Volatility and uncertainty drive global equity weekly declines. In the US market, there has been a notable shift in market dynamics for the week, characterized by a pronounced rotation out of technology megacaps and into cyclical and small-cap stocks. This led to the S&P 500's largest weekly drop since April, with the index shedding around 2%. The tech-heavy Nasdaq 100 bore the brunt of the sell-off, plummeting nearly 4% while the Russell 2000 small-cap index outperformed, gaining 1.7% for the week. This divergence underscores the market's evolving sentiment and the potential for a broadening rally beyond the leadership of megacap tech stocks.

Adding to the volatility were concerns over a global cyber outage that disrupted multiple industries. The Europe Stoxx 600 Tech Index ended the week 2.7% lower, and Japan's Nikkei 225 fell 2.7% due to concerns over tighter US restrictions on semiconductor exports to China. During China's third plenum, the Hang Seng Index retreated 0.5% for the week due to a lack of clarity on the execution of initiatives, alongside a concerning downside surprise in 2Q GDP.

Topic in focus: Japan equities – Benefits and challenges of a weak yen. The yen's depreciation to a 38-year low against the dollar has made Japan an attractive destination for overseas travellers. The tourism industry is expected to become Japan's second-largest export sector in 2024, trailing only the automotive industry and surpassing electronic components. While a weaker yen boosts export revenues, corporate profits, and wage growth, several issues persist. 

Export volumes remain stagnant and real wages are declining. Additionally, the weaker yen accelerates imported inflation, complicating the Bank of Japan's efforts to normalise monetary policy. Both core and wholesale inflation had risen in June, keeping alive market expectations of a near-term interest rate hike, while both business and consumer sentiments remain weak. The country is also facing an “overtourism” crisis with crowded trails and excessive littering at popular tourist spots. It also puts pressure on Prime Minister Kishida’s government, as declining purchasing power weakens domestic sentiment. The Japanese government has reduced its growth forecast for this year to 0.9% as rising import costs – arising from the weak yen – have impacted consumption, highlighting the patchy nature of Japan’s economic recovery.

Yen volatility, driven by extensive carry trades and intervention risks, has unsettled Japan’s equity markets. Previously fuelled by "Kishidanomics," the market is likely to pause and shift towards themes that generate alpha, such as AI beneficiaries and the financial sector.

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