Market Observations - Aug 3, '23
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U.S. Wednesday Market Wrap:?It Was a mere Flesh Wound!
As risk-off sentiment returns. Stocks hit sell-off mode, with the Nasdaq composite registering its worst day since February after Fitch downgraded the long-term rating for the U.S. The Nasdaq lost 2.17%, while the S&P gave up 1.38%, and the Dow tumbled 348 points or 0.98%, a level not seen since last Thursday. Two of eleven S&P sectors closed green. Consumer staples +0.31% led, and technology -2.50% lagged. In the U.S., Bank of America joined the Fed in reversing its recession call, now seeing the soft landing as the most likely outcome in the year ahead. It also pushed its first rate cut forecast to June 2024, with a slower pace of cuts to follow. Meanwhile, the ADP employment report showed that 324,000 jobs were added in July, driven primarily by the services sector.
Internationally, the Bank of Japan’s policy meeting minutes helped address concerns that its easy money era is over. Deputy governor Shinichi Ichida said,?“We do not have an exit from monetary easing in mind.”
All eyes are on Apple and Amazon earnings Thursday. But some traders say the chart of Apple suggests some pain ahead for the consumer tech giant.
They’re also pointing to?Microsoft, which experienced a failed breakout despite beating earnings expectations?and giving investors more guidance on how it intends to monetize artificial intelligence (A.I.). If one of the market’s main technology leaders is already 10% off its highs following good news, has sentiment gotten too far ahead of itself in Apple and others?
The global capital markets remain unsettled. The combination of the BOJ adjustment of its monetary policy, Fitch’s downgrade of the U.S. to AA+, ahead of a flood of supply, and new measures by China have injected volatility into the summer markets.
The U.S. dollar has extended its gains today against the G10 currencies and most emerging market currencies. The yen has recovered a bit after the BOJ stepped in and bought JGBs for the second time this week at market prices, well shy of the 1.0% upper band for the 10-year yield.
However, bonds and stocks continue to sell off. The 10-year JGB yield is near 0.65%, while European benchmark yields are 3-7 bps higher. The 10-year Gilt yield is up about 2bps to almost 4.42% ahead of the Bank of England meeting. Most now look for a 25 bps hike, but a 50 bps move cannot be ruled out. The decision by the Czech central bank is awaited, but it has been on hold since last June at 7.0%. The U.S. 10-year Treasury reached 4.16% today, its highest level since last November. Last year’s high was set in late October near 4.33%.
Equities extended their decline in the Asia Pacific region, though China bucked the move with modest gains.
Europe’s SXXP is off almost 1% for its 3rd consecutive fall.
U.S. index futures are also lower.
Gold fell to almost $1931, its lowest level since July 11, and is stabilizing in the European morning.
September WTI posted a key downside reversal yesterday, and follow-through selling took it to about $78.70 today (yesterday’s peak was almost $82.50). It, too, has steadied in the European morning.
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China’s Caixin services and composite PMI shed little fresh light on the world’s second-largest economy. The sub-50 reading of Caixin’s manufacturing PMI was followed by today’s news of a slightly firmer service PMI (54.1 vs. 53.9). The composite slipped to 51.9 from 52.5 and is the weakest since January. Last July, it stood at 54.0. The focus is on the new measures that Beijing is using its soft power to induce from local governments (accelerate borrowing plans), banks (low mortgage rates, reduce or postpone dollar sales, lend to the tech sector, and M&A funding) and new measures for the property market and to support consumption.
The U.S. economic calendar is packed today, but most of it will contain little new news. The Q2 productivity and unit labor costs are derived from the GDP data, which gives reason to expect productivity to have recovered from the 2.1% decline in Q1 and for unit labor costs to moderate after rising 4.2% in Q1. The final services and composite PMI are likely to have little change from the preliminary estimate at best, and June factory orders will offer little new to the durable goods orders. That leaves ISM services. Its average in H1 was 52.9, close to the PMI services average of 52.2. In the week ending July 22, weekly jobless claims fell to their lowest level since February (221k). Comparing weeks in which the nonfarm surveys are conducted shows an almost 40k decline. The ADP did not give much help in anticipating the June jobs report, which may deter many from tweaking their forecasts for tomorrow’s report.
Meanwhile, the implication of Fitch’s decision to remove the AAA rating from the U.S. is still being digested. As one would expect, most American orthodoxy is scratching their heads. “How dare they?”. The U.S. did not default, and with a 5.50% overnight rate, a 4% yield on the 10-year note does not look as if there are substantial questions about their security.
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