Market Commentary Week ending 11th August 2024

US: Record volatility and interest rate cut expectations rise

Last week was characterized by exceptional fluctuations in the stock markets. On Monday, the S&P 500 index was down almost 10% from its recent cycle highs, while the Nasdaq 100 was down as much as 15.81%. The VIX, interpreted by investors as a fear index, jumped to 65.73 on Monday, the highest level since March 2020 (the beginning of the COVID pandemic). True, as the week progressed, fears of poor macroeconomic performance eased, so the VIX fell accordingly to 20.69, while the US stock indexes rebounded to record small weekly changes.

It is worth emphasizing that several technical reasons contributed to the strong fall in shares. One of them is strongly related to the first increase in interest rates in Japan in the last ten years. Many investors had borrowed money in Japan at interest rates close to zero and later invested this money in higher-yielding assets in the USA and other countries (English carry trade ). Rising interest rates over the past few weeks and a particularly strong Japanese yen have rendered the scheme unprofitable, prompting a large number of investors to close their positions, which may have included various US investment instruments.

In addition, the fact that investors who wanted to cover long positions had to close profitable positions contributed to the fall of various financial instruments on Monday. Analysts at BullionVault note that this very reason contributed to gold’s fall. Finally, the sharp fall was followed by a rapid rebound in stock prices — Bloomberg analysts say that the closing of short positions and large purchase operations by venture funds contributed significantly to the rise. Goldman Sachs says it saw the biggest buying volume in US stocks in 5 months on Monday.

The bond market also experienced large fluctuations, with the yield on the 10-year US Treasury bond reaching just under 3.7% on Monday, ending the week at 3.94%. Assets under management of money market funds have reached an all-time high. At the height of the panic, investors’ assessment of the Fed’s rate cut has changed significantly — at one point it was expected that the Fed would cut interest rates by as much as 150 basis points this year. Also, this quarterly earnings season has seen a record number of corporates hint at cutting interest rates. According to Friday’s data, the market expects the Fed to cut interest rates by at least 100 basis points by the end of the year.

There was little macroeconomic news last week. It is true that such companies as Airbnb, Marriott, Hilton, Delta, United, Disney, KFC and others spoke about deteriorating consumption forecasts during the announcement of quarterly results. On the other hand, both the S&P Global agency and the ISM institute’s service sector purchasing managers’ index results were above the 50-point mark and marked the growth of business activity in the sector. S&P Global’s PMI was 55.5, while ISM’s was 51.4. Finally, wholesale inventories in the US rose 0.2% on the month, meeting analysts’ forecasts.

Eli Lilly, which announced positive quarterly results, registered exceptional growth last week — the share price of this company rose by 10.84%. Despite the fall on Monday, Meta gained as much as 6.07%, Netflix rose 3.31%, Costco — 4%.

Europe: positive in the German industrial sector and weaker consumption in the Eurozone

European stock indices also ended the week with less than 1% change, with Germany’s DAX up 0.35%, France’s CAC 40 up 0.25% and the UK’s FTSE 100 down 0.08%.

In Europe, Germany showed signs of recovery in the manufacturing sector. In this country, industrial production rose by 1.4% during the month and exceeded the forecast of 1%, and factory orders grew by as much as 3.9% during the month, when economists predicted a rise of 0.4%. Such a jump was recorded after five consecutive months of contraction. In addition, annual inflation in the country was in line with previous forecasts and reached 2.3%. On the other hand, Germany’s international trade volumes did not meet expectations, with the country’s exports shrinking by as much as 3.4% during the month, while imports grew by 0.3%, against expectations of 3.4%.

The difficult situation of consumers in the euro area was marked by retail sales, which fell by 0.3% during the month. The largest decline was observed in the food, beverage and tobacco segments. Such results indicate that consumption still needs time to recover from a period of high inflation. On the other hand, the producer price index in the region rose by 0.5% on the month, ending a streak of 7 consecutive negative months.

In the United Kingdom, positive real estate market data was received, which was probably influenced by the decision of the Bank of England to reduce interest rates. Home sales are expected to increase over the next few months. Also, the Halifax home price index rose 0.8% in July data, when economists had expected a 0.2% gain.

In Europe, for the second week in a row, strong declines were recorded by automotive companies: Volkswagen fell by 3.01%, BMW by 2.88%.

Asia: Sensitive Japanese market and rising inflation in China

Japan’s stock index Nikkei 225 started the week with the biggest fall of 12.4% in decades. Such a contraction was influenced by the particularly strong Japanese yen, which at one point even reached the level of 141 yen per one US dollar, when 153 Japanese yen could be purchased for one US dollar last week. True, the Japanese Nikkei 225 index ended the week with just 2.46%. In China, the CSI 300 fell 1.56%, while Hong Kong’s Hang Seng rose 0.85%.

From macroeconomic news, it was observed that household consumption contracted by as much as 1.4% during the year. On the other hand, wages rose by as much as 4.5% during the year, when the forecast was 2.4%. Central bank officials have commented that they are not going to raise interest rates as long as markets remain volatile.

China reported annual inflation of 0.5%, which was higher than the 0.3% forecast and 0.2% last month. The country also received data on the trade balance — this time, exports grew less than expected, while imports rose more, so the trade surplus was slightly lower than forecast. Meanwhile, the purchasing managers’ index of the country’s service sector rose slightly less than 1 point during the month and reached 52.1 points — the service sector PMI has remained above the 50-point mark for the 9th month in a row.