The State of Markets: Wave Three Underway
US equity markets have continued to follow the classic ‘three wave’ sell-off pattern.
That is, the downtrend resumed last week (after a strong ‘wave 2’ relief rally in August). In particular, following a bearish key day reversal in late August (see chart below), the NASDAQ100 broke convincingly below its 50 day moving average on Wednesday and Thursday, before moving sharply lower yesterday (i.e. post the nonfarm payrolls report).
Risk aversion has also been building in other asset prices, many of which broke key levels last week. The US 10 year bond yield, for example, closed at new YTD lows yesterday (3.72%); oil broke below a multi-year support level (from last December); while the YEN, having strengthened in recent weeks, broke above its 5th August intraday highs yesterday.
The key question, therefore, is: What’s next? How much more downside is there in risk assets? And, with the NASDAQ100 testing its 200 day yesterday, has ‘wave 3’ finished? We outline our view on that in this week’s research, including in our Daily Risk Appetite publication, as well as in our Tactical Equity Asset Allocation research.
Next week’s macro data will be watched closely and includes the US CPI report (Wednesday); NFIB small business optimism (Tuesday); and Michigan sentiment (flash estimate for August, due on Friday). Key events include the first ‘Trump vs. Harris’ presidential debate on Tuesday and, in Europe, the ECB policy decision (Thursday). Please see below for a full list of key data and events next week.
Key chart: NASDAQ100 futures candlestick, shown with 50 & 200 day moving averages
Upcoming important data/events this week:
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Events: |
Trump vs. Harris presidential debate (Tues, 9:00 pm EDT); ECB policy decision (Thurs, 1:15pm) followed by press conference hosted by Lagarde (Thurs, 1:45pm). |
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Monday: |
Chinese CPI & PPI (Aug, 2:30am); US consumer credit (Jul, 8pm). |
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Tuesday: |
UK employment, jobless claims & average weekly earnings (Juk/Aug, 7am); US NFIB small business optimism (Aug, 11am). |
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Wednesday: |
US headline & core CPI (Aug, 1:30pm); Chinese total social financing, new yuan loans, and M0, M1 & M2 money supply (Aug, 9am). |
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Thursday: |
US headline & core PPI (Aug, 1:30pm). |
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Friday: |
US Michigan sentiment (September first estimate, 3pm). |
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Key earnings: |
Oracle (Mon); Inditex (Wed); Adobe, Kroger (Thurs). |
Key Research
Quarterly Asset Allocation No. 59, 5th September 2024:
“Eurozone: North – South Divide a.k.a. German Recession (likely) Coming”
The case for an economic boom in the Eurozone economy (especially in Southern EZ countries) continues to grow. That is, while Europe faces several structural headwinds, a multi-year phase of above trend growth is likely for the next 1 – 4 years.
Most notably, as inflationary pressures continue to ease, and given structural headwinds in core (Northern) European economies (see below), the ECB should deliver on a significant cycle of rate cuts. As we noted previously, that should re-open housing markets (which have been largely closed due to high mortgage costs); generate wealth effects as house prices reflate; and push savings ratios back to lower, more ‘normal’, levels. Currently Europe’s household savings ratio is 15.4% of disposable income (its highest outside of the pandemic), fig 6.
Key North American macro data & events
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Events: |
Trump vs. Harris presidential debate (Tues, 9:00 pm EDT). |
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Monday: |
US wholesale inventories (July final estimate, 3pm); US New York 1 year inflation expectations (Aug, 4pm); US consumer credit (Jul, 8pm). |
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Tuesday: |
US NFIB small business optimism (Aug, 11am). |
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Wednesday: |
US headline & core CPI (Aug, 1:30pm). |
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Thursday: |
Canadian building permits (Jul, 1:30pm); US headline & core PPI (Aug, 1:30pm); US weekly jobless claims (1:30pm); US household change in net worth (Q2, 5pm); US monthly budget statement (Aug, 7pm). |
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Friday: |
US export & import price index (Aug, 1:30pm); Canadian capacity utilisation rate (Q2, 1:30pm); US Michigan sentiment (September first estimate, 3pm). |
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Key earnings: |
Oracle (Mon); Adobe, Kroger (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: |
ECB policy decision (Thurs, 1:15pm) followed by press conference hosted by Lagarde (Thurs, 1:45pm); ISTAT publishes note on the Italian Economy (Tues, 10am); speech by the ECB's Rehn in Helsinki (Fri, 9:30am). |
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Monday: |
Eurozone Sentix investor confidence (Sep, 9:30am). |
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Tuesday: |
German headline CPI (August final estimate, 7am); Italian industrial production (Jul, 9am). |
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Wednesday: |
N/A |
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Thursday: |
Italian unemployment rate (Q2, 9am). |
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Friday: |
French headline & core CPI (August final estimate, 7:45am); French wages (Q2 final estimate, 7:45am); Eurozone industrial production (Jul, 10am). |
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Key earnings: |
Inditex (Wed). |
Fig C: Eurozone Sentix investor confidence (index)
Key UK macro data & events
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Events: |
Bank of England releases inflation attitudes survey (Fri, 9:30am). |
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Monday: |
N/A |
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Tuesday: |
Employment, jobless claims & average weekly earnings (Jul/Aug, 7am). |
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Wednesday: |
Monthly GDP estimate, industrial & manufacturing production, goods trade balance & construction output (July, 7am). |
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Thursday: |
RICS house price balance (Aug, 12:01am). |
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Friday: |
N/A |
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Key earnings: |
N/A |
Fig D: UK RICS house price balance (index) against Rightmove house prices (Y-o-Y %)
Key Asia-Pacific macro data & events
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Events: |
Speech by the RBA's Hunter at the Barrenjoey Economic Forum (Wed, 1:20am); speeches by the BOJ's Nakagawa in Akita (Wed, 2:30am) & Tamura in Okayama (Thurs, 2am). |
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Monday: |
Japanese GDP & bank lending (Q2 final estimate, 12:50am); Chinese CPI & PPI (Aug, 2:30am). |
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Tuesday: |
Japanese M2 & M3 money supply (Aug, 12:50am); Australian Westpac consumer confidence (Sep, 1:30am); Australian NAB business confidence (Aug, 2:30am); Japanese machine tool orders (August first estimate, 7am). |
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Wednesday: |
Chinese total social financing, new yuan loans, and M0, M1 & M2 money supply (Aug, 9am). |
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Thursday: |
Japanese PPI (Aug, 12:50am); Australian consumer inflation expectation (Sep, 2am). |
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Friday: |
Japanese industrial production & capacity utilisation (July final estimate, 5:30am). |
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Key earnings: |
N/A |
Fig E: Chinese total social financing (CNY, trillions)
Last week:
Longview on Friday, 6th September 2024:
“Is This Time Different?”
Quarterly Asset Allocation No. 59, 5th September 2024:
“Eurozone: North – South Divide a.k.a. German Recession (likely) Coming”
Tactical Equity Asset Allocation No. 248, 5th September 2024:
“More (Wave 3) SELLing Expected a.k.a. Stay Tactically Cautious”
Monthly Global Asset Allocation No. 49, 3rd September 2024:
“Move NEUTRAL US Treasuries in Strategic Portfolio”
Prior week:
Longview on Friday, 30th August 2024:
“US Macro: Soft Landing or Recession?”
Global Macro Report, 29th August 2024:
“(State Based) Sahm Rule is Improving! A.k.a. Labour market not recessionary”
Monthly Global AA No. 48, 28th August 2024:
“Gold: Bull Run Ending? A.k.a. Reduce Weightings in the Strategic Portfolio”