Markets are facing a downturn as weak macroeconomic data and mixed Q2 earnings reports drive a defensive rotation, according to Barclays analysts.
The recent trend indicates that "bad is bad now," said the bank, noting that negative news has led to sharply adverse market reactions, a shift from the previous sentiment where poor data was seen as potentially reviving the Fed's supportive stance.
Barclays highlights that soft activity data from the US, China, and Europe has failed to reassure investors.
"Activity data in US, China and Europe mostly surprised to the downside," the analysts noted. This decline in economic indicators, coupled with mixed earnings reports, is said to have fueled uncertainty and defensive market behavior.
The analysts believe that while soft data had initially been well received by markets due to hopes of policy easing, the current climate shows "bad is bad now, and with quite a lot of policy easing already priced in, incremental negative data flow may not help much."
This shift reflects growing recession concerns, placing significant weight on upcoming economic reports, particularly today's payrolls report, which "may hold the fate of equities for the rest of summer."
Barclays also points out that the high market positioning has likely amplified negative reactions to earnings misses and cautious guidance.
"Sharply negative market reaction to misses/cautious guidance has likely been amplified by high positioning." They add that with year-to-date upgrades to FY24 estimates already reversing, the risk of further market unwinds persists if the earnings backstop deteriorates.
In light of these uncertainties, Barclays has cut cyclical exposure and recommends a cautious approach amid "high macro/geopolitical uncertainty and tricky late summer seasonality." They suggest that UK equities offer a safer haven, and highlight cheap DAX volatility as an attractive hedge against downside risks.