The bears ‘are back with a bang’

Digest – The bears were back with a bang yesterday, as stocks slumped across the board, though the path of least resistance continues to lead higher over the medium-term, ahead of today’s busy economic data docket.

Where We Stand – Summer’s over, and the bears are back with a bang. At least, that was the message from yesterday’s session, where sentiment was rather soggy throughout as US participants returned from the Labor Day weekend, with downside then extending after the cash open.

As for a catalyst? Answers on a postcard, please! News-flow was relatively light in nature, while the ISM manufacturing PMI figure only just missed expectations – 47.2 vs. 47.5 consensus – and also notched its first MoM increase since March, having risen from 46.8 in July.

The details of the report were, perhaps, a little less optimistic, with the prices paid sub-index rising, and the new orders gauge hitting its lowest level since last May, though neither of these prints justify a 2% decline on Wall Street.

It does, however, speak to the heightened sensitivity of participants to incoming data, particularly downside surprises – data-dependent policymaking may make sense, but such data-dependence can and does induce higher vol, particularly at turning points in the policy cycle, such as the point where we now sit.

In terms of ‘scores on the doors’, the S&P 500 slipped over 2% in its worst day since August, while the tech-heavy Nasdaq 100 lost over 3% in its biggest one-day decline since July. Nvidia, meanwhile, still seen by many as the ‘most important stock in the world’, slumped as much as 10%, notching the biggest ever one-day market cap decline for an SPX stock, as the excitement over AI continues to fizzle out.

The soggy sentiment seen on Wall Street continued into APAC trade overnight, unsurprisingly, with the Nikkei down as much as 4%, and Taiwan’s chip-focused Taiex down well over 5%.

In any case, taking a step back, it does seem rather charitable of ‘Mr Market’ to have given everyone a better buying opportunity on the first trading day of the final stretch of 2024. At risk of sounding like a stuck record, the path of least resistance continues to lead to the upside, with economic and earnings growth remaining strong, and the ‘Fed put’ still providing ample support. Dips, in my view, remain medium-run buying opportunities.

Naturally, with stocks trading softer, a risk-off vibe filtered through across all asset classes. Perhaps the most interesting move was to be found in the crude complex, where both Brent and WTI fell as much as 5%, the latter testing $70bbl to the downside, notching its worst day since last October. Manufacturing jitters coupled with signs of a resolution to the ongoing dispute in Libya bringing production back online combined to create something of a perfect storm.

In the FX space, meanwhile, a classic haven playbook went into effect – demand for the USD and the JPY, while higher-beta G10s such as the AUD, NZD, NOK, and GBP all faced rather stiff headwinds. Incidentally, yesterday was the Aussie’s worst day since early-June, while the DXY tested the 102 figure, as the recovery from YTD lows printed a couple of weeks ago continues. The buck looks to have more left in the tank – benefitting from haven demand were the equity slump to continue (not my base case), and standing to benefit were better data to spark a hawkish repricing of Fed expectations, with 97bp of cuts still in the curve by year-end.

Speaking of which, Treasuries saw demand across the curve, led unsurprisingly by the long-end of the curve, though gains were likely somewhat contained by a flood of new corporate issuance, with yesterday being the busiest day on record for new IG bond sales. While haven demand could see these gains extend, were it to continue into coming sessions, a renewed front-end sell-off, and round of curve steepening, should come to fruition as and when the market comes to reprice the Fed outlook in a hawkish direction, with current expectations for 100bp of cuts by year-end still over-the-top.

Look Ahead – A busy day awaits, with plenty of calendar events for participants to get their teeth into, while sentiment remains somewhat fragile after yesterday’s chunky decline.

US figures will, naturally, steal most attention, with the July JOLTS job openings figure the main event, set to show a modest decline in vacancies, with consensus seeing 8.1mln in July, from a prior 8.184mln. While the read-across to Friday’s employment report is somewhat lacking, given how jittery markets appear, any further signs of labour market fragility are unlikely to be looked upon too kindly. Factory orders, as well as the Fed’s ‘Beige Book’ are also due for release.

Elsewhere, the Bank of Canada announce policy, with a third straight 25bp cut fully discounted by the CAD OIS curve, as well as further such reductions at the final two meetings this year, in October and December. Guidance from the BoC will be key, given the rush that policymakers appear to be in to normalise policy, though the bar for a dovish surprise is a relatively high one, hence risks likely tilt to the upside for the CAD.

Final eurozone and UK PMIs, both for the services sector and the overall composite gauge, are also due today, though shan’t move the needle too significantly.