S&P closing in on ATH
No one talks anymore about the Yen Carry Unwinding Trade that brought markets heavily down at the start of this month. No one talked about it before it happened, and no on now after it has happened. It was a quick event with a strong downtick and a solid recovery. Currently the S&P again close to the all-time high (ATH).
Besides the Nikkei Panic Day, there has been little going on. Earnings season has not brought that many surprises and the economy of the US is clearly slowing down in combination with a lower and stable inflation.
jackson hole
In the yearly Jackson Hole event (somewhere in the Mountains in Wyoming), Powell on Friday laid the groundwork for the FEDs monetary policy for the next months. The Jackson Hole event is traditionally an event where the chairman of the FED does try to manage the expectations of the financial markets regarding what is likely to happen on the central bank front (read: interest rates mostly).
The market was and is pricing in 100bps of rate cuts in the next three meetings combined, so for the rest of 2024. Powell’s speech on Friday was in line with what the market expected and he doesn’t rule out the 100bps of rate cuts. Though, 75bps in cuts is also very realistic and in my opinion more likely. Though, the fact that Powell did not try to push back against the priced rate cuts did cause a new round of strength in the stock markets with the S&P rallying over 1%.
The middle one below shows the most likely scenario according to the market, where the target interest rate will go to 425-450 by the end of the year versus a target rate of 525-550 at the moment of writing.
all not so interesting
Regarding the central banks and the high likelihood that solid rate cuts are approaching: why care?
Exactly. The picture is quite clear with a slowing economy and a stable slowing inflation. Too many people are expecting the room to maneuver for central banks too high at the moment. People find it difficult to move on from a time where inflation was not under control to a more stable environment. It should not be that exciting over the next FED meetings as it is quite clear what will happen: rate cuts and more unsurprising inflation figures in combination with an economy that cools down probably a bit more.
Next to the above, the reality is that the markets are most likely back in summer mode. The market missed a few weeks of that mode when stocks declined at the start of August. The VIX, back to silent levels, also shows that there is not a whole lot too expect in the next few weeks and months. The next decent planned event is the US elections in November. Next to that, we need to wait for a new event/theme to move the markets. You should not bet on that, hut just wait till there a signs of such a theme and then make up your mind and spot opportunities. We will keep you posted!
next week, nvidia!
Most interesting day of the week will be Wednesday. After the stock market close, Nvidia will report their earnings over Q2. Nvidia is the second biggest company in the S&P and does quite often have large moves on the earnings as it is the AI darling of Wall Street. And AI does move the markets this year. Looking at the Nvidia options, we can see that the market expects an around 9% move on the earnings after the bell on Wednesday. Nvidia has an around 6.5% weight in the S&P. So the S&P can also see a decent move of close to 0.6% after the close.
recently discussed a large small cap opportunity
Recent weeks have been slower in the markets, but we have spotted a small cap company without debt and with large profitability that due to low market volume and recent stock dilution has been punished far too much in our opinion. As the dilution is over and the company now even announced a buyback (of over 50% of the shares at the current price in the next 2 years), we do see a very high risk/reward opportunity where the chance of x3-x5 is probably even larger than the halving or worse in value.
