8 August 2024
Weekly Market View
What to do after the shakeout?
After a period of mostly smooth sailing since equities bottomed last October, investors were jolted out of some over-crowded positions last week.
Concerns about a slowing US job market, tightening monetary policy in Japan and doubts about near-term benefits of AI investments led to the equity market sell-off and a reversal of FX carry trades funded by low-cost JPY and CHF.
As bond markets consolidate, US 10-year bond yield around 4% offers an opportunity for those still holding cash to lock in the yields from high quality bonds for a longer period. Bonds should benefit as the Fed cuts rates to support growth.
The market dislocation has made US technology-related equities attractive again. There is also an opportunity to add to the defensive healthcare sector in Europe and non-financial state-owned enterprises in China.
USD is likely to consolidate after the recent slump but upside likely to be capped as the Fed cuts rates.
Where are the key opportunities in equities after the recent sell-off?
Is it time to add to bonds after the recent yield slump?
Are safe haven currencies such as the JPY and CHF overbought?
Charts of the week: Winners and losers
Gains in bonds partly offset losses in equities, highlighting the benefits of a diversified allocation as US growth weakens
Performance of key assets since latest S&P500 index peak*

US bond, equity performance after yield curve turned positive

Source: Bloomberg, Standard Chartered; *S&P500 peaked on 16 July
Editorial
What to do after the shakeout?
After a period of mostly smooth sailing since equities bottomed last October, investors were jolted out of some over-crowded positions last week. This is a risk we have been flagging in recent weeks amid concerns about economic growth and one-sided short positioning in low-cost JPY and CHF currencies.
Despite the volatility, the return of negative correlation between stocks and bonds meant our balanced asset allocation strategy has been relatively resilient. This highlights the benefits of a diversified foundation allocation. Our near-term technical model has turned bearish on equities for the first time in two years, implying near-term risks are present, but our longer-term quantitative model remains pro-risk. Besides, the Fed is likely to cut rates significantly in the coming months to support growth. Hence, we see opportunities from the shakeout, including taking advantage of cheaper valuation in the high-growth US technology and communication services sectors and adding defensive equity sectors in Europe and China.
What triggered the shakeout? Concerns about a slowing US job market, doubts about near-term benefits of Artificial Intelligence (AI) investments amid crowded investor positions and tightening monetary policy in Japan appeared to be the primary drivers.
Slowing US job market: US monthly job creation slowed sharply in July. Some US recession indicators we closely follow have been triggered following the latest job report (see page 3). Nevertheless, an unusual rise in labour supply in this cycle due to a surge in immigration could distort the signal. Also, a closely followed US service sector business confidence indicator surprisingly strengthened in July, partially allaying concerns about growth. We will need to watch higher frequency job indicators, such as weekly jobless claims, closely. A weaker job market is likely to hurt consumption, the key US growth driver.
Reset of AI expectations amid crowded investor positions: Doubts about the near-term benefits of AI have grown during the recent Q2 earnings season. This coincided with investor positioning in the US technology sector turning extremely crowded, a risk we flagged in the Weekly Market View three weeks ago. Nevertheless, the US earnings outlook remains robust, with almost 80% of S&P500 companies beating Q2 earnings estimates. Consensus expects 10.5% earnings growth in 2024 and 14.8% growth in 2025.
Tightening BoJ monetary policy jolts FX carry trades: The BoJ’s ultra-loose monetary policy in recent years against the backdrop of surging policy rates in other major economies had led investors to borrow the low-cost JPY to build leveraged positions in cyclical assets. The BoJ’s surprise rate hike last week and its plans to halve its bond purchases by Q2 26 jolted FX markets. At one point, USD/JPY plunged over 12% from its mid-July level. USD/JPY and USD/CHF (another favoured borrowing currency) are now likely to consolidate. While this points to some upside for the pairs near term, gains are likely to be capped amid US growth concerns and Fed rate cuts. We see a more attractive opportunity in the GBP (see page 5).
Investment implications: US growth equities, defensive European and China sectors: The market dislocation has made US technology equities attractive again. Earnings growth expectations and corporate balance sheets remain robust. There is also an opportunity to add to the defensive healthcare sector in Europe and non-financial Chinese state-owned enterprises (SOE).
Moving to quality bonds as markets consolidate: The US 10-year bond yield has bounced off December’s low just below 3.8% as markets consolidate. A yield around 4% offers an opportunity for those still holding cash to lock in the yields from high quality bonds for a longer period. Bonds are also likely to benefit as the Fed cuts rates to support growth.
The weekly macro balance sheet
Our weekly net assessment: On balance, we see the past week’s data and policy as negative for risk assets in the near term
(+) factors: Dovish Fed, recovering US ISM services
(-) factors: Weak US jobs data, geopolitical tensions

One of our closely watched US recession indicators was triggered after the recent non-farm payrolls report
3-month average of US unemployment rate of permanent job losers minus its 12-month low; non-farm payrolls

Euro area investor confidence and retail sales deteriorated in the latest release
Euro area Sentix investor confidence and retail sales

China services activity remained robust, while manufacturing activity is weakening
China Caixin Manufacturing and Services PMI

Top client questions
Is it still time to add to bonds after the recent yield slump?
US government bond yields fell sharply in the past week on a trifecta of growth concerns, higher rate cut expectations and safe-haven demand. Friday’s weaker-than-expected employment report was a key driver. The data triggered some closely watched US recession indicators, though Hurricane Beryl and the surge in immigrant workers risks adding distortions. However, bullish positioning on US government bonds now looks increasingly stretched, with positioning in 10-year bonds reaching an all-time high on Monday. Moreover, markets are now pricing in about 180bps of Fed rate cuts over the next 12 months, which is aggressive. Together, these data points suggest US bond yields are at risk of a consolidation in the near term.
That said, we still see opportunities to add to bonds as yields consolidate. Firstly, shorter-term yields fell more than longer-term yields in August, making it attractive to lock in yields for longer. Secondly, history shows that a Fed rate cutting cycle coincides with falling longer-term bond yields (rising bond prices). Finally, the risk premium of most corporate and Emerging Market (EM) bonds rose, offsetting the decline in government bond yields. For instance, the yield premium on our preferred EM USD government bonds rose more than 10bps, further enhancing its valuation relative to history.
— Zhong Liang Han, CFA, Investment Strategist
Where are the key opportunities in equities after the recent sell-off?
Global equities witnessed an 8% peak-to-trough decline from their mid-July high, with the S&P500 experiencing a drawdown of similar magnitude. We continue to expect US equities to outperform global equities over the next 6-12 months. Following expected rate cuts from the Fed, we believe investors will be drawn to US equities’ strong earnings growth. The Q2 earnings season supports our view. A total of 86% of S&P500 companies have reported earnings, with 78% beating expectations, according to LSEG I/B/E/S. Expectations for 2024 earnings growth have ticked down to 10.5%, while 2025 earnings growth has ticked up to 14.8%, from 10.7% and 14.4%, respectively, prior to the start of the Q2 earnings season.
Our preferred US sectors are communication services and technology. Communication services is expected to deliver the strongest earnings growth this year (24%), with strength in digital advertising and online entertainment. Technology is also likely to see strong earnings growth this year (19%), driven by AI spending, a semiconductor cycle upturn and cloud computing. In addition, we see an attractive buying opportunity in US major banks – financials delivered one of the most positive Q2 earnings surprises, and banks would benefit from yield curve steepening. Europe’s healthcare sector and Chinese SOEs can also add some defensive exposure.
— Fook Hien Yap, Senior Investment Strategist
Bullish positioning in US 10-year government bonds looks increasingly stretched
Open interest of US 10-year government bond futures

Valuations of most bond sub-asset classes have improved following the market sell-off
Yield premium and percentile* for major bond asset classes (current vs end-July)

S&P500 has technical support around the 200-day moving average (5,021), and subsequently at 4,770
S&P500 index with 200-day moving average

Top client questions (cont’d)
GBP/USD has fallen steadily since the recent BoE rate cut. Do you see further downside for the pair?
GBP/USD has continuously moved lower since the BoE cut rates. This means it has underperformed other G10 currencies despite a softening of the USD. However, the case for further GBP weakness from here is not compelling, in our view, and may be short-lived. The BoE is not the only major central bank embarking on a rate cutting cycle, and its cautious approach appears in line with its peers. This suggests that current and expected relative-yield differentials should not vary significantly in the coming months, limiting further GBP/USD weakness from here.
The latest improvement in UK retail sales indicates consumption remains resilient. UK inflation and GDP readings will be closely watched. Technically, GBP/USD is still trading in its ascending channel (formed since October 2023), and we expect the pair to rebound once it finds support at 1.2610 (June 2024 low). Resistance is at 1.3040.
We initiate a bearish EUR/GBP to capture the view above, choosing to express our view versus the EUR rather than the USD, given more attractive technicals. See the Daily Navigator for more details.
— Iris Yuen, Investment Strategistst
GBP/USD is still trading in its ascending channel and is likely to rebound
GBP/USD and technical levels

Are safe haven currencies such as the JPY and the CHF overbought?
Safe haven currencies have strengthened dramatically in recent days on rising concerns of slower-than-expected US growth and a related unwinding of carry trades (ie, trades that use low-yielding currencies as sources of funding).
However, we believe the momentum of this move is fading. Technically, both USD/JPY and USD/CHF are oversold. We expect a moderate near-term rebound over the coming week. Resistance for USD/JPY is at 151.8. US producer prices and inflation are the next key catalysts; it would likely take a further unexpected cooling in both to cause USD/JPY to test its next support at 140.2.
We see USD/CHF facing strong resistance at 0.8730. The upcoming SNB meeting in late September is the next focus. An unexpected acceleration of Fed rate cuts would raise risks of the pair testing support at 0.8330 after a technical rebound.
— Iris Yuen, Investment Strategistst
USD/JPY is oversold and looking for a technical rebound
USD/JPY and technical levels

Market performance summary*

*Performance in USD terms unless otherwise stated, 2024 YTD performance from 31 December 2023 to 7 August 2024; 1-week period: 1 August 2024 to 7 August 2024
Our 12-month asset class views at a glance

Economic and market calendar

The S&P500 has next interim resistance at 5,540
Technical indicators for key markets as of 7 August close

Investor diversity has normalised across asset classes
Our proprietary market diversity indicators as of 7 Aug close


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The Materials have not been prepared in accordance with UK legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research. Vietnam: This document is being distributed in Vietnam by, and is attributable to, Standard Chartered Bank (Vietnam) Limited which is mainly regulated by State Bank of Vietnam (SBV). Recipients in Vietnam should contact Standard Chartered Bank (Vietnam) Limited for any queries regarding any content of this document. Zambia: This document is distributed by Standard Chartered Bank Zambia Plc, a company incorporated in Zambia and registered as a commercial bank and licensed by the Bank of Zambia under the Banking and Financial Services Act Chapter 387 of the Laws of Zambia.