Last week was relatively quiet in terms of macroeconomic events, leading to limited market volatility. Early in the week, ASML’s downward revision of its earnings forecast triggered a broad pullback in tech stocks, but this was soon offset by TSMC’s upward revision of its revenue outlook, which brightened the mood. The Nasdaq quickly recovered its losses, and the S&P 500 hit new intraday highs, with the Nasdaq hovering near previous highs. Despite the initial sell-off on ASML’s disappointing news, we saw an uptick in bearish sentiment among investors. However, we believe it is still premature to enter short positions, as the current upward trend has not shown signs of exhaustion, and more time is needed to determine the direction of the market.
Our analysis remains focused on three key themes:
1. U.S. Economic Outlook: Recent data indicates that the risk of a U.S. recession is rapidly fading. Last week, Federal Reserve member Christopher Waller preemptively warned the market that the upcoming nonfarm payroll data might come in weaker than expected due to the Boeing strike and other temporary factors. As the Fed is currently in its blackout period ahead of the next FOMC meeting, Waller’s comments were intended to manage market expectations and prevent overreactions to potentially weaker job numbers. Based on the current data and Fed statements, the recession risk appears low for the time being.
2. U.S. Presidential Election: Donald Trump is currently leading the race against Kamala Harris with a 60:40 probability, according to Polymarket. The market is increasingly pricing in a “Trump trade,” favoring industries expected to benefit from his potential return to office, such as real estate, cryptocurrency, and traditional manufacturing sectors. The ongoing strength in the S&P 500 and the Russell 2000 reflects this shift. We advise investors to begin considering how to position themselves for a potential Trump victory.
3. Geopolitical Risks: Recent tensions in the Middle East and on the Korean Peninsula have somewhat subsided over the past week, reducing the market impact of war-related concerns. However, these risks remain on the radar and are worth monitoring closely.
In summary, recession and war risks have eased over the past week, while the probability of a Trump victory continues to rise. Investors should start preparing for the potential market shifts associated with a Trump-led administration.
Outlook for This Week
This week is also relatively light on macroeconomic data. Key releases include initial jobless claims, the services and manufacturing PMI reports, and the University of Michigan inflation expectations. Based on recent trends, we expect services to remain strong, with the PMI reading likely to surpass expectations, while manufacturing is expected to continue underperforming. Overall, these two data points may offset each other’s effects on the market, leading to only short-term volatility unless there is a significant deviation from forecasts.
The University of Michigan inflation expectations will be the most important data to watch. If it falls below expectations, it could bolster the case for more aggressive rate cuts by the Federal Reserve, improving market liquidity. However, if inflation expectations significantly exceed forecasts, it would signal a slower pace of rate cuts, which could weigh heavily on the market.
Conclusion
Both U.S. equities and cryptocurrencies remain in a bullish trend, but the groundwork for a potential bearish shift is being laid. Some divergence in market sentiment is emerging, especially with the upcoming U.S. election in November potentially leading to major market changes. As a result, we are considering reducing our long positions in international markets and, when appropriate, initiating selective short positions.