Weekly house view | “R” for rotation

Weekly house view | “R” for rotation

The CIO's view of the week ahead.

The week in review

Continuing a recent trend, US small caps and cyclical sectors outperformed large-cap indexes and noncyclical stocks last week. Thus, the Russell 2000[i] returned 3.5% (in USD), in sharp contrast with the Nasdaq’s -2.1%[ii]. With the Q2 reporting season in high gear, lacklustre results from a couple of the ‘Magnificent Seven’ names weighed on the S&P 500[iii], with the index returning -0.9% (in USD) over the week. Equity volatility remained considerably higher than just a couple of months ago. Unexpected cuts to interest rates in China underlined the country’s continued economic challenges and failed to prevent the MSCI China[iv] from reporting a -2.3% fall on the week (in USD). Japan’s TOPIX[v] dropped a notable 5.6% (in yen), in part due to the yen’s rebound as yen-funded carry trade strategies were unwound. With a possible rate hike from the Bank of Japan this week, the yen surged 2.5% against the USD. Ramped-up bets on Fed rate cuts meant that the inversion of the US Treasury yield curve continued to unwind. While the Fed is unlikely to cut rates this week, there are even odds of a Bank of England cut.

Elections

In the first week of her White House bid, Vice President Kamala Harris raised USD200 m, energising Democrats. In Venezuela, the election authority declared incumbent Nicolas Maduro winner of Sunday’s presidential vote.

Key data

Flash readings for S&P Global purchasing managing indexes (PMI) for July pointed to a listless euro area economy. The composite PMI for the euro area dropped to 50.1 from 5o.9 in June, only slightly above the 50 mark that separates expansion from contraction. S&P Global’s flash composite for the US rose to 55.0 in July from 54.8 in June. The first estimate for Q2 GDP growth in the US accelerated to an annual 2.8% from 1.4% in Q1, with business investment rising 5.2%.  The Fed’s favourite inflation gauge, the personal consumer expenditure index dropped to an annual rate of 2.5% in June from 2.6% in May. Consumer prices excluding fresh food rose at an annual 2.2% in the Tokyo region in July, up from 2.1% in June, the third consecutive month that core CPI increased. But ‘new core’ inflation moderated to 1.5% from 1.8%.

[i] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, Russell 2000 (net 12-month return in USD):  2019, 25.5%; 2020, 20%; 2021, 14.8%;  2022, -20.4%; 2023, 16.9%
[ii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, Nasdaq Composite (net 12-month return in USD):  2019, 36.7%; 2020, 44.9%; 2021, 22.2%;  2022, -32.5%; 2023, 44.6%.
[iii] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, S&P 500 Composite (net 12-month return in USD): 2019, 31.5%; 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%.
[iv] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, MSCI China (net 12-month return in USD): 2019, 23.7%; 2020, 29.7%; 2021, -21.6%; 2022, -21.8%; 2023, -11%.
[v] Source: Pictet WM AA&MR, Thomson Reuters. Past performance, TOPIX (net 12-month return in JPY): 2019, 15.2%; 2020, 4.8%; 2021, 10.4%; 2022, -5.1%; 2023, 25.1%.
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