A defensive case in the current market turmoil

According to the latest July Cattle on Feed report, the number of cattle and calves on feed for the slaughter market in feedlots with a capacity of 1,000 head or more totalled 11.3 million on July 1, up 1% from a year earlier, with steers and steer calves accounting for 60% of the inventory. Placements in feedlots totalled 1.56 million head, down 7% from a year ago. Feedlot placements of 1.79 million were the second lowest since the series began in 1996 and were 9% lower than last year. Possibly due to relatively low prices for grains such as corn and soybeans, the number of cattle on feed was higher in May, June and July. However, should grain prices rise, this could lead to a reduction in the number of cattle on feed, with sequential effects on supply.

In summary, the recent market volatility that has affected stocks has also affected livestock, pulling down futures prices. However, the balance between supply and demand does not appear to be different from before the pullback. Barring a particularly cold or wet end to the summer of 2024, this balance should remain for the rest of the grilling season. It is therefore possible that futures prices will recover from the recent pullback. However, this recovery does not necessarily mean that prices will remain elevated for the rest of 2024. Rather, it is more likely that prices will peak in late August and early September, before giving way to pigs in the fourth quarter. There is an opportunity to enjoy the recovery back to supply/demand equilibrium. However, traders should be aware that once autumn arrives, it may be time to swap burgers for bacon.

Live Cattle (USD/Lbs), one-year daily chart

Live Cattle (USD/Lbs), five-year weekly chart

The S&P500 peaked on 16 July and has since fallen, first modestly and then very sharply since 31 July. The Nasdaq had lost 7% over the past week, while the S&P500 was down 5% before Tuesday’s trading session in the US (with S&P500 up 1.0% around 22.30 CET). Meanwhile, the German Dax and Swedish OMX 30 are down 5.7% and 7.4% in a week respectively.

Defensive sectors such as consumer staples, chemicals, real estate and infrastructure have generally fallen less than the broader indices. This is since the stock market decline is mainly due to investor concerns about a deteriorating US economy. US nonfarm payrolls in July 2024 was unexpectedly weak, with only 114k jobs added versus expectations for 176k. But there have also been other weak macro data releases from Europe and China during the summer that prompted some investors to hit the sell button.

The US two-year Treasury yield fell 20bp from 4.1% to 3.9% on the nonfarm payroll announcement on Friday 2 August and is now traded at 3.98%.

US nonfarm payrolls, January 2023 to July 2024

As of Friday 2 August 2024, approximately 375 S&P 500 companies (75% of all companies) have reported their Q2 2024 results. 78% have reported positive earnings surprises, while 59% reported positive revenue surprises.

The best performing sectors in the US in terms of Q2 2024 earnings performance have been Health Care, Real Estate and Industrials with 90%, 86% and 81% of their Q2 reports beating expectations. Meanwhile, Consumer Staples, Consumer Discretionary and Communication Services are the worst performers, with only 71%, 70% and 57% of Q2 2024 earnings surpassing expectations. 

The average earnings growth rate for S&P500 companies in Q2 2024 has been 11.5%, which could be compared with analyst’s estimates of 8.9% on 30 June 2024. The sectors that have seen their Q3 2024 earnings estimates decrease most are Energy with 6.6%, Industrials with 6.1% and Health Care with 4.0%.

Virtually all large and mid-cap OMX companies had reported their Q2 results by the end of July. Of the 88 OMX companies that reported in Q2, 63% were better than expected on the earnings front and 59% on the sales front. However, the index-heavy engineering sector fared worse, with only 53% beating on profit and 45% beating on revenue.

Today, Wednesday 7 August, from the US there will be quarterly reports from CVS Health, Disney, Emerson Electric, McKesson, Rockwell Automation and Shopify. Tomorrow, Thursday 8 August, we expect interim results from Eli Lilly, Gilead Sciences and Parker Hannifin.

Downside risks remain

Yesterday, the S&P 500 bounced nicely after the large sell-off on Monday. However, this improves the likelihood of the gap being closed. A break above MA100, currently around 5,320, would enhance the possibility even more. However, the lack of such a scenario and the risk on the downside remains from a technical perspective. Also, note the support levels in the weekly chart.

S&P 500 (in USD), one-year daily chart

S&P 500 (in USD), weekly five-year chart

Interest rates are also worth keeping an eye on. Given that the sharp fall was triggered by increased fears of recession, rising interest rates should now translate into rising equity indices - back to normal.

For the Nasdaq 100, the MA200 was recaptured during yesterday's trading. MA100, currently at 18,730, is the next level to the upside. MA20 follows. If MA20 can be approached and retaken in the next few trading days, the recession fears can almost be called a thing of the past - for this time. 

Nasdaq 100 (in USD), one-year daily chart

The MA50 acts as a support on the weekly chart.

Nasdaq 100 (in USD), weekly five-year chart

Given the performance of the US markets after the Swedish close, we would be surprised if the OMXS30 did not manage to regain the MA200 during today's trading, all else being equal.

OMXS30 (in SEK), one-year daily chart

Note that the OMXS30 is trading at support in the weekly chart.

OMXS30 (in SEK), weekly five-year chart

The DAX closed yesterday's trading around the MA200. Monday's close at 17,660 is the first level to the upside. This is followed by EMA9, currently at 17,900.

DAX (in EUR), one-year daily chart

Once again, the MA50 acts as a support on the weekly chart.

DAX (in EUR), weekly five-year chart