July 24, 2024 | Rising VIX

MARKETS

S&P 500: Down -118 points to 5438, VIX: 17.96

Asia: Japan -1.11%, China -0.46%, Hong Kong -0.91%

Europe: Euro Stoxx 50 -1.16%, FTSE -0.20%, DAX -0.95%

FX: USD (DXY) down 0.27%, EUR down 0.01%, GBP up 0.12%, JPY up 1.38%, CNY up 0.16%

Energy: WTI Crude up 1.36% to $78.01, Brent up 1.25% to $82.00

Cross markets: Terminal rate unch at 5.33, Implied rate cuts 2-years from terminal up ~3bp at 176bp, 5/10 yield spread +11bp

Treasuries: 2-year yields down ~11bp at 4.383%, 10-year yields down ~3bp at 4.217%, 30-year yields down ~1bp at 4.476%

WHAT WE'RE THINKING

Snapshot: US equities are lower as crowded positioning in mega-cap secular growth unwinds.  The cyclically-sensitive Russell 2000 (RTY) holds up best as the Nasdaq 100 (NDX) and S&P 500 (SPX) come under pressure. Today’s risk-off tone follows disappointing (in one way or another) overnight results from GOOGL, TSLA and V.  The very small earnings disappointment at V was attributed to a slowdown in US volume growth that mixes with an LVMH organic revenue miss to drive increased concerns about consumer spending. Today’s weaker consumer spending theme goes from luxury European handbags to French fries with LW the worst performing stock in the SPX after slower restaurant traffic drove a big EPS/EBITDA miss.  Capital goods is another major source of earnings-driven weakness with shares of ROP, FTV, GD, OTIS, WAB and WNC lower after reporting.  Banks remain an area of relative strength, while ENPH, CSGP and T sit on top of the SPX leaderboard after better reports. Treasury yields are mostly lower with notable curve steepening following yesterday’s strong 2-year auction. The Dollar Index is lower with yen strength the big story as today’s demand for safe haven currencies exacerbates the unwinding of a popular carry trade. Gold is a touch higher as a safe haven asset and WTI crude lifts after a US weekly inventory draw.  

• Disappointing/underwhelming earnings from consumer focused companies (LW, LVMH, V) signal further cooling in consumer spending momentum and drives risk-off sentiment this morning.
•  Overnight results from GOOGL and VRT exceed a high bar/support a bullish AI theme, but shares trade lower as crowded positioning unwinds.  
• July composite flash PMI was mostly inline with services stronger than expected, while manufacturing moved into contraction for the first time in six months. 
• June new-home sales came in well below consensus and support the message from yesterday’s softer existing home sales number.  The June US Architecture Billings Index increased to 46.4 from 42.4 in May but remains in contraction territory amid elevated interest rates, high construction costs and slightly lower property values. 
• Former Richmond Fed President Mike Dudley said “the Fed needs to cut now” as active Fed members remain in the pre-meeting quiet period.
• The decision on when to cut rates could be influenced by tomorrow’s data that includes a first look at Q2 GDP, durable goods orders and weekly jobless claims, while Friday’s June core PCE inflation print is the macro highlight for the week. Consensus is looking for a MoM increase of +0.1% (second straight month) to push the 3-month annualized rate below the Fed's 2% target.
• Europe’s July flash PMIs fell short of expectations, while UK flash PMIs improved from last month with manufacturing and services in expansion.
• Notable earnings-driven outperformers include IP, MAT, NBR, NEE, PKG, STX, TDY, TEL, THC, TMO and TXN, while APH, BSX, FTV, GD, IPG and TNL trade lower after reporting. 

Now: This week’s slate of macro reports and ramp in Q2 earnings season was expected to provide incremental direction for equity markets.  On Monday, we discussed the potential for a bullish scenario where inline macro data and continued earnings strength could produce an ‘everything rally’ (improved market breadth).  The Goldilocks narrative that prevailed for the last two months included resilient growth, rising earnings estimates and rate cuts. While it’s still early, week-to-date trends point to slowing growth, unchanged earnings estimates and Fed rate cuts.  Unfortunately, the beginning of past Fed easing cycles in response to weaker growth has NOT been a tailwind for equity markets. 

Vol: The CBOE Volatility Index (VIX) is higher this morning and currently sits at 17.95.  A prolonged period of subdued realized volatility (below 20) starting in November has driven a higher forward earnings multiple.  VIX levels above ~20 generally become a headwind for rally attempts.  VIX levels north of ~30 tend to align with equity corrections in the 7%-18% range.  Once the VIX gets above 30, it often takes months to return to subdued/supportive levels below 20. 

Chartist: The SPX keeps its bullish bias at levels above ~5375 (June 12 upside gap) and pullbacks should first be considered buying opportunities unless/until it breaks. However, a sustained close below the 50-day moving average of ~5428 would likely generate increased selling momentum.  The NDX is currently trading below key technical support at ~19210.  Sustained closing levels below ~19210 would signal a change in trend and generate additional downside to ~18415.  The Philadelphia Semiconductor Index (SOX) is also currently trading below technical support levels near ~5220 with a sustained break marking an intermediate change in trend. 

FACT OF THE DAY

Octopus wrestling was a sport in the 1960’s, which involved diving into shallow water and fighting an Octopus back to the surface. The 1963 record was a 57-pounder.

JSC IN THE MEDIA

Technology stocks to continue rally: In a CNBC feature, Andrew shares why the AI theme is here to stay and how JSC portfolios have managed to outperform the market YTD. Read More

Bank Earnings Preview: Appearing on Schwab Network’s 360 Round, Andrew shares his ‘cautiously constructive’ view heading into bank earnings. Watch Now

Fox Business News: Andrew joins Charles Payne on Making Money to discuss risks to the soft landing scenario and factors necessary to sustain the current bull market. Watch Video

See more of JSC in the Media.

THIS DAY IN HISTORY

July 24, 1982: Originally written and performed for Sylvester Stallone’s third movie of the Rocky franchise, Survivor’s ‘Eye of the Tiger’ reaches #1 on the Billboard pop chart. The band was hand-picked by Stallone to write a song for Rocky III after hearing their 1981 hit ‘Poor Man’s Son.’ This was the second #1 hit from the boxing film series after the theme of the original, ‘Gonna Fly Now’ reached the top of the charts following the first film…back when berets and wrist bands were cool.

CATALYST CALENDAR

Tomorrow: 1) Australian jobs for April; 2) Japan machine tool orders for April; 3) ECB economic bulletin; 4) US weekly continuing claims; 5) US import prices for April and; 6) earnings before the open: Deutsche Telecom, DSX, EQM, Merck KGaA, Prudential PLC, WIX and WNC. After the close: AMAT, CDR, FTCH and NLOK. Friday: 1) China April Industrial Production, retail sales, Fixed Asset Investment and jobless rate; 2) India imports/exports for April; 3) Germany’s Q1 GDP; 4) Eurozone Q1 GDP; 4) Eurozone trade balance for March; 5) US retail sales for April; 6) US Empire Manufacturing Index for May; 7) US Industrial Production for April; 8) US Michigan Confidence for May and; 9) earnings before the open from DKNG, JD and VFC.

Jackson Square Capital produces Inside Markets. We also offer financial planning and investment management services. Learn more here and catch up on our recent media appearances.

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This material is intended for informational purposes only. It should not be construed as legal or tax advice and is not intended to replace the advice of a qualified attorney or tax advisor.