The State of Markets: How Long Will the Relief Rally Last?
After the prior three and a half week’s selling, price action across the main global markets was dominated last week by the ‘wave two relief rally’. That is, risk assets bounced sharply, while safe havens receded. With that, and as is typical of wave two rallies, the asset prices which sold off the most in the initial pullback, rallied the most. In the US, for example, the Philly SOX and Nasdaq100 both closed the week higher (despite their major weakness on Monday); the Nikkei 225 (which was down almost 30% on Monday from its July 11th highs), bounced sharply over the course of the rest of the week, closing Friday +12% from its Monday’s intraday lows; while bond yields backed up, Fed rate cut expectations moderated and the VIX finished the week significantly down from Monday’s highs (65.7%).
Most pullbacks occur in waves: That is, they start with a ‘wave one’ of selling; which is followed by a ‘wave two relief rally’ as traders cover short positions, and the initial panic subsides; before a final third wave (of selling) back to the ‘wave one’ intraday lows or lower. Occasionally in pullbacks those three waves evolve into five waves. The short-term ebb and flow in ‘Fear and Greed’ is at the heart of those waves as correlations across global assets tend towards one (at these times of heightened uncertainty/panic), and the effectiveness of our short-term risk appetite models increase (because of that heightened correlation across assets).
This week’s price action will again be critical. Short-term traders will need to assess and judge the extent and length of this ‘wave two relief rally’ (& the timing of the switch to ‘wave three’). That will be the focus of the ‘Daily Risk Appetite Gauge’ publication over coming weeks (for a trial, click here: https://www.longvieweconomics.com/the-daily-risk-appetite-gauge). Elsewhere it’s a key week for Chinese macro data (with the total social financing/monthly loans data released on Monday); US consumer price inflation data will be closely watched on Wednesday (along with UK inflation data & US PPI on Tuesday); while the US quarterly earnings season continues with various key retail stocks reporting this week. For full details see below.
Key chart: US S&P500 shown with 50 & 200 day moving averages
Upcoming important data/events this week:
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Events: |
RBNZ policy decision (Wed, 3am). |
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Monday: |
Chinese total social financing, new yuan loans, and M0, M1 & M2 money supply (Jul, 10am). |
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Tuesday: |
US NFIB small business optimism (Jul, 11am); US headline & core PPI (Jul, 1:30pm). |
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Wednesday: |
UK headline & core CPI (Jul, 7am); US headline & core CPI (Jul, 1:30pm). |
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Thursday: |
Japanese GDP (Q2 first estimate, 12:50am); UK GDP (Q2 first estimate, 7am); US retail sales (Jul, 1:30pm). |
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Friday: |
US housing starts & building permits (Jul, 1:30pm); US Michigan sentiment (August first estimate, 3pm). |
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Key earnings: |
Home Depot (Tues); Cisco, Tencent Holdings (Wed); Walmart, Applied Materials, Alibaba (Thurs). |
Key Research
Longview on Friday, 9th August 2024
“Equities, US Soft Patch, & JGB Fair Value”
One of the ‘rules of thumbs’ in markets is that:
‘markets always revisit intraday crash lows (at a later date)’.
In the late August 2015, for example, the S&P500 fell sharply over five trading sessions (19th to 25th). After bouncing through to 17th September, the S&P500 then sold off again and retested those initial lows at the end of that month. Similarly the pullback in January 2016 was followed by a retest in February. The sell-off in Jan/Feb 2018 was followed by a retest in April 2018, and so on. Indeed, as laid out in this week’s analysis of ‘stock market price action post a crash’:
Key North American macro data & events
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Events: |
Speeches by the Fed’s Bostic on the Economy (Tues, 6:15pm), Musalem on the Economy and monetary policy (Thurs, 2:10pm), Harker at Philadelphia Fed (Thurs, 6:10pm) & Goolsbee in Fireside chat (Fri, 6:25pm). |
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Monday: |
Canadian building permits (Jun, 1:30pm); US New York 1 year inflation expectations (Jul, 4pm); US monthly budget statement (Jul, 7pm). |
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Tuesday: |
US NFIB small business optimism (Jul, 11am); US headline & core PPI (Jul, 1:30pm). |
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Wednesday: |
US headline & core CPI (Jul, 1:30pm). |
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Thursday: |
Canadian wholesale sales (Jun, 1:30pm); US Empire manufacturing (Aug, 1:30pm); US retail sales (Jul, 1:30pm); US Philadelphia Fed business outlook (Aug, 1:30pm); US weekly jobless claims (1:30pm); US import & export prices (Jul, 1:30pm); Canadian existing home sales (Jul, 2pm); US industrial & manufacturing production & capacity utilisation (Jul, 2:15pm); US business inventories (Jun, 3pm); US NAHB homebuilders index (Aug, 3pm); US total net TIC flows (Jun, 9pm). |
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Friday: |
Canadian housing starts (Jul, 1:15pm); US housing starts & building permits (Jul, 1:30pm); US New York Fed service sector business activity (Aug, 1:30pm); US Michigan sentiment (August first estimate, 3pm). |
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Key earnings: |
Home Depot (Tues); Cisco (Wed); Walmart, Applied Materials, Deere&Company (Thurs). |
Fig B: US CPI Services and Services less rent of shelter (M-o-M %)
Key European macro data & events
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Events: |
Market holiday in various European countries (e.g. Greece, Italy, Poland etc.) on account of Assumption Day (Thurs). |
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Monday: |
N/A |
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Tuesday: |
German & Eurozone ZEW survey - expectations & current situation (Aug, 10am). |
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Wednesday: |
French headline & core CPI (July final estimate, 7:45am); Eurozone GDP & employment (Q2 second estimate, 10am); Eurozone industrial production (Jun, 10am). |
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Thursday: |
N/A |
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Friday: |
Eurozone trade balance (Jun, 10am). |
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Key earnings: |
N/A |
Fig C: Eurozone industrial production (Y-o-Y %)
Key UK macro data & events
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Events: |
N/A |
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Monday: |
N/A |
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Tuesday: |
Employment, jobless claims & average weekly earnings (Jun/Jul, 7am). |
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Wednesday: |
Headline & core CPI, RPI & PPI (Jul, 7am); Land Registry house prices (Jun, 9:30am). |
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Thursday: |
GDP (Q2 first estimate, 7am), monthly GDP estimate, industrial & manufacturing production, goods trade balance & construction output (Jun, 7am). |
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Friday: |
Retail sales (Jul, 7am). |
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Key earnings: |
N/A |
Fig D: UK real GDP (Q-o-Q %, annualised)
Key Asia-Pacific macro data & events
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Events: |
RBNZ policy decision (Wed, 3am) followed by news conference (Wed, 4am) & RBNZ’s Governor Orr speaks on monetary policy at Parliament Select Committee (Wed, 10:10pm) & again at lunch hosted by Chamber of Commerce (Fri, 1:30am); speech by the RBA’s Hauser (Mon, 3am) & Governor Bullock before parliament (Thurs, 12:30am); market holiday in Japan on account of Mountain Day (Mon) & South Korea on account of Liberation Day (Thurs). |
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Monday: |
Chinese total social financing, new yuan loans, and M0, M1 & M2 money supply (Jul, 10am). |
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Tuesday: |
Japanese PPI (Jul, 12:50am); Australian Westpac consumer confidence (Aug, 1:30am); Australian wage price index (Q2, 2:30am); Australian NAB business confidence (Jul, 2:30am); Japanese machine tool orders (July first estimate, 7am). |
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Wednesday: |
N/A |
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Thursday: |
Japanese GDP (Q2 first estimate, 12:50am); Australian consumer inflation expectation (Aug, 2am); Chinese new & used home prices (Jul, 2:30am); Australian employment data (Jul, 2:30am); Chinese activity data (industrial production, retail sales, fixed asset, property investment & unemployment rate - Jul, 3am); Japanese industrial production & capacity utilisation (June final estimate, 5:30am). |
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Friday: |
N/A |
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Key earnings: |
Tencent Holdings, Foxconn Industrial Internet, JD (Wed); Alibaba, NetEase (Thurs). |
Fig E: Chinese total social financing (CNY, trillions)
Last week:
Longview on Friday, 9th August 2024:
“Equities, US Soft Patch, & JGB Fair Value”
Monthly Global Asset Allocation No. 47, 8th August 2024:
“Italian Equities: Stay OW in Strategic Portfolio”
Longview ‘Tactical’ Alert No. 83, 6th August 2024:
“Price Action Post a Crash”
Prior week:
Longview on Friday, 2nd August 2024:
“How to Position Portfolios for the Changing Market & Macro Environment”
Tactical Equity Asset Allocation No. 247, 1st August 2024:
“Pullback – Ongoing or Over?”
Monthly Global Asset Allocation No. 46, 31st July 2024:
“UK Rate Cuts -> ‘mini’ Boom Ahead”
The SHORT VIEW (& market positioning), 30th July 2024:
“OIL: BUY Case Brewing”