Last Friday we started the note with “To say it has been an interesting week would be an understatement as some volatility has returned to markets.” We could start the same way today, but the understatement would be saying “some volatility” as it came back with a vengeance, especially in the back half of the week. Last week was mostly a continuation of the “Great Rotation” following the better-than-expected CPI report but at the end of the week there were some signs of strain beginning to show up and that turned into some broader de-risking to close the week. The VIX moved above 15 for the first time since April and the fact that it was options expiration did seem to add to the volatility.
Politics once again dominated the weekend headlines with President Biden officially withdrawing from the election, but markets took that in stride. The macro backdrop was also a bit quieter with Fed officials muzzled until next week’s FOMC rate decision and a lack of key economic data until later in the week. This left the focus squarely on earnings.
As the pace of earnings began to ramp up early in the week there was a modest bounce which was not terribly surprising given the very steep declines in the mega-cap tech stocks/semis last week (NYSE FANG -4.6%, ICE Semiconductor -9%). That bounce did not come at the expense of the rotation which continued to occur just a little more quietly.
That is until the first two of the mega-cap tech names, Alphabet and Tesla, reported earnings on Tuesday night. In our Q2 Earnings Preview we highlighted the bifurcation within earnings expectations with the bar being set very high for the mega-cap tech names given the YTD strength. Well, the companies failed to live up to those High Hopes which caused a bit of a Panic! At the Disco (sorry to re-use my joke but I liked it so much the first time).
The tech earnings set a negative tone for Wednesday but the weakness accelerated overnight as the Yen rallied over 1% verse the USD, a continuation of the unwind of another very crowded trade, and earnings in Europe didn’t help the situation. On Wednesday the S&P 500 fell 2.3% the biggest decline since 2022 closing right around the 50d moving average. The selloff broke the longest streak without a 2% single session decline since before the GFC. Initially the weakness was contained to tech but that spread into the close as the VIX pushed above 17. The NYSE FANG+ and ICE Semis both fell >5% on the day.
Wednesday night led to more Yen strength which then seemed to bleed into other assets like commodities and cryptocurrencies overnight. Better than expected GDP and capital goods orders along with a tick down in claims data helped the USD firm up and futures recouped the modest overnight losses ahead of the open. However, shortly after the open there was another very violent wave of tech selling. The S&P 500 briefly broke below 5,400 and the VIX almost hit 20 before a bid showed up and there was an aggressive reversal in tech names. At the lows, the NYSE FANG+ index was down nearly 2.5% while Nvidia was down 7% bringing its high-to-low drawdown to just under 25%. The rebound was equally as aggressive with NYSE FANG+ moving into positive territory while the S&P 500 rallied ~100pts (1.8%) off the lows. It looked like it could be a solid reversal day however, markets peaked ~1:00 and faded into the close reversing pretty much all of that rebound.
Which brings us to today and the most important piece of economic data of the week. Overnight Asian markets and the Yen were tame by recent standards and US futures rallied along with European indices recouping about half of the late day selloff. All-in-all the data came in pretty much in line with estimates with PCE up 0.1% and core-PCE up 0.2% on a monthly basis and with the annual readings at 2.5% and 2.6%, respectively. The latter was flat on a m/m basis but a tenth ahead of estimates. Coming in, there was some concern that the numbers could be a touch hot after PCE within the Q2 GDP data came in ahead of expectations yesterday. Yields moved modestly lower on the data while equities held the pre-market bid. During the day the S&P 500 rallied to test yesterday’s high around 5,490 but couldn’t clear that level and pulled back modestly. There were broad based gains today with every sector ending higher.
There was volatility this week, but it was mostly about the rotation and unwinding of crowded positions. The VIX ended the week ~16.5, it is still elevated but not screaming stress. We’re also not seeing any strain in credit markets or Treasury volatility.
For the week the S&P 500 ended down 0.8% while the equal-weight version of the index was up a similar amount. The NYSE FANG+ and ICE Semis were both down 3% for the week while the Russell 2k was up 3.4%.