Day: August 30, 2024

BCA Research has issued a bearish outlook for the S&P 500, warning that stock prices are likely to be “meaningfully lower 6-to-12 months from today.”

“Investors should maintain an underweight stance toward risky assets,” wrote BCA.

The firm states that the prediction comes amid growing concerns about the U.S. economy’s ability to avoid a recession as labor demand weakens and inflationary pressures persist.

“The U.S. economy is now at the point where a further decline in labor demand would likely coincide with a surge in unemployment and a recession,” they state.

According to BCA Research, despite the Federal Reserve’s expected rate cuts starting next month, the market’s optimistic “soft-landing narrative” is overly confident.

The analysts argue that “it is still too early for the Fed to declare ‘mission accomplished’ on inflation,” as core inflation remains above target, wage growth exceeds historical norms, and inflation expectations remain high.

BCA Research cautions that while a “stealth tightening” effect will impact U.S. households even as the Fed lowers rates, an outsized cut in September is possible.

However, they do not anticipate more than 220 basis points of easing in the absence of a recession. They also suggest that long-term government bond yields might initially rise before falling again as recessionary dynamics become more apparent.

In light of these factors, BCA says investors should maintain an underweight stance toward risky assets, advising against buying into any short-term rally that may occur due to the bullish rate-cut narrative.

The firm notes that “the U.S. election race has narrowed” but does not see the election as a positive catalyst for the economy or corporate profits, further reinforcing their cautious outlook.

Overall, BCA Research’s position is clear: despite the potential for short-term market optimism, they expect that the S&P 500 will face significant downside risk over the next 6 to 12 months.

Despite recent market volatility, Barclays analysts maintain that the AI investment theme remains robust.

The bank said in a note Friday that while equities have been navigating various challenges—such as the Jackson Hole meeting, Nvidia’s earnings, and upcoming payroll data—the broader AI narrative continues to be a driving force in the market.

Barclays highlighted that Nvidia (NASDAQ:NVDA), a key player in the AI space, faced high expectations following a strong rally since early August.

“For Nvidia shares, having rallied significantly since the early August sell-off, the Q2 results were always going to be a high bar to clear,” the analysts noted.

This sentiment stems from the market’s anticipation of consistent “beat and raise” results from Nvidia, which has been a norm since Q1 2023.

However, Barclays suggested that the intense growth and excitement surrounding Nvidia may begin to temper, potentially leading to a normalization in market pricing and valuation.

Interestingly, Barclays sees this potential normalization as a positive development for the broader market.

“We actually think this could be healthy for the overall market, and for an eventual broadening out of market returns,” the bank stated.

The firm pointed out that equity market dynamics have been heavily reliant on the tech sector, particularly Nvidia, over the past 18 months.

As real money positioning remains heavily skewed towards tech, Barclays believes this poses a risk, but the overall AI growth trajectory is still seen as attractive.

Barclays also emphasized the importance of monitoring other factors, such as the German elections and the French Prime Minister announcement, but reaffirmed their positive outlook on the AI sector.

“We still find the AI space and its growth trajectory attractive while valuations have improved,” they concluded, recommending adding to EU Tech positions during market dips.

Investing.com– Bitcoin’s price drifted lower on Thursday amid caution over an upcoming U.S. inflation reading that is likely to factor into the outlook for interest rates cuts.

But the world’s biggest cryptocurrency was nursing a steep decline in August, as a broader risk-off move across financial markets hit crypto prices particularly hard.

Bitcoin fell 1.2% to $59,726.0 by 08:46 ET (12:46 GMT), and was set to lose nearly 9% in August. 

Bitcoin nurses August losses amid slew of headwinds 

Bitcoin spent most of August trending lower, as the world’s biggest cryptocurrency was dented by persistent concerns over token distributions and mass sale events, especially from defunct exchange Mt Gox.

Slowing capital inflows into crypto also weighed, especially as initial hype over the launch of spot Bitcoin exchange-traded funds now appeared to have petered out. 

This, according to a recent report from blockchain analytics firm Glassnode, appeared to have largely quashed speculative activity in the token, which presented few immediate cues for price movement. 

Retail interest in Bitcoin was also seen largely dwindling in recent months. 

Concerns over a U.S. recession had sparked deep losses across global financial markets at the beginning of August, with crypto seeing no exception. But while broader markets, especially stocks, recovered from these initial losses, crypto has so far struggled.

Bitcoin established a trading range of $50,000 to $60,000 over the past month, and has struggled to remain above $60,000 for extended periods. 

Crypto price today: PCE data on tap, caution persists 

Broader cryptocurrency prices drifted lower in tandem with Bitcoin, and were also nursing losses for August. 

World no.2 crypto Ether losd 1.6% to $2,529.75, and was down a whopping 22.2% in August- its worst month since a rout seen in January 2022. 

Other altcoins XRP, SOL and ADA fell between 1.4% and 4%, and were also down for August. MATIC shed 4.5%.

Markets were largely on edge before key PCE price index data due later in the day. The reading is the preferred inflation gauge of the Federal Reserve, and is likely to factor into the central bank’s stance on interest rates. 

Lower rates bode well for cryptocurrencies, given that they free up more liquidity for speculative trade. 

Traders are pricing in a greater chance of a 25 basis point cut in September, according to CME Fedwatch. 

Elon Musk wins Dogecoin manipulation lawsuit, prices little changed 

Among meme tokens, Dogecoin fell 1%, taking little support from the dismissal of a lawsuit alleging Elon Musk and Tesla (NASDAQ:TSLA) manipulated the price of the meme token.

Musk had made a series of posts on social media website Twitter, now known as X, hyping up Dogecoin. 

He had also briefly teased the prospect of accepting DOGE as payment for Tesla vehicles. The carmaker currently accepts DOGE as payment for Tesla merchandise, according to its website. 

WazirX sets aside millions of dollars to recover stolen assets, cover legal costs

In other crypto-related news, troubled cryptocurrency exchange WazirX has earmarked millions of dollars to cover legal expenses following the theft of hundreds of millions in cryptocurrency during a devastating cyberattack in July that severely impacted the Indian exchange.

Singapore-based Zettai Pte Ltd, the parent company of WazirX, on Wednesday submitted an affidavit to the High Court of Singapore, seeking a 30-day moratorium. This pause is intended to facilitate discussions with investors and creditors, aiming to stabilize the platform.

If approved, the moratorium is considered crucial for maintaining the platform’s operations and preventing additional legal complications.

WazirX has halted withdrawals as it works to recover user funds following the breach, which saw attackers make off with $230 million in various cryptocurrencies, including $102 million in Shibu Inu tokens. The attack has left many users in a difficult position and significantly damaged trust in the exchange.

In an effort to alleviate investor concerns, Nischal Shetty, WazirX’s co-founder, stated on Thursday that the exchange is actively working to resolve the issue as quickly as possible.

Meanwhile, rival exchange CoinSwitch has taken legal action against WazirX over funds that are currently inaccessible on its platform.

Zettai stated in its affidavit that it is taking into account creditors’ interests in a proposed scheme aimed at determining the optimal method for distributing users’ assets.

Zettai disclosed that its liquid assets consist of $284 million in cryptocurrency, with an additional $12 million set aside for ongoing investigations, legal proceedings, and efforts to restructure its liabilities.

Ambar Warrick contributed to this report. 

In the second quarter, long-only funds (LOs) made significant moves by increasing their exposure to Communication Services, boosting their relative weight in the sector by five percentage points to over 30% overweight, according to a note from Bank of America on Friday.

In its active managers holding update note, BofA says the shift underscores a growing confidence in a sector that was already considered “the most crowded” as LOs sought to capitalize on its perceived stability.

To fund this shift, LOs are said to have notably reduced their positions in cyclical sectors, particularly in Materials and Energy, with exposure decreasing by 4 and 3 percentage points, respectively.

The reduction in Discretionary stocks, down by four percentage points, is seen as further highlighting ongoing concerns about consumer resilience, particularly as economic indicators suggest a possible downturn.

Bank of America’s analysis also reveals that despite these strategic reallocations, active managers have not shown a strong appetite for taking on positive tail risk.

The firm’s US Regime Indicator and Global Wave both indicated a deteriorating economic environment in July, suggesting a potential shift from the current Recovery phase back to a Downturn.

This caution is reflected in factor tilts favoring Low Beta stocks, as well as an uptick in cash levels, signaling rising risk aversion among active managers.

Interestingly, the “least crowded stocks were spared during the summer sell-off,” said Bank of America.

“A strategy of going long the 25 least crowded stocks and short the 25 most crowded stocks (based on both LOs’ relative weight and ownership breadth) would have generated >8ppt of alpha during the S&P 500’s peak-to-trough decline,” they added.

Overall, the widening market breadth, observed since June, bodes well for active managers, particularly those who have been grappling with the dominance of mega-cap stocks.

“Healthier breadth is a positive for PMs, who over the past year have been faced with the choice of either increasing their concentration risk or heavily underweighting recent leadership,” concludes BofA. “We expect the rotation to continue, favoring the equal-weight index.”

Investing.com — Investors should be more concerned about the potential burst of the AI bubble than a looming U.S. or global recession, according to strategists at BCA Research.

The firm’s analysis warns that the risks associated with the booming AI sector outweigh those posed by broader economic downturns.

“When bubbles burst, the investment priority is to steer well clear of the bursting bubble plus sectors, regions, and countries heavily exposed to it,” BCA Research emphasized.

This means that whether or not a recession follows the bubble’s collapse, the focus should be on avoiding areas most affected by the fallout.

On a cyclical 6-12 month horizon, BCA Research says there are several key strategies to mitigate risk.

First, they recommend staying overweight in bonds and the Japanese yen (JPY), which are traditionally seen as safer havens during periods of market turbulence.

Conversely, investors should underweight U.S. tech and quasi-tech sectors, which are most closely tied to the AI boom, and reduce exposure to U.S. equities in a global portfolio.

“Tactically, SGD/USD is vulnerable to reversal,” the note adds, suggesting caution for those involved in the Singapore dollar and U.S. dollar currency pair.

Additionally, BCA Research sees a “long copper versus gold” strategy as a viable countertrend trade, potentially offering a hedge against the broader market risks.

The overarching message from BCA Research is: “Investors should worry much less about a U.S. or global recession than they should worry about the bubble in anything AI-related.”

As the AI sector continues to draw immense attention and capital, BCA believes the potential for a sharp correction poses a significant threat, making it a critical factor for investors to consider.

Investing.com — Traders have increasingly positioned themselves for the Federal Reserve to initiate interest-rate cuts at its upcoming meeting in September, according to a report from Reuters.

Market participants are now widely expecting a quarter-point reduction in the policy rate rather than the larger half-point cut that some had anticipated.

This shift in expectations follows the release of the U.S. central bank’s preferred inflation gauge for July, which showed that inflation rose in line with economists’ forecasts.

The Personal Consumption Expenditure (PCE) index, which is closely watched by the Fed, increased by 2.5% year-over-year, slightly below the expected 2.6%, while on a monthly basis, it rose by 0.2%, as predicted.

Despite solid gains in consumer spending, the fact that inflation continues to moderate has bolstered confidence that the Fed will move towards easing monetary policy.

Traders are now projecting that the Fed will cut rates by a total of one percentage point across its final three meetings of the year.

Last week, Fed Chair Jerome Powell signaled a shift in policy stance, stating that “the time has come for policy to adjust,” reinforcing market expectations of a more accommodative approach as the year progresses.