Summary and Price Action Rundown
Global risk assets are under pressure again this morning as the countertrend selloff in high-flying tech stocks looks set to continue today. S&P 500 futures point to a 0.6% lower open after the index lost 0.8% on Friday, taking its losses last week to 2.3%, reducing its year-to-date upside to 6.1%, and falling further below last Wednesday’s record high. With losses concentrated in richly-valued IT stocks, the tech-heavy Nasdaq is set for a more downbeat open at -2.0%. Equities in the EU are also down but Asian stocks were mostly higher overnight. A broad dollar index is continuing to climb from its recent 28-month low, while longer-dated Treasury yields are stabilizing after Friday’s spike, with the 10-year yield at 0.69%. Brent crude prices are sliding toward the lower end of their recent range, falling below $41 per barrel.
Countertrend US Equity Market Dynamic Extends
Although the magnitude of the stock market moves have moderated since last Thursday, which featured the steepest losses in months, underperformance for tech shares is continuing this morning and weighing on broader indexes. Equity markets continue to undergo what analysts characterize as a rotation among sectors as investors dump high-performing tech shares in favor of traditional “value” stocks, such as financials and industrials. The IT stock swoon last Thursday, which began more modestly on Wednesday with a bout of modest underperformance, extended into Friday with the tech-heavy Nasdaq dropping 2.7% on top of its 5% loss over Thursday’s trading period. Futures suggest that the Nasdaq will open another 2% lower later this morning. Analysts are pondering an array of potential catalysts for the move rather than one specific trigger. Some suggest that recent economic data, which has shown remarkable resilience of the US recovery (more below), alongside upbeat news about progress toward a vaccine may be eroding the relative appeal of technology, a strong performer during the pandemic, versus laggard cyclical stocks that are expected to rebound in the post-pandemic environment. Others have opined that the selloff may simply be a healthy and corrective move after the massive outperformance of tech stocks finally led to an inevitable bout of profit-taking among investors. There is also speculation that SoftBank spurred an unsustainable melt-up of tech stocks through large-scale buying of call options over the past several months. Analysts are pointing to this recent bout of volatility as a possible preview of the months ahead, particularly with the combination of institutional investors returning from summer, ready to seriously scrutinize potential economic pitfalls, and the inherent volatility that will be present leading up to the November 3rd presidential election.
Upside Surprise in Friday’s Nonfarm Payrolls Induces a Flicker of Treasury Volatility
The fifth straight upside surprise for the monthly US jobs report hoisted longer-dated Treasury yields upward despite some nuanced underlying details. Data from the BLS on Friday morning showed the US economy added 1.371 million jobs in August, easing from July’s downwardly revised 1.734 million, and just topping expectations of 1.35 million. Though total nonfarm payrolls topped estimates, government payrolls accounted for nearly a quarter of the gain at 334K, and largely reflected a temporary hiring hike for the 2020 census. Isolating private payrolls, 1.027 million was still strong but missed the consensus of 1.325 million, and showed a continuing downtrend from last month’s revised 1.481 million. Retail trade added 249K jobs, while leisure and hospitality added 174K, education and health services grew by 147K, financial activities by 36K and manufacturing by 29K. August’s private sector job growth marked the slowest pace since the recovery began in May, with total payrolls remaining at about 11.5 million below pre-pandemic levels. The US unemployment rate fell for the fourth consecutive month, down to 8.4% from 10.2% in July, placing well below consensus estimates of 9.8%. While the unemployment rate may indicate far better-than-expected results, the Labor Department had noted that misclassification of workers who should have been labeled as unemployed has been a prevalent data bias in recent months. Adjusted for this misclassification, the rate could have been nearly 0.7% higher in August. The participation rate increased to 61.7%, possibly reflecting more Americans looking for work amid the expiration of the $600 weekly benefits. One troubling figure from the report showed that permanent job losses rose nearly 534K to 3.4 million.
Additional Themes
US-China Tensions Continue to Percolate – During a press conference on the Labor Day holiday, President Trump again mused about “decoupling” the US and Chinese economies, emphasizing that he is focused on boosting US manufacturing jobs to “end our reliance on China once and for all.” President Trump has made his “tough on China” stance a key election issue, accusing Joe Biden of being soft on Beijing. Also, reports indicate that the US could announce a ban on cotton from Xinjiang, the province at the center of China’s crackdown on Muslim minorities.
Brexit Developments Weigh on the Pound – After tagging its highest level against the dollar for more than two years on September 1st, the pound has retreated 2.5% versus the dollar, with losses today spurred by deepening doubts about the feasibility of a Brexit agreement. Another round of key negotiations is beginning today after a set of hardline remarks from Prime Minister Johnson, who called October 15th the deadline for an agreement that can be enacted by year-end. Reports also indicated that the UK government is considering steps that may weaken elements of the Withdrawal Agreement, specifically in regard to Northern Ireland.