Pop Goes the Bubble… Mag Seven Enters Correction Mode

Equities get a reality check after being priced for perfection

Highlights

• Equities get a reality check after being priced for perfection

• More evidence that job gains have been overstated

• Expect the BoC to do more after yesterday’s “dovish cut”

• Low-income consumers are not really “lovin’ it”

While We Were Sleeping

The rollover in global equities yesterday has been extended overnight, with the chips sector plunging (Alphabet’s earnings numbers and the details definitely failed to impress, and Ford missed on its Q2 profit expectations, the stock is being pummeled in the pre-open trade).

U.S. futures are pointing to a soft open (the Dow outperforming the S&P 500 and Nasdaq), and Europe has retreated a hefty -1.7% at the moment, though off their worst levels (Porsche and Gucci are the latest luxury goods producers getting hit hard by the lingering weakness). All in, the MSCI Asia Pacific index closed with a -1.7% loss to a one-month low with the spiking yen (up +1.2% to ¥152.1 at one point overnight and riding a four-day stretch of advances) igniting a dramatic selloff in Japan’s Nikkei 225 (-3.3%; and has now entered an official technical correction). The Emerging Market complex is currently off -0.8%, led by Hong Kong (-1.8%), Korea (-1.7%), Singapore (-1.0%), Thailand (-0.5%), and India (-0.2%).

The unwinding of these massive short bets on the yen in the futures & options pits (leveraged funds have slashed their net short yen positions this past week by the most since March 2011) has been nothing short of epic (as the swaps market now prices in a 70% chance of a BoJ rate hike next Wednesday, up from 43% odds at the end of last week). Not even a surprising additional rate cut by the PBOC (-20 basis points in its one-year rate to 2.3%) in the first such move since April 2020 could stop the Shanghai Composite from faltering -0.5% today.

Bitcoin is down -3.0% here in the early going to $64,056; gold is down -1.1% to $2,370 per ounce; and Brent crude has slipped -0.7% to $81.12 per barrel. In addition to the yen, the defensive “risk-off” Swiss franc also rallied to a one-month high (+0.7%) against the euro today to 0.9528. The descent in the pro-cyclical and reflationary currencies of the Australian dollar (-0.7% to 65.42 cents (U.S.) and down -2.2% so far this month) and the New Zealand dollar (-0.2% to 59.16 cents (U.S.) and riding a five-day losing streak) is testament to the view that all asset classes are gearing up more forcefully now than any other time this year for a visible global growth downturn. As if the base metals haven’t been flagging this for some time now as they have been in freefall (down an additional -0.6% yesterday).

Bonds also have reclaimed a bid — 10-year yields are down -2 to -4 basis points across Europe, down -2.3 basis points in Japan to 1.04%, off nearly -2 basis points to 2.20% in China (clearly a global deflationary number), and the 10-year T-note has found its legs (-5 basis points to 4.23% after yesterday’s surprising upside yield reversal). All market quotes are time-stamped to 4:30 a.m. ET.

It was light on the data calendar but what did come out was on the weak side — the German ifo business sentiment index dropped to 87.0 in July from 88.6 (consensus was 89.0). The closely watched “expectations” component sagged to 86.9 from 88.8 in June (consensus here was 89.3, so a decent-sized miss to the downside). This is not a data point per se, but it could be a harbinger for next week’s U.S. employment report: Signs Grow That Hottest Job Market In Decades Is Cooling on the front page of the WSJ.

If you’re in search of some silver linings today, go straight to page 10 of the FT: Investors Hail ‘Turning of Tide’ For Previously Unloved U.K. Stocks. This dovetails very nicely with our recently published analysis of the secular re-rating underway in British assets and the currency (titled London Calling, which we published back on July 19th).