The Davy Digest - 6th August 2024

US equities finished lower after a busy week in markets. Four of the so-called Magnificent Seven stocks reported earnings, results were strong in general but investors have started to question the potential returns from big tech’s AI spending spree. The Federal Reserve met on Wednesday and decided to leave interest rates unchanged as expected. Fed Chair Powell said a rate cut in September is “on the table,” provided the inflation data continues to be encouraging. The labour market data on Friday was worse than expected with the unemployment rate rising to 4.3% from 4.1% in June, this led to a selloff in US equity markets due to fears of an economic slowdown. European equities also finished lower, dragged down by negative sentiment globally. Eurozone inflation data came in slightly higher than expected but market expectations for rate cuts in Europe were mostly unchanged. In the UK, the Bank of England (BOE) decided to cut interest rates for the first time since March 2020, the start of the pandemic. The bank’s decision comes after UK inflation dropped to its 2% target in May. The Bank of Japan decided raise interest rates by 15 basis points, sparking a rally in the yen and a selloff in Japanese equities.

Last week's highlights

	FOMC Meeting (31/07) – Rates unchanged, a rate cut could be “on the table as soon as the next meeting in September.” US Nonfarm Payrolls (02/08) – Unemployment rate up to 4.3%, the US added 114k jobs in July vs 175k expected.
	Eurozone Inflation (CPI) (30/07) – Higher than expected at 2.6% YoY vs 2.4% forecast. Q2 Eurozone GDP (30/07) – Economy grew by 0.3% in Q2 2024, better than 0.2% forecast, showing economic recovery is underway.
	Bank of England Meeting (01/08) – Voted narrowly to cut rates by 25 basis points, UK inflation hit the central bank’s target of 2% in May.
	Bank of Japan Interest Rate Decision (31/07) – Raised interest rates by 0.15% to 0.25%, the yen strengthened following the meeting. China Caixin manufacturing PMI (01/08) – Came in at 49.8, well below expectations of 51.5. The decline reversed five consecutive monthly gains through June.

Looking ahead to this week, in the US, initial jobless claims data will be released on Thursday. In Europe, retail sales were released this morning, coming in weaker than expected at -0.3% vs +0.1% expected. In China, the Caixin Services PMI was released yesterday, coming in at 52.1 vs 51.4 expected, showing an improvement in China’s services sector. Chinese inflation data will be released on Friday. The most recent inflation data release disappointed investors as it came in lower than expected due to weak demand.  

What's on the radar

	ISM Services PMI (05/08) Initial Jobless Claims (08/08)
	Eurozone Producer Price Index (05/08) Eurozone Retail Sales (06/08)
	UK BRC Retail Sales (05/08)
	China Caixin Services PMI (05/08) China Inflation (CPI) (09/08)

Chart of the moment

US markets start to broaden

Source: UBS, Bloomberg, 06/08/2024. The Magnificent 7 index is market cap weighted.

• The US market’s narrowness dissipated over the last few weeks as the leaders of this year’s rally, the Magnificent 7, sold off.
• This continued over the last two days as the Magnificent 7 sold off by more than the broader market. The recent equity selloff was sparked by weaker than expected labour market data on Friday.
• Since the start of 2024, the US market had become increasingly concentrated as a small number of mega cap tech stocks dominated market returns based on AI optimism.
• Mega Cap tech companies have dramatically increased AI related spending to avoid falling behind, but investors have started to question the return on these investments.
• Davy portfolios remain underweight the Magnificent 7 due to our active managers positioning and our recent decision to diversify away from the US and go overweight Europe.

The Magnificent 7 are Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla.  AI stands for artificial intelligence.