ASX Market Update 8th August 2024

Global Market Commentary

Chart: S&P 500 as at 07/08/24

After the week we had in the markets I thought it was important to get a note out to you all keeping you informed on what has happened, why and my thoughts.

We have seen some weakness in the US markets for a couple of weeks now, but it really accelerated last week. First, we got an extremely weak ISM Manufacturing number which saw it come well below expected and weakness across all metrics including hiring, prices and new orders. Then on Friday night we had a very weak jobs data drop which sent the market into a panic. The US added 114k jobs for July when 170k was expected and the unemployment rate rose to 4.3% from 4.1%. These triggered fears of a recession and talk they already may be in one. One very popular recession indicator the ‘Sahm Rule’ did trigger a recession warning as well. Then on top of this Intel released quarterly earnings which were abysmal and included laying off 15k people. This stoked fears further. This saw a sharp 6% sell off in the S&P500 over three trading sessions, as well as commodities and yields with the 10yr hitting a low of 3.66%. Remember yields peaked at 4.70% in April of this year. This rippled right across the globe with most equity markets seeing similar types of losses. However, the US was only part of the story and probably the catalyst of what was to come in Asian trade Monday.  

Chart: TOPIX Index as at 08/08/24

The recession fears that were stoked in the US saw massive ramifications across all markets but mostly in Japan. Japan’s main index saw a massive 12% fall on Monday as the ‘Yen Carry Trade’ unwound. Now the carry trade is simple in principle. You borrow money in a very low yielding currency, such as the Yen close to 0%, and then convert it into another high yielding currency, in this case USD, and invest it for higher returns than the cost of borrowing. This had been building over a couple of years as the US ramped up rates whereas Japan kept theirs mostly negative for that time. You could borrow at near 0% and then invest in US bonds and get a risk free 5% or into big US tech companies and get even better returns. This works fine if all inputs remain fairly stable…… but they didn’t.

It has been slowly coming to the boil for a while with the BOJ lifting rates from negative to 0.10% a few months ago to 0.25% last week. Then when recession fears kicked into markets last week everything went against this carry trade and investors had to head for the exits all at once. It saw yields dive in the US and the USD drop and the Yen rip higher as well as Japanese yields. This made the carry trade much less attractive as borrowing costs in yen terms rose and potential returns in the US dropped. Add in a currency move that further impacted the trade as when you converted USD back into yen you got less for your money than previously, and you get one large unwind. Investors must sell US stocks and get their money back to Japan as quickly as possible.

A part of this as well investors had borrowed heavily in Japan to invest in their own market. And we have seen their index outperform most over the last 12 months. So again, when Japanese yields rose and borrowing costs increased investors had to sell. This caused margin calls which then snowballed into more selling, which triggered more margin calls etc and in the end you get a 12% fall in the TOPIX in one trading session and 25% in the last three. It was their largest one-day decline since the 1987 crash.

What happens now? For a while we will see heightened volatility and probably some more selling as uncertainty rules. The markets are having trouble measuring the risk and therefore can’t price it. The VIX peaked at 65 on Monday night, although untradeable, but has settled back at 30 now. We saw the TOPIX bounce 10% on Tuesday and some green in US markets but they have continued their slide last night and today. The US received some positive ISM Services data which beat expectations and suggests the economy isn’t in recession but there isn’t any further major macro data until next week. The markets will want to see some further positive economic data to build some confidence.

Rate cuts are coming. The Fed didn’t cut rates at their August meeting but are almost certain to in September its just a matter of by how much. Before this week’s event’s it was only one cut factored in but 50bps have since been priced in. The US economy is slowing, but I feel is not in a recession now and this will be backed up by data over the coming weeks. The Fed will also get another set of jobs data before the next meeting it is being said we could see the unemployment rate dip back to 4.1% again for August. This is mainly because 249k people were temporarily laid off during July and mostly due to hurricanes in the southeast. 

Opportunity. What I think this is creating is an opportunity to get high quality companies at better prices. The S&P 500 is down 8.2% from its highs and the Nasdaq is off 13.6%. High quality companies such as Microsoft, Apple, Google, Amazon, Nvidia etc. are on sale now and we can either go buy them direct or gain exposure via ASX listed ETFs such as FANG & NDQ. MSFT is probably my priority as it is down 15% closely followed by NVDA -27%. I would be happy to start accumulating now but not to go all in, in case this sell off does have more legs. As a colleague of mine, Chris Weston, said this week you wait for the dip and buy the rip. That’s when we get more aggressive.  

S&P/ASX 200

Chart: S&P/ASX 200 as at 08/08/24

The XJO was not spared from the selling as we are now 5.6% off the record highs we set just last week. It’s been broad based selling, and we are loitering around the 200dma for the first time since December last year. Don’t think it’s worth looking at different support levels as during times like these they don’t hold anyway, and we often see markets get oversold. We are just starting our major earnings period but very few of the larger companies have reported. It will heat up next week.

Again, like the US we will get opportunities to buy quality stocks at discounted prices. The fear is that this is now a synchronized global sell down with China and the EU already struggling and the US was the last domino to fall. Thus, more downside is possible if macro data continues to come in weak. I would be keeping my eye on companies such as WTC, PME, GMG, ARB, LOV, JBH, TNE, RMD, COH, CSL, XRO as names to start accumulating on continued weakness. This is what we have been waiting for, for the better part of the year, and now it’s upon us its best to get ready to deploy cash from the sidelines.

I hope this update and explanation of this week’s events is not too technical as I try and keep it as simple as possible. As always if you have questions or have concerns, please feel free to give me a call. Stay safe and I’ll speak to you all soon. Go Crows!

heath@hlminvestments.com.au

0413 799 315

Important Notice

Heath Moss is an Authorised Representative (AR 278605) of PGW Financial Services Pty Ltd AFSL 384713. Any advice in this article should be considered General Advice only and does not consider your personal needs and objectives or your financial circumstances.  You should therefore consider these matters yourself before deciding whether the advice is appropriate to you and whether you should act upon it. I am happy to assist you in this process. To do so, I will need to collect personal and financial details from you before providing my recommendations. Please note the author may own shares in the companies mentioned in the above blog.