Last week’s market volatility was primarily driven by non-macro factors in what can be termed a “macro-light week.” The first factor was Trump’s survival after being shot, and the second was the US imposing further sanctions on China’s semiconductor industry. These events caused initial market surges followed by declines. Should Trump take office, his policies are expected to support the cryptocurrency sector, a loose monetary environment, and traditional manufacturing industries. As anticipated, the markets opened on Monday with a broad rally, including significant gains in liquidity-sensitive assets like the Russell 2000. However, by Wednesday evening, Trump’s interview revelations and the Biden administration’s intensified sanctions on China’s semiconductor sector caused significant market pullbacks. The Nasdaq dropped nearly 3% intraday and continued to fall by about 1.5% over the next two days. This might present a buying opportunity, considering initiating positions and adding more if the market continues to decline.
AI and semiconductors have been leading the Nasdaq’s recent gains, but latent fears may be brewing. On July 19th afternoon Beijing time, many Microsoft computers globally, equipped with CrowdStrike, experienced blue screen errors. This disruption affected numerous prominent international companies, including airlines and hotels, causing trading interruptions at various exchanges. Following the incident, Microsoft shares fell almost 3%, recovering to a 1% drop by market close. CrowdStrike plunged 16% at its lowest, ending the day down 11%. It’s crucial to watch for further declines due to potential compensation claims. This incident underscores the fragility of today’s interconnected world, where a single erroneous line of IT security code can cause widespread disruption via global internet updates. It raises concerns about whether the proliferation of AI, with its increased computational power, might exacerbate such risks, making the dystopian scenarios of AI ruling humanity depicted in science fiction seem plausible.
Next week, the importance of macro data increases significantly. Firstly, the PMI data to be released on Wednesday at 9:45 PM is crucial. The previous services PMI was 55.3, with an expected value of 54.5, and the manufacturing PMI was 51.6, with an expected value of 54.5. Given that a September Fed rate cut is almost certain, an above-expected PMI will not alter this decision but will reduce recession probabilities. Thus, strong PMI data will be good news. If the PMI falls short, it implies two things: 1. Increased recession risk, and 2. An earlier Fed rate cut, which might negatively impact risk markets rather than positively. Considering the current economic data, the economy remains robust, and we lean towards the PMI exceeding expectations.
Secondly, the preliminary annual GDP growth rate to be released on Thursday evening follows a similar logic to the PMI data. The previous value was 1.4%, with an expected 1.9%. Given the high prosperity in the US AI industry and the services sector, we expect this data to surpass expectations. Additionally, since this is a preliminary value, it might be slightly embellished for the US election, implying it should be favorable. However, if it falls short, it indicates an imminent recession, significantly increasing recession probabilities, and altering current market trading logic.
Lastly, the core PCE data to be released on Friday at 8:30 PM is also significant. The previous value was 0.1%, with an expected 0.2%. Given the earlier June CPI data, we anticipate a substantial decline in this figure, which would benefit risk markets and further enhance the likelihood of a September Fed rate cut, aiming for two rate cuts in 2024.
Overall, the market is transitioning from a previous unilateral upward trend to a phase of oscillation and adjustment. This presents a good opportunity to buy on dips, considering gradually building positions in equity markets. In line with the logic of declining US Treasury yields and rising bond prices, buying Treasury futures could be a strategic move, betting on a new round of significant monetary easing under a potential Trump administration.