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An investor shift from Big Tech into smaller stocks in July gave the Russell 2000 index one of its best months in years — and its biggest outperformance against mega caps since 2001. However, some of the big moves have already started to unwind.
The small-cap benchmark gained 10.2 per cent last month as investors grew disenchanted with the outlook for several of the so-called Magnificent Seven technology companies that had powered blue-chip stocks to a series of record highs this year. The Russell 2000, by contrast, is still more than 10 per cent below its 2021 record high and smaller companies, which typically have higher debt burdens, are expected to benefit from interest rate cuts.
On Wednesday, signals from the Federal Reserve that it could lower borrowing costs as soon as September helped small caps.
But the index fell sharply on Thursday and Friday, driven in part by an unexpectedly weak rate of job creation and a bigger than forecast rise in the unemployment rate. That has increased fears that the US economy is weakening faster than the Federal Reserve will act to support it and could be heading for a so-called hard landing that would hurt smaller companies
“Our view on the rotation into small caps is that it can only work if you get soft landing data and Friday’s payrolls were definitively not that,” said Stuart Kaiser, head of US equity trading strategy at Citigroup. “It’s a strong headwind for that rotation into smaller cap-value, lower quality-type stocks.” Jennifer Hughes
Is China moving further away from deflation?
Investors will get a better idea of whether China is pulling away from the deflation it suffered last year with inflation data due next week.
The consumer price index in the world’s second-largest economy is expected to have risen 0.4 per cent year on year in July, according to a Reuters poll of analysts, above June’s reading of a 0.2 per cent rise and also ahead of the readings in April and May.
While still subdued, Chinese inflation has been in positive territory every month this year since January. Frequent instances of deflation last year contrasted sharply with high price growth and interest rate rises in other large economies.
Policymakers in Beijing have come under pressure to further support the economy, especially given a three-year property slowdown that has weighed heavily on consumer confidence and seen new home prices fall at faster rates in recent months. However, the Communist party’s flagship policy meeting ended last month without any big announcements of support for the moribund property sector.
Last month, authorities cut key lending rates that underpin corporate lending and mortgages by 0.1 percentage points. Retail sales rose just 2 per cent in June, far below expectations, official data showed in mid-July.
Analysts at UBS, who forecast a 0.4 per cent rise in CPI for July, expect a “continued large decline” in property sales and new starts in the same month. Thomas Hale
Will Australia need to raise interest rates?
August has been looming as a critical moment for the Reserve Bank of Australia in its battle against inflation, with disappointing data in recent months pointing to a potential interest rate rise.
The RBA, which has held rates at 4.35 per cent since November, has made it clear that its patience was being tested in recent months as inflation proved more stubborn than it had hoped.
This week’s consumer price index data from the Australian Bureau of Statistics came in at 3.8 per cent in June, still well above the 2 to 3 per cent target range. On a quarter-on-quarter basis, the index rose 1 per cent, a touch above forecasts, with housing and food ticking higher. Fruit and vegetable prices rose more than 6 per cent — the biggest rise since 2016.
Yet the data was, in fact, much better than some had feared, as economists argued that if the data had come in at 4 per cent or above then a rate rise would have been nailed on. As it was, the RBA’s decision is still up in the air.
Investment bank Morgan Stanley said it no longer viewed a rate rise as likely for August, albeit it expects the hawkish language of the RBA to be maintained. Moreover, it said that not moving to raise rates suggested an extended pause would now be the likely scenario ahead of potential cuts next year.
CBA agreed that while a rate cut was now likely to be off the table, “it is too early to shift the tone”. Against a backdrop of the UK cutting rates and Japan raising them, analysts expect the Australians to hold fire for now. Nic Fildes