Global equities took a significant hit on Monday, with Japan’s Nikkei and Topix each plummeting 12% on the day, pushing the latter into bear market territory.
The U.S. market also suffered as a string of weak US economic data came to a climax following a surprisingly soft jobs report. The S&P 500 fell 3% to 5,186, the lowest closing price since May.
“The markets now seem to believe that high rates and strong growth cannot coexist indefinitely,” Citi strategists said in a note.
Disappointing economic data has dashed “soft landing” expectations, leading to an aggressive repricing of Federal Reserve policy. Citi economists now believe the Fed will implement consecutive 50 basis points rate cuts in September in November to support a slowing economy.
Longer-term bond yields have also responded. US 10-year bond yields are notably lower than their April peaks, and the US yield curve has almost returned to normal.
“The good news is that markets have now priced in more realistic EPS outcomes, with a buffer for EPS downgrades in Europe excluding UK, and Japan. However, positioning has only started to come off, with risks tilted to further unwind,” strategists continued.
Citi highlighted that its Bear Market Checklist, which had 8.5 out of 18 red flags at its recent peak, suggests buying into market weakness. Still, strategists said they prefer to wait for evidence of a more complete positioning unwind and a potential stabilization in earnings momentum before doing so.
Against the current backdrop, Citi has recently increased the defensiveness of its global equity strategy, upgrading the US to Overweight and the UK to Neutral. They have also upgraded global Communication Services to Overweight and Consumer Staples to Neutral.
For those concerned about continued volatility, strategists suggest that cheap defensiveness can be found in the UK.