remained in contraction territory last month with a 47.2 reading in August. Export sales declined at the weakest rate for seven months and new orders as well as manufacturing output fell at the slowest pace since the beginning of the year. International demand is still below historical levels as executives remain cautious on their capital expenditures. Services PMI dropped to 45.0 in August, versus 45.4 previously. According to Au Jibun Bank, activity and new orders decreased in August. Consumer confidence decreased from a month ago, as companies continue to scale back their staffing level. The Japanese stock market was one of the rare markets up last week, with the NIKKEI 225 posting 1.41% gains.
Emerging Markets – In Brazil, the August manufacturing PMI strengthened to 64.7, versus 58.2 previously. According to IHS Markit, record increases in output, and new orders drove the overall growth. The survey also revealed that business confidence about the economic outlook in the next 12-month was high. On the same note, consumer confidence increased to 80.2 versus 78.8 previously. As a commodity exporter, the current U.S. dollar weakness is a tailwind for Brazil. The IBOV Index was down 0.88% last week.
In India, Services PMI rose to 41.8 in August, up from 34.2 previously. According to IHS Markit, “reduced business activity saw the Indian service sector operating below capacity”. Business confidence remained flat last month while consumer confidence improved from a month ago. The Nifty 50 Index was down 2.69% last week, led by consumer discretionary.
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