Tech fund flows, JPY undervaluation and China’s export resurgence

JPY undervaluation presents contrarian opportunities

What the chart shows:

The chart displays USDJPY and its fair valuations derived from 10-year yield differentials and purchasing power parity (PPP). Using 3-year and 20-year rolling regressions reflects shorter- and longer-term aspects of capital flows and inflation dynamics, respectively. Additionally, it provides USDJPY scenarios based on 2.5-3.5% 10-year US-Japan bond yield differentials and visualizes USDJPY’s long-run subsequent returns compared to PPP fair valuation deviations.

Behind the data:

The {{nofollow}}BoJ tightened its monetary policy, raising the policy rate to 0.25% and reducing bond purchases. The {{nofollow}}Fed held rates steady but {{nofollow}}signaled a possible cut in September. These narrowed the 10-year US-Japan bond yield gap to around 3%. Given scenarios of 2.5-3.5% 10-year yield differentials, USDJPY is estimated to be around 129-146. 

The PPP model shows JPY undervaluation against the USD above +2 standard deviations, indicating potential for long-term reversion.

However, overestimated core inflation and {{nofollow}}slowing real wages in Japan may challenge BoJ’s hawkish stance, suggesting USDJPY overvaluation—even reverting—might persist.

Is the US economy peaking amid tech-driven optimism?

What the chart shows:

The chart displays the US Sentix Economic Index, the US Investors Intelligence Investment Index, and the S&P 500. The upper pane illustrates the economic and investment sentiment indices in terms of z-scores using monthly data from July 2002 to the present, compared to the year-over-year growth of the S&P 500. In the lower pane, the US economic-investment z-score differentials are displayed with ±1 and ±2 standard deviation (s.d.) bands.

Behind the data:

When US economic sentiment lags investment sentiment significantly (below –1 s.d.), it suggests pessimistic macro and investment cycles, as seen during the Global Financial Crisis, the euro area sovereign debt crisis, and the COVID pandemic. 

Currently, the macro-investment sentiment gap is negative but not beyond –1 s.d. while the cycle remains an uptrend, primarily led by technological advancements and AI prospects. However, the upcycle shows signs of peaking, and the increasing economic-investment discrepancy might be cautionary.

Tech sector dominates global fund inflows

What the chart shows:

The chart uses data from EPFR to illustrate the sectoral breakdown of global net fund flows aggregated since the beginning of the year.

Behind the data:

The AI-driven rally, particularly around the "Magnificent 7," has significantly impacted global fund flows, with the technology sector receiving around 10 billion USD by the end of July. Conversely, other sectors saw significant outflows, collectively losing almost 25 billion USD. This trend highlights the concentrated investor interest in tech amid broader market adjustments, reflecting a substantial shift in investor focus towards technology and telecommunications.

Record divergence between S&P 500 market-cap and equal weight indices

What the chart shows:

The chart illustrates the one-month rolling return correlation between the S&P 500 market-cap weighted index and the {{nofollow}}S&P 500 equal weight index from the 1990s.

Behind the data:

Previously, we have shown the S&P 500 index diverging significantly from its equal-weight index. Specifically, their ratio—market-cap relative to equal weighting—has been surpassing +2 standard deviations but has not yet exceeded +3 standard deviations, as it did during the dot-com period.

Their dynamic return correlation provides comparable results. It is noticeably low during both the dot-com and COVID-19 eras but high during periods of tranquility. However, in early July 2024, the recent correlation revealed an even more remarkable observation as it tumbled to a record low of about zero.

Such a historically non-existent correlation may not be overlooked amid AI-motivated markets that underpin large-cap concentrations, as opposed to the diversifications reflected in the equal-weight index.

Early summer volatility spike raises market caution

What the chart shows:

This chart compares the VIX throughout the calendar year, with the blue line representing 2024, the green line showing the historical mean, and the purple line depicting the historical mean excluding extreme years (2008 and 2020).

Behind the data:

Historically, volatility tends to increase at the end of summer. This year, VIX spiked significantly in July due to upcoming Federal Reserve meetings, Democratic delegate votes, and earnings reports. Although rate cuts and political confirmations might ease investor concerns, the early and sharp rise in VIX above 20 indicates heightened market caution. Market confidence may be bolstered by anticipated rate cuts and political clarity, but current volatility signals cautious investor sentiment.

Tech fuels recovery in China’s exports

What the chart shows:

The chart shows China’s export growth contributions by category, smoothed using a three-month moving average, highlighting machinery and equipment, basic metals, transport equipment, etc.

Behind the data:

‍{{nofollow}}China's exports have been recovering, driven by global manufacturing improvements, front-loaded orders, and low-base effects. Key contributors include tech-related products like phone sets, automatic data processing machines, and electronic circuits. 

As {{nofollow}}China leads in high-tech and AI sectors, its export trends remain critical global economic indicators. The recovery indicates China's growing influence in global trade, particularly in high-tech industries, which may shape future economic dynamics.

Surge in Chinese copper exports amid high inventories

What the chart shows:

This chart looks at Chinese copper inventories (blue line) and copper exports (green line).

Behind the data: 

Throughout 2024, Chinese copper inventories rose while exports increased significantly due to limited domestic demand. This trend reflects broader commodity market dynamics where sluggish domestic consumption drives producers to seek higher international prices, despite potential trade tensions. The surge in exports amidst high inventories suggests strategic shifts in response to domestic economic conditions and global demand pressures.