Daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow
Scotiabank strategist Hugo Ste-Marie identified a “swift rotation out of tech/growth”,
“Cooling U.S. inflation has boosted hopes of a September rate cut, which in turn unleashed a powerful reversal in the Dow Jones-to-Nasdaq ratio and the Value (VLUE) to Growth (IUSG) ratio in July … Rotation Also Benefited the Size Trade. The size effect was visible even within the S&P 500, where the S&P 500 EW (+4.4%) easily outpaced the S&P 500 (+1.1%) in July. As shown below, the S&P 500 EW to S&P 500 ratio bounced hard. Similarly, the S&P 600 to S&P 500 ratio enjoyed a strong upside reversal. The small cap outperformance was broad based in July as every single small cap sector outperformed its large cap (LC) peers (see slide 21). In Canada, the size trade reversal was not as pronounced. In fact, the TSX SC (+5.7%) very slightly outperformed the TSX Composite (+5.6%), and only six small cap sectors beat their large cap counterparts in July”
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RBC Capital Markets head of global commodity strategist Hellima Croft is concerned about geopolitics,
“The assassination of Hamas political leader Ismail Haniyeh in Tehran on Wednesday has moved this conflict appreciably up the escalatory ladder and edges the region closer to a wider war … Haniyeh’s death came less than 24 hours after an IDF airstrike in the suburbs of Beirut killed senior Hezbollah commander Fuad Shukr, and has been followed today by Israel claiming the mid -July killing of Hamas military leader Mohammed Deif. While the Beirut strike seemingly fell largely in the established engagement parameters between Israel and Hezbollah, the killing of Haniyeh on Iranian soil could trigger a dangerous kinetic response from the Iranian leadership. Supreme Leader Khamenei has already vowed retaliation, stating, “Following this bitter, tragic event which has taken place within the borders of the Islamic Republic, it is our duty to take revenge” … The US has also deployed at least 12 warships to the Middle East, an official stated, as tensions have risen … As we have previously noted, the oil market has largely faded this story, but if the war does spread beyond current borders, we cannot assume that the region’s energy supplies will be safeguarded”
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BMO ESG strategist Doug Morrow is seeing interest in water-related companies and select industrials,
“A bright spot was water technology, where a consistently increasing number of companies are providing positive descriptions of their water solutions business in July disclosures going back to 2022. Companies from our coverage that gave favorable mentions to their water-related business segments in July 2024 include DD-NYSE, ECL-NYSE, FBIN-NYSE and VLTO-NYSE. While slowing YoY, a significant number of issuers gave positive views of their low-carbon business lines on earnings calls, including AA-NYSE (”Green premiums support our view that the demand for low[1]carbon products is rising”), DAR-NYSE (“We are seeing global fat pricing improve, indicating more demand for low carbon intensity feedstocks for renewable diesel”) and YAR-NO (“Decarbonized nitrates and NPKs will have a significant advantage in Europe compared to imported urea”).
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BofA Securities Flow Show report was even more blunt than usual,
“Old School Risk-Off. Zeitgeist: “people underestimate how much lower rates may need to go to stimulate a weak economy no longer juiced by government spending.” The Price is Right: US govt spend -6% (12-month rolling – Chart 3), 5-year UST yield down 90bps past 3 months, 14-month high for defensive UTIL [U.S. utilities] vs cyclical TRAN [Dow Transports]; weaker macro means ABB (Anything But Bonds) trade reversal deepens … The Biggest Picture: July US ISM weak (46.8); only other period ISM … Small cap by contrast has been king of the “hard landing”; historically when HY [high yield] outperforms IG [investment grade] bonds, small cap outperforms large cap big-time”
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Wells Fargo strategist Christopher Harvey (whose been extra useful lately) also chimed in on economic data and small caps,
“Wednesday’s Fed rate-cut euphoria gave way to Thursday’s geopolitical concerns and harsh ISM realities (orders, employment, and manufacturing below expectations... but prices higher) as the SPX closed down 0.2% WTD. Large-cap Value (RLV: -0.3%) and Growth (RLG: -0.4%) performed similarly … We again saw divergent returns by market cap, as small caps (R2000) are down 3.3% WTD, with essentially the entire decline occurring yesterday on the soft ISM data. This suggests the rotation is predicated not only on Fed easings but also a benign economic backdrop. The 2yr UST is the “tell.” A much lower yield (-25bps) signals weaker growth and the Fed to do more. Still, the R2000 has outperformed the SPX by over 1,000bps (+6.6% vs. -3.5%) since the June 10th onset of the “Great Rotation.”
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Diversion: “Let’s Not Fool Ourselves About Yogurt” – The Atlantic