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A shift in investor sentiment from large tech companies to smaller stocks in July resulted in the Russell 2000 index experiencing one of its best months in years. This move also marked the biggest outperformance against mega caps since 2001. However, some of the gains made during this period have already started to reverse.
The Russell 2000 index saw a 10.2% increase last month as investors became less optimistic about the future of some of the major technology companies that had been driving blue-chip stocks to record highs. In contrast, the Russell 2000 is still more than 10% below its peak for 2021. Smaller companies, which often carry higher debt levels, are expected to benefit from cuts in interest rates.
Signals from the Federal Reserve on Wednesday suggesting a possible reduction in borrowing costs as early as September provided a boost to small-cap stocks.
However, the index experienced a sharp decline on Thursday and Friday, partly due to lower-than-expected job creation numbers and a higher-than-forecast increase in the unemployment rate. This has raised concerns that the US economy might be weakening faster than the Federal Reserve’s ability to support it, potentially leading to a significant downturn that could impact smaller companies.
“Our perspective on the shift to small caps is that it will only be successful if we see positive economic data, and the latest payrolls report was not indicative of that,” said Stuart Kaiser, head of US equity trading strategy at Citigroup. “This poses a significant challenge for the rotation into smaller-cap, value-oriented, lower-quality stocks.” Jennifer Hughes
Is China moving away from deflation?
Investors will gain insight into whether China is moving away from the deflation it experienced last year when inflation data is released next week.
Analysts predict that the consumer price index in China, the world’s second-largest economy, is expected to show a 0.4% year-on-year increase in July, surpassing June’s 0.2% rise. While still modest, Chinese inflation has been positive every month this year since January. This contrasts with the frequent episodes of deflation seen last year, which stood in stark contrast to the high price growth and interest rate hikes in other major economies.
Policy makers in Beijing are under pressure to further stimulate the economy, especially given a slowdown in the property market over the past three years. Despite this, the recent policy meeting did not announce any major support measures for the struggling property sector.
Authorities recently lowered key lending rates by 0.1 percentage points. However, retail sales in June only rose by 2%, well below expectations. UBS analysts, who predict a 0.4% rise in CPI for July, anticipate a continued decline in property sales and new starts for the same month. Thomas Hale
Will Australia need to raise interest rates?
August has emerged as a crucial period for the Reserve Bank of Australia in its fight against inflation, with recent data hinting at a potential interest rate hike.
The RBA, which has maintained rates at 4.35% since November, has indicated its growing impatience as inflation has proven more persistent than expected.
Recent consumer price index data for June showed a 3.8% increase, still above the target range of 2 to 3%. While some feared a rate hike if the data exceeded 4%, the actual figures have left the RBA’s decision uncertain.
Investment bank Morgan Stanley no longer sees a rate hike in August as likely, but expects the RBA’s hawkish stance to continue. Analysts believe that a rate cut is now unlikely but it is too early to shift the tone. Against a backdrop of rate cuts in the UK and rate hikes in Japan, most analysts expect the RBA to maintain the status quo for now. Nic Fildes