Soft landing scenario to face key data in the week ahead

02 September 2024

AT A GLANCE

Last week was a relatively quiet conclusion to the tumultuous month of August
Most data kept hopes of a soft landing alive, while Nvidia results were no game changer
The week ahead will provide important data: monthly PMIs and the crucial US jobs report

August started with a turmoil, followed by a strong rebound of everything with radical expectations for US rate cuts, and ended with a relatively quiet week. Weekly returns were flat for global equities, and modestly negative for global bonds, with a 10 basis points increase in the long dated US Treasury yields, to 3.7% for the 5-year and 3.9% for the 10-year.

Indeed, the data released last week, from a stronger than expected US consumption in Q2 to a reassuring core PCE inflation in July and improving consumer confidence, all reinforced the scenario of a soft-landing, rather than an imminent recession. Disinflation is slow but unchallenged: our 2024 scenario is unfolding, and markets are right to expect Western central banks to materially ease their policies

Now, the concerns. While we remain confident in our scenario, we see the current market implied 100 bps of US policy rate cuts for 2024 excessive. We expect 50. This comes at a time when most asset classes are fairly priced for this very scenario. This is not bad news, but this leaves little potential for upside.

What it leaves, by contrast, is potential for volatility: economic data, geopolitics and of course an extremely tight race in the US November US elections are all potential catalysts for turbulences. Those may not prove much more terrible than what happened in early August, but it’s good to be prepared for it. The week ahead will matter, with the final monthly PMIs being released for all major regions, and the important August job report on Friday. Bad economic news may be bad for stocks, while good could affect bonds. We are slightly defensive, and highly diversified. Stay safe.

Soft landing scenario to face key data in the week ahead

Cross-asset Update

Following Fed chair Powell’s dovish speech at Jackson Hole, markets have continued to discount at least one Fed cut at the September meeting with almost certainty. The start of an easing cycle is going to have significant implications across asset classes, including stocks, bonds, and the US dollar. In the case of a no recession history points to equities being strong twelve months out, outperforming bonds that would anyway be showing gains on falling yields. The dollar should be weakening, with investors selling safer dollar-denominated assets to buy non-US equities. Markets have quickly recovered from their almost 10% fall recorded in August, with leadership shifting from technology to other sectors. While IT stocks and the so-called Magnificent Seven are still below their August peak, that is not the case for industrials and financials, and the same holds for the cap-weighted S&P 500 that has yet to record new all-time highs, versus the S&P 500 equal-weighted, that has already cleared its August highs. Market volatility has worked in favour of the average stock, supporting a broadening of the rally that was in the making even before the August swoon. The change in leadership in favour of the more pro-cyclical pockets of the market would be confirming investor’s conviction that a recession is not in the offing, giving hope for the sustainability of the rally. This view ties in with the resilient macro data, from non-farm payrolls growing firmly above 100k per month despite the latest hefty revisions, to the Q2 GDP revised higher, as well as personal expenditure growing faster than consumer income as per the latest PCE report.

But resilient growth is not a good recipe for depressed yields. The 10-year yield below 4% is already discounting slowing activity, and its deeper fall would require a contraction of the economy, currently not visible on the forecast horizon. Money markets are discounting four Fed cuts into year-end, that may well be in excess of what chair Powell could be considering as a prudent course of action to avoid stoking up price pressures. Yields are rebounding from oversold levels, and the dollar is following suit. As long as the US economy exceeds expectations, the number of market-implied rate cuts will have to be revised somewhat down, further supporting yields and the US dollar.

If the US keeps on surprising to the upside, the opposite is true for the Chinese economy. Consensus GDP forecasts have been revised down and there is increasing doubt that the 5% growth rate set by Beijing for 2024 will be achieved. As much as the May real estate rescue package temporarily revived local equities, the now rumoured refinancing of mortgages to lower borrowing costs for millions of families to boost consumptions should achieve the same. Chinese equities should respond, with valuations cheap and sentiment quite depressed.

Soft landing scenario to face key data in the week ahead

Fixed Income Update

In the last Weekly, we had mentioned that the number of rate cuts priced in seem to be excessive if markets believe in the ‘soft landing’ paradigm. The Q2 US GDP estimates released last week exceeded expectations printing at 3% due to strong consumption numbers. There has been a slight downward revision of the number of cuts priced in since then. The US Treasury yield curve has bear steepened as a result. The 3-year curve increased by 5 bps whereas the long-end 30 year has increased by more than 10 bps. The US 10-year is trading around 3.9%, very close to our fair value estimate of 4% for this year. This Friday’s Jobs data holds the key to gauge near term movement in the yields. The median estimate according to Bloomberg is 165k with the difference between min and max estimates at more than 100k indicating the possibility of large variation.

Research from GS has published some interesting data points about credit fundamentals post the Q2 earnings season on US domiciled bond issuers. We present some selected data points from the report below. In summary, the fundamentals remain within historical range and robust. Net leverage for the median IG-rated issuer remains largely stable near the high-end of its historical range at 2.7x but down from its all-time peak of 3.2x during the pandemic. Interest coverage ratios among IG issuers are slightly below their long-run average at 5.5x and have decreased for 10 consecutive quarters.

The median HY issuer also held its leverage steady quarter over quarter, at the lower end of its historical range at 3.4x. HY issuers increased their debt servicing capacity quarter over quarter, levelling out the trend after 6 consecutive quarters of decreasing interest coverage. Balance sheet liquidity has largely remained flat this quarter in both IG and HY. Of note, the divergence in profit margins between IG and HY has continued, with net margins among HY issuers compressing further down to 4.1% this quarter while expanding for the median IG issuer up to 10.7%.

Since last week, we have seen multiple mandate announcements from UAE Entities including RAKBANK, ADCB, BOS and ADNOC, with pricing expected to occur during this week. Both RAKBANK and ADCB have announced tier-2 bonds, sized at $250 million and $500 million, respectively. ADNOC Murban, a wholly owned subsidiary for ADNOC, has also issued a mandate announcement for a multi-tranche, USD notes for 5-, 10-, 30-year bonds. Bank of Sharjah has issued a mandate for 5-year senior unsecured bond. We expect to have multiple strong pipeline issuers from the GCC during September to take advantage of lower yield and tight credit spreads.

Soft landing scenario to face key data in the week ahead

Equity Update

August ended positively for equities (+2.5%), though a flat performance last week following the prior 3 weeks’ recovery from the early August selloff. All major regions gained with a stronger performance from the Eurozone, the UK and India. Mag 7 stocks were close to flat while the Russell 2000 (mid cap) and regional banks lagged the broader market with negative returns. Last week, the S&P 500 settled 0.27% higher, close to its all-time high, as a reacceleration in growth for Q2 and a resilient US consumer gives greater conviction the economy is holding up fine. DM central banks on a more certain rate cut path – better for consumer credit, mortgages, and corporate borrowing. In the Euro area, the STOXX 600 rose 1.4% and the ECB looks likely to cut again. Japan’s TOPIX continued to recover losses from its selloff in early August, closing a percent higher.

Emerging markets saw disappointment around China tech –results from PDD (Temu) took the stock down 28% on the day. India saw new highs – a slow and steady year, The UAE has some interesting equity issuance before year end which broadens the market and dividend payouts remain key.

We are neutral equities with a preference for the US in developed markets and India and the UAE in emerging markets. All global sectors are positive year to date, and 6 of the 11 in the US are at 52-week highs (financials, utilities, industrials, healthcare, materials and real estate). Berkshire Hathaway became the first US company in non tech to reach a $1tn valuation and represents the more domestic US economy. The Tech sector recently lost momentum but is still the best performing sector year-to-date. The three most popular themes in the market right -now are Obesity, AI and Defense. AI looks fairly valued, while semis are outperforming, and we see plenty of industry adopters that should gain in the next few years. Obesity and healthcare overall had a great August, and the leaders Eli Lilly and Novo Nordisk continue to get upgrades on revenue and EBITDA growth. Another sector we add to the mix is Defense, with nations spending more and see more potential along with cyber security.

NVidia released quarterly numbers and guidance. Nvidia beat on revenue and earnings and guidance was also very solid. The stock lost 6% last week but is still +140% YTD following a 240% gain last year. It has led the AI boom to reach a $3 trillion market cap, the leader in high end chips and data centers needed to train and operate AI systems. Demand for generative AI products in large language models, images and personal assistants has supported sales of Nvidia’s specialized chips. Big Tech companies have boosted their capital spending as they build the infrastructure supporting AI. Microsoft, Alphabet, Amazon, and Meta spending in H1 was at $106bn. This has caused concerns recently whether the AI spend will lead to commensurate earnings and concerns that valuations among the Mag 7 have become stretched.

Soft landing scenario to face key data in the week ahead

Written by:

Maurice Gravier Chief Investment Officer , MauriceG@EmiratesNBD.com
Anita Gupta Head of Equity Strategy , Anitag@EmiratesNBD.com
Satyajit Singh Fixed Income Analyst , SatyajitSI@EmiratesNBD.com
Giorgio Borelli Head of Asset Allocation , GiorgioB@EmiratesNBD.com

Disclaimer

This document is prepared by Emirates NBD Bank (P.J.S.C) (“the Bank” or “Emirates NBD”), a public joint stock company incorporated in Dubai, United Arab Emirates (UAE) and licensed to provide various financial services including promotion, financial consultation, securities portfolio management, managing investments of investment funds, etc. Emirates NBD is regulated supervised and controlled by the Central Bank of the UAE (“Central Bank”) and the Securities and Commodities Authority of the UAE (“SCA”), having its head office at Baniyas Road, Deira, PO Box 777, Dubai, United Arab Emirates. This document may be distributed and/or made available by the Bank and its affiliates and subsidiaries, including Emirates NBD Capital KSA CJSC (“ENBD Capital”) (through its website, its branches or through any other modes, whether electronically or otherwise).

Emirates NBD and its affiliates, subsidiaries and group entities, including its shareholders, directors, officers, employees and agents are collectively referred to Emirates NBD Group.

This publication is prepared without regard to the individual financial circumstances and objectives of persons who receive it. Data/information provided in this publication are intended solely for illustrative purposes for the general information or its recipients, irrespective of their customer classification as an Ordinary Investor or Professional Investor under the SCA Regulations.

Any person (hereinafter referred to as “you”, “your”) who has received this document or have access to this document shall acknowledge and agree to the following terms.

Reliance

This publication may include data/information taken from stock exchanges or other third-party sources from around the world, which Emirates NBD reasonably believes to be reliable, fair and not misleading, but which have not been independently verified. The provision of certain data/information in this publication may be subject to the terms and conditions of other agreements to which Emirates NBD is a party. Opinions, estimates and expressions of judgment are those of the writer and are subject to change without notice. Emirates NBD or any member of Emirates NBD Group makes no representation or warranty and accepts no responsibility or liability for the sequence, accuracy, completeness or timeliness of the information or opinions contained in this publication. Nothing contained in this publication shall be construed as an assurance by Emirates NBD that you may rely upon or act on any information or data provided herein, without further independent verification of the same by you.

The contents of this document are prepared as of a particular date and time and will not reflect subsequent changes in the market or changes in any other factors, including those relevant to the determination of whether a particular investment activity is advisable. Emirates NBD does not undertake any obligation to issue any further publications or update the contents of this document. Emirates NBD may also, at its sole discretion, update or change the contents herein without notice. Emirates NBD or any member of Emirates NBD Group does not accept any responsibility whatsoever for any loss or damage caused by any act or omission by you as a result of the information contained in this publication (including by negligence).

References to any financial instrument or investment product in this document are not intended to imply that an actual trading market exists for such instrument or product. Certain investment products mentioned in this document may not be eligible for sale in some jurisdictions, and they may not be suitable for all types of investors. The information and opinions contained in this publication is provided for informational purposes only and have not been prepared with any regard to the objectives, financial situation and particular needs of any specific person, wherever situated. If you wish to rely on or use the information contained in this publication, you should carefully consider whether any investment views and investment products mentioned herein are appropriate in view of your investment experience, objectives, financial resources and relevant circumstances. You should also independently verify and check the accuracy, completeness, reliability and suitability of the information and should obtain independent and specific advice from appropriate professional advisers or experts.

Confidentiality

This publication may be provided to you upon request (and not for distribution to the general public), on a confidential basis for informational purposes only, and is not intended for trading purposes or to be passed on or disclosed to any other person and/or to any jurisdiction that would render the distribution illegal.

Solicitation

None of the content in this publication constitutes a solicitation, offer, recommendation or opinion by Emirates NBD to buy, sell or trade in any security or to avail of any service in any jurisdiction. This document is not intended to serve as authoritative legal, tax, accounting, or investment advice regarding any security or investment, including the profitability or suitability thereof and further does not provide any fiduciary or financial advice. This document should also not be used in substitution for the exercise of the prospective investor’s judgment.

Third Party

This publication is not intended for use by, or distribution to, any person or entity in any jurisdiction or country where such use or distribution would be contrary to law or regulation. It is the responsibility of any person in possession of this publication to investigate and observe all applicable laws and regulations of the relevant jurisdiction. This publication may not be conveyed to or used by a third party without the express consent of Emirates NBD or its affiliates, subsidiaries or group entities distributing this document. You should not use the data in this publication in any way to improve the quality of any data sold or contributed by you to any third party.

Liability

Notwithstanding anything to the contrary set forth herein, Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries shall not, directly or indirectly, be liable, in any way, to you or any other person for any: (a) inaccuracies or errors in or omissions from this publication including, but not limited to, quotes and financial data; or (b) loss or damage arising from the use of this publication, including, but not limited to any investment decision occasioned thereby. Under no circumstances, including but not limited to negligence, shall Emirates NBD, its suppliers, agents, directors, officers, employees, representatives, successors, assigns, affiliates or subsidiaries be liable to you for direct, indirect, incidental, consequential, special, punitive, or exemplary damages even if Emirates NBD has been advised specifically of the possibility of such damages, arising from the use of this publication, including but not limited to, loss of revenue, opportunity, or anticipated profits or lost business.

This publication does not provide individually tailored investment advice and is prepared without regard to the individual financial circumstances and objectives of person who receive it. The appropriateness of an investment activity or strategy will depend on the person’s individual circumstances and objectives and these activities may not be suitable for all persons. In addition, before entering into any transaction, prospective investors should: (i) ensure that they fully understand the potential risks and rewards of that transaction; (ii) determine independently whether that transaction is appropriate given an investor’s investment objectives, experience, financial and operational resources, and other relevant circumstances; (iii) understand that any rates of tax and zakat or any relief in relation thereto, as may be referred to in this publication may be subject to change over time; (iv) consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment; (v) understand the nature of the investment and the related contract (and contractual relationship) including, without limitation, the nature and extent of their exposure to risk; and (vi) understand any regulatory requirements and restrictions applicable to the prospective investor.

Where this publication provides any information about Shariah compliant products, the Bank will not have engaged a Shariah board (or similar body) to determine independently whether or not such products are compliant with Shariah principles. The Bank accepts no liability with respect to the fairness, correctness, accuracy, reasonableness or completeness of any such determination or guidance by any Shariah board that has certified or otherwise approved such products as Shariah compliant. Nothing contained in this publication shall be construed as a recommendation by the Bank to invest in such product. In deciding whether to invest in Shariah compliant products, you should satisfy yourself that investing in such products will not contravene Shariah principles. You should consult your own Shariah advisors as to whether investing in such products is compliant or not with Shariah principles.

Forward Looking

Past performance is not necessarily a guide to future performance and should not be seen as an indication of future performance of any investment activity. The information contained in this publication does not purport to contain all matters relevant to any particular investment or financial instrument and all statements as to future matters are not guaranteed to be accurate. Certain matters in this publication about the future performance of Emirates NBD or members of its group (the Group), including without limitation, future revenues, earnings, strategies, prospects and all other statements that are not purely historical, constitute “forward-looking statements”. Such forward-looking statements are based on current expectations or beliefs, as well as assumptions about future events, made from information currently available. Forward-looking statements often use words such as “anticipate”, “target”, “expect”, “estimate”, “intend”, “plan”, “goal”, “seek”, “believe”, “will”, “may”, “should”, “would”, “could” or other words of similar meaning. Reliance should not be placed on any such statements in making an investment decision, as forward-looking statements, by their nature, are subject to known and unknown risks and uncertainties that could cause actual results, as well as the Group’s plans and objectives, to differ materially from those expressed or implied in the forward-looking statements. Estimates of future performance are based on assumptions that may not be realized.

Risk

Data included in this publication may rely on models that do not reflect or take into account all potentially significant factors such as market risk, liquidity risk, and credit risk. Emirates NBD may use different models, make valuation adjustments, or use different methodologies when determining prices at which Emirates NBD is willing to trade financial instruments and/or when valuing its own inventory positions for its books and records. The use of this publication is at the sole risk of the investor and this publication, and anything contained herein, is provided "as is" and "as available." Emirates NBD makes no warranty of any kind, express or implied, as to this publication, including, but not limited to, merchantability, non-infringement, title, or fitness for a particular purpose or use.

Investment in financial instruments involves risks and returns may vary. The value of investment products mentioned in this document may neither be capital protected nor guaranteed and the value of the investment product and the income derived therefrom can fall as well as rise and an investor may lose the principal amount invested. Investment products are subject to several risks factors, including without limitation, market risk, high volatility, credit and default risk, illiquidity, currency risk and interest rate risk. It should be noted that the value, price or income of securities denominated in a foreign currency may be adversely affected by changes in the currency rates. It may be difficult for the investor to sell or realise the security and to obtain reliable information about its value or the extent of the risks to which it is exposed. Furthermore, the investor will not have the right to cancel a subscription for securities once such subscription has been made. Prospective investors are hereby informed that the applicable regulations in certain jurisdictions may place certain restrictions on secondary market activities with respect to securities.

Before making an investment, investors should consult their advisers on the legal, regulatory, tax, business, investment, financial and accounting implications of the investment. In receiving this publication, the investor acknowledges it is fully aware that there are risks associated with investment activities. Moreover, the responsibility to obtain and carefully read and understand the content of documents relating to any investment activity described in this publication and to seek separate, independent financial advice if required to assess whether a particular investment activity described herein is suitable, lies exclusively with the investor.

Intellectual property

This publication has been developed, compiled, prepared, revised, selected, and arranged by Emirates NBD and others (including certain other information sources) through the application of methods and standards of judgment developed and applied through the expenditure of substantial time, effort, and money and constitutes valuable intellectual property of Emirates NBD and such others. All present and future rights in and to trade secrets, patents, copyrights, trademarks, service marks, know-how, and other proprietary rights of any type under the laws of any governmental authority, domestic or foreign, shall, as between the investor and Emirates NBD, at all times be and remain the sole and exclusive property of Emirates NBD and/or other lawful parties.

Except as specifically permitted in writing, you should not copy or make any use of the content of this publication or any portion thereof or publish, circulate, reproduce, distribute or offer this publication for sale in whole or in part to any other person over any medium including but not limited to over-the-air television or radio broadcast, a computer network or hyperlink framing on the internet or construct a database of any kind. Except as specifically permitted in writing, you shall not use the intellectual property rights connected with this publication, or the names of any individual participant in, or contributor to, the content of this publication, or any variations or derivatives thereof, for any purpose. This publication is intended solely for non-commercial use and benefit, and not for resale or other transfer or disposition to, or use by or for the benefit of, any other person or entity. By accepting this publication, you agree not to use, transfer, distribute, copy, reproduce, publish, display, modify, create, or dispose of any information contained in this publication in any manner that could compete with the business interests of Emirates NBD. Furthermore, you should not use any of the trademarks, trade names, service marks, copyrights, or logos of Emirates NBD or its subsidiaries in any manner which creates the impression that such items belong to or are associated with you, except as otherwise provided with Emirates NBD’s prior written consent. You shall have no ownership rights in and to any of such items.

IMPORTANT INFORMATION ABOUT UNITED KINGDOM

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the London branch of Emirates NBD Bank (P.J.S.C) which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority in the UK. Some investments and services are not available to clients of the London Branch. Any services provided by Emirates NBD Bank (P.J.S.C) outside the UK will not be regulated by the FCA and you will not receive all the protections afforded to retail customers under the FCA regime, such as the Financial Ombudsman Service and the Financial Services Compensation Scheme. Changes in foreign exchange rates may affect any of the returns or income set out within this publication.

IMPORTANT INFORMATION ABOUT SINGAPORE

This publication was prepared by Emirates NBD Bank (P.J.S.C) in the United Arab Emirates. It has been issued and approved for distribution to clients by the Singapore branch of Emirates NBD Bank (P.J.S.C) which is licensed by the Monetary Authority of Singapore (MAS) and subject to applicable laws (including the Financial Advisers Act (FAA) and the Securities and Futures Act (SFA). Any services provided by Emirates NBD Bank (P.J.S.C) outside Singapore will not be regulated by the MAS or subject to the provisions of the FAA and/or SFA, and you will not receive all the protections afforded to retail customers under the FAA and/or SFA. Changes in foreign exchange rates may affect any of the returns or income set out within this publication. Please contact your Relationship Manager for further details or for clarification of the contents, where appropriate. For contact information, please visit www.emiratesnbd.com.

IMPORTANT INFORMATION ABOUT EMIRATES NBD CAPITAL KSA CJSC

Emirates NBD Capital KSA CJSC (“ENBD Capital”), whose registered office is at P.O. Box 341777, Riyadh 11333, Kingdom of Saudi Arabia, is a Saudi closed joint stock company licensed by the Saudi Arabian Capital Market Authority (“CMA”) under License number 37-07086 dated 29/08/2007G (corresponding to 16/08/1428H) to deliver a full range of quality investment products and related support services to individuals and institutions in the Kingdom of Saudi Arabia. ENBD Capital is subject to Capital Market Law, and Implementing Regulations in the Kingdom of Saudi Arabia

ENBD Capital’s contact details are T +966 (11) 299 3900 and F +966 (11) 299 3955.

This document may not be distributed in the Kingdom of Saudi Arabia except to such persons as are permitted under the Investment Funds Regulations issued by the Capital Market Authority.

The Capital Market Authority does not make any representation as to the accuracy or completeness of this document, and expressly disclaims any liability whatsoever for any loss arising from, or incurred in reliance upon, any part of this document. Prospective subscribers of the securities offered hereby should conduct their own due diligence on the accuracy of the information relating to the securities offered. If you do not understand the contents of this document, you should consult an authorised financial adviser.

more app