Investors trim risk and crowded positions

US equities ended sharply lower on Friday, with the S&P 500 down 1.8%, the Nasdaq falling 2.4%, and the Dow Jones dropping nearly 610 points. This decline followed a weaker-than-expected jobs report and disappointing tech earnings, including an 8.8% drop in Amazon and a 26.1% plunge in Intel. The STOXX 50 also fell 2.8% on Friday and declined 3.7% for the week, driven by fears of a slowing US economy and a significant 11.2% drop in ASML, which mirrored broader global chip sector selloffs. For the week, the S&P 500 and Dow fell 2.1%, while the Nasdaq decreased 3.4%.

Summary for 05.08.2024

Asian shares fell sharply on Monday amid US economic slowdown fears, with Japan's Nikkei and TOPIX nearing bear market territory. Wall Street's slump and mixed earnings weighed on regional equities. Japan's losses were driven by foreign investor exits and a strong yen. China's markets saw limited losses, supported by positive services PMI data.

Major European equity markets were seen heading for a flat to lower open while US equity futures indicated a sharp decline at Monday's open, extending last week's selloff due to recession concerns and disappointing jobs data.

Oil prices edged up slightly in Asian trade this morning amid concerns over potential supply disruptions from heightened Middle East tensions, despite fears of slowing economic growth. Brent and WTI crude futures each rose 0.1%. Recent weak US and Chinese economic data, suggesting potential recession risks, have pressured oil prices despite the ongoing geopolitical risks.

China's services activity grew in July, with the Caixin/S&P Global services PMI rising to 52.1 from 51.2 in June, indicating expansion for the 19th month. New orders increased, but overseas demand hit an 11-month low. Despite rising costs, employment rose. China's economy faces slow growth, deflationary pressures, and a property slump.

In July, the US unemployment rate rose to 4.3%, its highest since October 2021, with 352,000 more unemployed individuals. Nonfarm payrolls increased by 114,000, below expectations, and average hourly earnings grew by just 0.2% to $35.07, slightly missing forecasts. The cooling labour market has led traders to raise the probability of a 50 basis point Federal Reserve rate cut to 63%, up from 28% the previous day, while reducing expectations for a smaller 25 basis point cut.

CrowdStrike rejected Delta Air Lines' claim that it is responsible for a global outage on July 19, which led to $500 million in losses and over 6,000 cancelled flights. CrowdStrike disputed allegations of negligence and highlighted its offer of assistance, emphasising that any liability is contractually limited to a few million dollars. Meanwhile, it was reported that, Alphabet’s CapitalG reduced its stake in CrowdStrike by half before the July global outage.

Mars Inc., one of the biggest privately-owned companies in the world, is exploring a potential acquisition of Kellanova, the maker of Pringles, valued at around $27 billion. If completed, it could be one of the largest deals in the food industry. However, antitrust concerns may arise due to both companies' significant market presence. Mars last made a large acquisition in 2017.

Design flaws could delay Nvidia’s launch of its new AI chips by three months or more, impacting major clients like Meta, Google, and Microsoft. The company’s Blackwell chip series, intended to follow the Grace Hopper Superchip, faces production setbacks. Nvidia confirmed strong demand for its Hopper chips and ongoing Blackwell production.

Berkshire Hathaway has sharply reduced its Apple stake, selling about 390 million shares in Q2 after offloading 115 million earlier in the year, and boosting cash reserves to nearly $277 billion. Despite this, Wedbush notes Warren Buffett remains a strong supporter of Apple, which continues to be Berkshire's largest investment. The move reflects Buffett's cautious stance on market valuations and the broader US economy, even amid a record quarterly profit.

ExxonMobil's second-quarter earnings exceeded expectations, with adjusted EPS of $2.14 and revenue of $93.06 billion, driven by strong production from Permian Basin and Guyana assets and the Pioneer Natural Resources merger. The company reported $9.2 billion in earnings, its second-highest Q2 result in a decade, and plans significant share repurchases.

Chevron's Q2 earnings fell 19% to $2.55 per share, missing estimates, as operational issues and weak refining margins impacted results. The company faces a potential delay in closing its $53 billion acquisition of Hess Corp, possibly extending into 2025 due to Exxon's challenge. Chevron also plans to move its headquarters from California to Texas.

Barclays upgraded Ferrari to Overweight after the company exceeded Q2 EBIT consensus by 7%, achieving a record 29.9% margin and raising its FY24 guidance. Ferrari’s strong performance, driven by margin tailwinds and cost efficiencies, led Barclays to set a €450 price target, marking Ferrari as a top equity pick.

Goldman Sachs downgraded Lululemon Athletica from Buy to Neutral, citing execution challenges, weak innovation, and increased promotional activities as factors impacting growth. The bank lowered its 12-month price target to $286 and expressed doubts about near-term sales improvement, anticipating the shares will remain rangebound without significant positive catalysts.

Hedge fund Elliott Management described Nvidia's shares as being in a "bubble," driven by "overhyped" AI technology. Elliott expressed scepticism about the sustainability of Nvidia's rally, citing concerns over AI's practicality and cost-efficiency. Despite major investments from tech giants, Nvidia’s shares have fallen over 20% since June amid broader doubts about AI and economic conditions.

Morgan Stanley warns that achieving a "Goldilocks" economic scenario of moderate growth and low inflation is becoming challenging. They highlight mixed economic surprises and limited positive earnings surprises, advising investors to focus on asset diversification and valuation. They recommend considering the equal-weighted S&P 500 and high-quality cyclicals or defensives while avoiding speculative small-cap shares and tech equities.

HSBC's updated outlook for European equities in H2 2024 highlights deteriorating earnings growth and mixed economic data. The bank notes European shares underperformed globally in H1 and warns that declining earnings growth may impact future performance. HSBC favours cyclical sectors like Real Estate and Healthcare, and the UK market, while downgrading France due to political uncertainty.

This week, investors will focus on US economic data such as the ISM Services PMI and initial jobless claims. Key earnings reports from Walt Disney, Caterpillar, and Uber will also be in the spotlight. Internationally, China will release inflation data, and Germany will provide trade balance and industrial data.

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