Global economy on the precipice

Global growth looks firmly in decline, and equity markets are only just starting to take notice.

China has been in a property driven slowdown that is now two-years old, and all the external signs looks like the economy there is slowing further. This is driving commodity prices ever lower, with oil now testing multi-year lows and iron-ore also under pressure.

EU is following suit with the largest economy, Germany, suffering persistent drops in industrial production. This is highlighted by the car industry which is a big part of European IP suffering from huge overcapacity as the world moves to EVs, and additional capacity is created by new EV companies without existing ICE production going offline. In addition for Europe China-export led luxury goods segment in France and Italy is also in deep trouble.

Now US data is also turning firmly negative with jobs data continuing to deteriorate. Ignore the first release NFP number, which was weaker than expected, more worryingly every month the downward revisions to previous months initial releases is getting more significant. In addition ISM data last week showed a continuation of the deterioration in manufacturing conditions that we have seen recently.

So equity markets were sharply lower,

• S&P 500 down 4.1%

• Nasdaq Down 5.8%

• SOXX Index down 9.5%

• ASX down 2.5%

• EU stoxx down 4.8%

• CN/HK down 2%

• Japan down 9%

The epicenter of the sell-off is the semiconductor industry, which is why SOXX index is so important to watch. NVDA is the biggest component in SOXX Index and was down 14.5% on the week.

For the week ahead, I expect an early week small bounce-back but further selling as the week progresses. So sell into strength. I look to sell SOXX ETF at 209.00 and Nasdaq 100 at 18,545. A break below the 193.00 low from 5th August is likely later this week in SOXX.

Also look at the motor vehicle industry, it is turning into a major problem as highlighted by VW last week. The rise of TSLA and BYD (and many many others) is creating huge overcapacity in cars. The mix of EV vs ICE engine sales is not moving as quickly to EV as expected. However, both segments of the car industry will suffer from overcapacity as ICE makers build EV capacity without downgrading their own ICE production. VW highlighted that this week with their announcement of massive cost cutting, and a 4.5% fall on Friday to new multi-year lows.

TSLA is the name most overvalued in this space, and it should start to suffer as this overcapacity becomes more apparent. Many TSLA holders are religious in their belief in Elon Musk and this shoe is yet to drop.