July 5, 2024 | VIX Spike on Global Risk-Off Trade

MARKETS

S&P 500: Down -178 points to 5169, VIX: 34.68

Asia: Japan -12.40%, China -1.54%, Hong Kong -1.46%

Europe: Euro Stoxx 50 -1.51%, FTSE -2.16%, DAX -1.95%

FX: USD (DXY) down 0.59%, EUR up 0.47%, GBP down 0.31%, JPY up 1.89%, CNY up 0.58%

Energy: WTI Crude down 0.82% to $72.90, Brent down 0.70% to $76.27

Cross markets: Terminal rate down ~1bp at 5.32, Implied rate cuts 2-years from terminal up ~54bp at 236bp, 5/10 yield spread +16bp

Treasuries: 2-year yields unch at 4.881%, 10-year yields down ~1bp at 3.785%, 30-year yields down ~3bp at 4.074%

WHAT WE'RE THINKING

Snapshot: US equities are lower but off worst levels after an improved ISM services print dulls the imminent recession narrative.??Equity volatility (VIX) spiked this morning to match Covid lockdown levels in March ’20.??All sectors are lower with some of the bigger declines in Tech and Consumer Discretionary stocks.??INTC is the worst performing stock in the S&P 500 (SPX) on follow through selling from Friday with WBA, CZR and WYNN close behind. Credit-sensitive banks (C and SYF) and homebuilders/building materials also underperform. Defensive groups like Consumer Staples outperform with K at the top of the performance table on takeover speculation, while post-earnings upside in TSN adds further support. Treasury yields are mixed with curve flattening after the 2/10 segment briefly traded with a positive slope this morning. The Dollar Index?is lower with yen strength?still the dominant story in FX. Commodities are mostly lower with copper underperforming and resuming its downtrend.??Gold?is down more than -1.5%, while WTI crude holds up best on a Middle East risk premium.?

• Global risk-off follows further unwinding of the yen carry trade after the BOJ tightened policy last week.??
• Friday’s weaker US Jobs Report (and worst ISM manufacturing employment print since 2020) provided a fundamental justification for risk-off sentiment but the magnitude of the move comes from the yen carry trade dynamic.?
• Japan's Nikkei 225 fell more than -12% overnight (biggest decline since 1987), which dragged Eurozone and US equity futures lower as well.??
• Major US indices have clawed back some of that decline after July ISM services moved back into expansion territory at 51.4 from 48.8 last month. New orders also moved into expansion and the employment component moved to its best level in 10 months. There should be some interest in the Fed’s Senior Loan Officer Opinion Survey due later this afternoon, but Thursday’s release of weekly jobless claims will be the next major macro report.?
• Chicago Fed President Goolsbee said the Fed doesn’t react to one month's numbers on jobs, which only reinforces concerns that policymakers falling behind the curve. Expect that theme to remain present during a busy week of scheduled Fed speeches.?
• Overseas data includes a better China Caixin services PMI for July, which came in at 52.1 vs. consensus for 51.5.??
• SAH joins TSN on the short list of earnings-driven winners, while BNTX, BRK/B, CG and THS trade lower after reporting.??Earnings highlights after the close include results from CAR, CSX, PLTR, SPG, TDC, VNO and YUMC.?

Carry trade: The unwinding of a popular carry trade is mostly responsible for the magnitude of the recent sell off.??The basic carry trade involves borrowing money in currency with a low rate of interest (low financing cost) and buying assets in a currency with a high rate of interest (higher return on cash).??Japanese yen has been the big funding currency over the last few years with higher yielding US cash as a popular investment – with some of the borrowed yen finding its way into US equities.

?

Vol: The VIX Index spiked above 65 this morning but has pulled back to ~36 as I type.??VIX levels above 20 become a headwind for equity rally attempts and levels above 30 take a few months to unwind.??Subdued levels of equity volatility were partially responsible for the multiple expansion seen over the past 9 months, and elevated volatility will now weigh on multiples until it dissipates.??The VIX hasn’t had a proper capitulation (above 30) event in 17 months, but a mostly supportive macro environment (Q2 earnings season has been better than expected) could shorten the time it takes to settle down.??An optimistic guess would be late-September/early-October.? ??

?

Chartist: We’ve been highlighting the damaged technical picture for the NDX and SOX over the last two weeks. The SPX joined the list of damaged charts Thursday afternoon when it broke bullish trend support of 5445.??The index now has a ‘tactically’ bearish trend until it crosses back above 5450. Selling momentum accelerated on Friday after the Jobs Report pushed the index below its 50 simple moving average (CTAs use simple moving averages as selling triggers). Today’s global risk trade has the SPX below first level support of 5225 with the 5070-5130 range as the most likely place for a short-term rebound.??

FACT OF THE DAY

Vultures with GoPros and GPS trackers are used to find illegal trash dumps in Peru – because vultures like to hang out at trash dumps. Duh

JSC IN THE MEDIA

AAPL Earnings Beat Despite Slip in iPhone Sales: Andrew Graham and CFRA’s Angelo Zino talk about Apple's (AAPL) earnings and what to expect from 'Apple Intelligence.' Watch Now

?

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

?

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

August 5th, 1914: Cleveland, Ohio installs the first electric traffic light at the intersection of Euclid Ave. and East 105th St.

CATALYST CALENDAR

Tomorrow: 1) RBA decision; 2) German factory orders for June; 3) Taiwan’s CPI for July; 3) Eurozone retail sales for June; 4) New Zealand’s jobs data for Q2; 5) China’s exports/imports for July; 6) Earnings before the open: ADNT, AHCO, ARMK, ATI, AVNT, BAX, BLD, BLDR, BLMN, BR, CAT, CEG, DUK, ENR, EPC, EXPD, FIS, GFS, GXO, H, HSIC, IDXX, INGR, J, JLL, KLG, KVUE, MD, MPC, MKTX, NVT, OC, OGN, PLNT, SMCI, SSTK, STWD, SWX, TAP, TPX, TRMB, UBER, VMC, YUM, ZTS; 7) Earnings after the close: ABNB, AIZ, AMGN, ANDE, ASH, AXON, AZPN, BGS, BL, CRC, CRUS, DVA, DVN, FTNT, GO, IAC, IFF, ILMN, IPAR, JACK, KD, LUMN, MOS, ORA, PGNY, POWI, PR, QLYS, RUN, TRIP, TREX, VECO, VFC

?

Wednesday: 1) German exports for June; 2) US consumer credit for June; 3) Earnings before the open: AVA, BCO, CRL, CVS, DIN, DIS, DT, EMR, EXTR, EYE, GEO, GOGO, GPN, HLT, KMT, LESL, LPX, MMI, NYT, ODP, PAYO, RCM, RL, ROK, RXO, SHO, SHOP, TECH, TGNA, VSH, VSTS, VVV, WMG, WWW, ZBH; 4) Earnings after the close: AGO, AOSL, BHF, BOOT, CACI, CF, CSGS, CW, CXT, CXW, DLB, DUOL, ENS, EQIX, HI, HPP, JXN, KAR, KLIC, KW, LESL, LNW, MCK, MKSI, MMS, MRO, NTR, OXY, PRI, RAMP, RYN, SEDG, SONO, WBD, WTS, ZD

?

Thursday: 1) RBI decision; 2) German industrial production for June; 3) Taiwan’s exports/imports for July; 4) US weekly jobless claims; 5) US wholesale inventories/trade sales for June; 6) China’s PPI/CPI for July; 7) Earnings before the open: CARS, CCOI, CHH, EPAM, FUN, HAE, KOP, LAMR, LLY, MLM, MUR, NRG, NXST, PBH, PENN, PH, PZZA, SEE, TKO, UAA, USFD, VST, VTRS, WD, WMS, YETI; 8) Earnings after the close: AKAM, ALRM, DBX, DEI, DIOD, DOCN, DOCS, DXC, ELF, EXPE, G, GDOT, GILD, NUS, NWS, PARA, PDFS, PODD, PRA, REZI, SOLV, SYNA, TRUP, TTGT, TTWO, VIAV, VRRM

?

Friday: 1) Norway’s CPI for July; 2) Earnings before the open: AMCX, EMBC, EVRG, SLVM

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.

Investment Advisory Services offered through Jackson Square Capital, LLC, a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

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.