The Quarter Ahead
Good morning all, and welcome to Q4 2024. After what felt like a long Q3, we’re stepping into what I expect will be a pivotal final quarter of the year. Let’s dive into the key themes.
The Fed kicked off its rate-cutting cycle in September with a bold 50bps cut, and all signs point to more easing before year-end. The market’s reaction? A mixed bag. While inflation is cooling, the labour market is starting to soften, and with the US election around the corner, volatility is bound to stay elevated.
China remains a focal point. The government’s well-timed (post Fed-cut + stronger JPY) stimulus efforts have boosted equity markets, but let’s not get carried away. After being beaten down for so long, and with negative positioning, this recent unwind was inevitable—bazooka or not. The long-term fundamentals still have question marks.
As for US equities, tech continues to dominate. The setup is intriguing, especially as we move closer to the election. I’ll be diving deeper into the potential impact on tech and broader market direction in the section for paid subscribers, so stay tuned for insights on where the SPX could head next and how to position for it.
Macro Environment
The US economy continues to show resilience as we head into Q4. Growth was stronger than expected in Q3, with consumer spending holding up, the weak link was labour market. That said, as we approach the US election, the risk of an economic slowdown is creeping up, with concerns over the cooling labour market and broader global uncertainty. Although the election will take centre stage for a few weeks, data shouldn’t be ignored…
China, meanwhile, has seen a surge in its equity markets thanks to government stimulus. While the market response has been strong, there are still doubts about how sustainable this rebound is. Throwing money at the problem doesn’t solve the structural issues, and the deflationary pressures that have weighed on the economy may take time to resolve. For now, I will hold my small short.
The Fed’s 50bps rate cut in September marked the beginning of what many expect to be a longer easing cycle. With inflation cooling and signs of a softening labour market, the Fed will likely continue cutting rates through the rest of the year (dependent on incoming data), aiming to keep the economy on track for a soft landing.
Across the Atlantic, the ECB has been more cautious, cutting rates in response to a slowing economy but with limited room to manoeuvre. While additional cuts are expected, the ECB’s actions may not be enough to counteract the broader economic challenges facing the region. Germany, in particular, is struggling with a recessionary environment despite the ECB's efforts to ease monetary policy. Growth across the region remains sluggish, and the imminent rate cuts will likely not be enough to stimulate meaningful recovery.
Japan, on the other hand, continues to take a different approach, “tightening” monetary policy.
Single Stocks, Index & Vol
US equities have performed ok in Q3. Despite a challenging macro backdrop, the underweight positioning across tech leaves an exciting dynamic into year-end. The AI trade is still alive, and participants seem hesitant to miss out, which could drive a FOMO rally as we head into the election and beyond. Spooz has been steadily gaining ground, and it wouldn’t be surprising to see a further leg up if liquidity dries up and tech sees another round of buying after its recent consolidation. From what I can see, participants are well-hedged, and plenty more hedges are being put on ahead of incoming data (specifically NFP this week) and next month's US election.
On the other hand, European equity markets have performed well. While there have been pockets of strength, particularly in defensive sectors, the overall outlook for Europe remains cautious as economic growth lags behind the US and China. As I recently mentioned, you could look at buying European China beneficiaries as a China play.
In China, the rally is very fast-money-esque, which means the downside will be fragile. Chinese stocks have been beaten down for so long that positioning, rather than fundamentals, drove much of the recent surge. The government’s efforts are clearly aimed at preventing a deeper slowdown, but whether that translates into sustained market gains remains to be seen.
Here’s what you must know to position yourself for the final quarter push.