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The Week began in Asia on Sunday night with the Nikkei in Japan losing 4,451.28 points, its biggest ever one-day drop, eclipsing the 3,836.48 points it lost on Monday, October 20th, 1987 (Black Monday).
The recent collapse started, innocently enough, high-flying tech stocks started giving back gains that nearly all of Wall Street was convinced had gone too far.
Sometimes the market just needs a catalyst to reset and we’re now roughly a month into a trauma that expanded this week to encompass everything from emerging-country currencies to Japanese shares, before defusing almost as fast.
A signature fact of the worst turbulence of 2024 remains how much of it is confined to excesses wrought by traders. Speculators exploiting an ever-weakening yen got chased out of cross-border wagers. Quants who’d been ringing up gains for months suffered a comeuppance. Popular options bets premised on calm briefly blew up. This is the world we now live in with US speculation increasing with the rise of crypto creating a market of excess.
In short, while economic fears lit the match that fuelled the selloff’s loudest bursts, a daisy chain of leverage drove a slew of market reversals that muddy the potential recessionary message from slumping stocks. With a slew of asset classes and sectors not yet screaming economic angst, one bullish mantra is beginning to emerge from the noise and it’s one we’re on board with: Buy the dip.
The economic data that caused the panic was simply not that bad. It was a weaker than expected jobs report, but still one that more often than not would be considered perfectly acceptable. The fact is, once the Quants (speculative algorithmic trading systems looking for patterns) started dumping stock, so did all the other machines. Then the retail investors follow suit scared by financial news outlets reporting an upcoming recession.
TPP and most other institutions saw this as an opportunity to buy. As the markets calm down, this is looking more likely to be the correct decision than those dumping stocks and wiping out the year's gains.
This week London's stock markets ended on a high note after stronger-than-expected US jobless claims data on Thursday alleviated concerns about the health of the American economy. As we have already pointed out, the initial report was grossly misinterpreted and unless we see more weakness, the calm should trickle back.
On London’s equity markets, heavily weighted miners were in the green yesterday, with Anglo American up 0.35%, Antofagasta ahead 1.79%, and Glencore rising by 1.43%.
The sector’s gains were driven by the stronger-than-expected consumer price inflation data from China for July.
Hargreaves Lansdown jumped 2.18% following the announcement of its acquisition by private equity firms CVC Group, Nordic Capital, and Abu Dhabi’s sovereign wealth fund in a £5.4bn deal.
Housebuilder Bellway rose 3.39% after signalling a potential return to growth in the 2025 financial year, contingent on stable market conditions.
The company reported a drop in housing completions for the year ended 31 July but noted signs of market recovery following recent interest rate cuts.
Despite the decline, the firm's results were slightly ahead of previous guidance.
Beazley climbed 2.4%, continuing its upward trend after posting a record first-half profit of $728.9m on Thursday.
Similarly, Entain rallied 1.49% for a second consecutive day after the sports betting and gaming group raised its full-year guidance.
Lancashire Holdings added 5.94%, building on Thursday's report of a 26% increase in first-half profits, marking the non-life insurance group's best-ever half-year performance.
On the downside, Burberry Group fell 2.26%, making it one of the worst performers on the FTSE 100, alongside Spirax Group, which dropped 3.04%.
On the continent, the STOXX Europe 600 Index clawed back sharp losses from earlier in the week to end 0.27% higher. Major stock indexes were mixed. Germany’s DAX gained 0.35%, and France’s CAC 40 Index increased by 0.25%. Italy’s FTSE MIB, however, fell 0.74%.
Eurozone government bond yields broadly rose, climbing from lows earlier this week after a global market rout sparked by worries about economic growth.
Retail sales volumes in the eurozone unexpectedly declined 0.3% sequentially in June after increasing 0.1% in May. This weakness reflected a drop in the sales of food, drinks, and tobacco. The data suggested that consumers are taking longer to recover from the inflationary squeeze, adding to doubts about the strength of demand in the second quarter.
German industrial output in June rose 1.4%, while industrial orders increased by 3.9% on a seasonally and calendar-adjusted basis. Both data points exceeded expectations. This strength contrasted with final estimates of the latest purchasing managers’ index, which indicated that the downturn in the manufacturing sector worsened in July.
Meanwhile, the foreign trade surplus declined to EUR 20.4 billion in June from a revised EUR 25.3 billion in May, as exports fell more than expected due to weaker demand from the U.S. and the European Union.
In the US the major indexes closed modestly lower for the week after recovering from the biggest sell-off in nearly two years. The S&P 500 Index neared correction territory (down over 10%) on Monday morning when it fell as much as 9.71% from its intraday high in mid-January; around the same time, the Nasdaq Composite was down 15.81% from its peak, after entering a correction the previous Friday. Even more pronounced were the swings in the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, which briefly spiked Monday to 65.73, its highest level since late March 2020, before falling back to end the week at 20.69.
Technical factors and programmed trading strategies appeared to be partly behind the swings. A recent increase in Japanese short-term interest rates, albeit modest (see below), seemed to result in a partial unwind in the so-called carry trade, in which investors borrow at near-zero interest rates in Japan and then invest the funds in higher-yielding assets in the U.S. and other countries. A sharp rise in the yen over the preceding few weeks made the trade unprofitable, however, causing many investors to pull out of their positions.
In earnings calls, several major companies reported signs of weakening consumer demand. Airbnb, Marriott, Hilton, Delta, United, and Disney all reported softer travel demand, while Yum! Brands referenced slowing sales at its KFC and Pizza Hut franchises.
Data from S&P Global offered a somewhat contrasting picture, however. S&P’s gauge of services sector activity fell slightly in July to 55.5 from 56.0 in June but remained solidly in expansion territory—rounding out its best three-month growth spell in two years, according to its chief researcher. (Readings above 50.0 indicate expansion.) Likewise, the Institute for Supply Management’s rival gauge bounced back from a contractionary 48.8 in June—its lowest reading in over three years—to 51.4.
The take on this data from us is that the economy is weakening, but not by any measure that should cause alarm. High interest rates are designed to slow the economy down and lower inflation via demand, and that is simply what we’re seeing. Rates will now start to come down as the desired effect is now evident. Markets often overreact in both directions, but calm should now start to filter through and interest rates can take their natural course before finding a level that is comfortable, and the ‘new normal’.
Japan’s stock markets started the week with the most severe one-day sell-off in decades, driven by a rebounding yen on the back of the Bank of Japan’s hawkish turn at its July meeting, where it both raised interest rates and detailed plans to taper its bond purchases. Concerns about slowing global growth dampened risk appetite, and investors continued the rapid unwinding of the yen carry trade, where they borrow yen at Japan’s ultralow interest rates to invest in a higher-yielding foreign market, in anticipation of a narrowing U.S.-Japan rate differentials and a stronger yen. By the end of the week, Japan’s markets had recouped much of the lost ground, however, with the Nikkei 225 Index and the broader TOPIX Index down 2.5% and 2.1%, respectively.
Chinese stocks retreated as a stronger-than-expected increase in consumer prices failed to offset concerns about deflationary pressures. The Shanghai Composite Index fell 1.48% while the blue-chip CSI 300 gave up 1.56%. In Hong Kong, the benchmark Hang Seng Index gained 0.85%, according to FactSet.
China’s consumer price index rose 0.5% in July from a year earlier, from June’s 0.2% rise. Analysts attributed the increase to seasonal factors, such as bad weather conditions and a low base for pork prices in 2023. Core inflation, which strips out volatile food and energy costs, rose 0.4%, narrowing from 0.6% in June and marking the lowest growth since January, according to Bloomberg. The producer price index fell 0.8% from a year ago, unchanged from June and marking its 22nd month of decline.
Separately, the private Caixin/S&P Global survey of services activity edged up to a better-than-forecast 52.1 in July from 51.2 in June, marking its 19th straight month of expansion, according to Reuters. However, the Caixin composite purchasing managers’ index softened to 51.2 from 52.8 in June as the Caixin manufacturing PMI unexpectedly contracted for the first time in nine months the prior week. The mixed PMI readings highlighted the uneven growth of China’s economy amid a prolonged property slump that has hit domestic consumption even as manufacturing and exports have shown strength.
The Week Ahead
US and UK consumer price inflation updates on Wednesday will be prominent among potential market-moving macroeconomic events of the week ahead.
For the UK, the key releases that traders will be watching will be jobs data on Tuesday, inflation on Wednesday, GDP on Thursday and retail sales on Friday.
After the Bank of England delivered the first interest cut of the cycle at its 1 August meeting, officials said the risk of inflation picking back up from the 2% seen in May and June was the main reason why they may need to wait a while before reducing rates again.
Last month's UK inflation report from the Office for National Statistics showed the consumer price index rose 0.1% over the month of June, which meant the annual rise in CPI remained at 2.0% for the second month running.
Core CPI, which excludes more volatile prices such as food and fuel, remained at 3.5%, as did services sector CPI, a key measure watched by the BoE’s monetary policy committee as an indicator of persistent inflation, at 5.7%.
For July, the BoE monetary policy committee expects CPI to pick back up to 2.4% but this is mostly due to a reading of -0.4% last July falling off the year-over-year figure. The monthly increase is expected to be roughly in line with the 2% annual target.
As for US inflation, the last reading saw a negative monthly movement of -0.1%, leading to the annual rate at 3%, around its lowest level in more than three years.
For July, the headline 12-month CPI rate is expected to ease further to 2.9%, with a 0.2% month-on-month reading for both headline and core rates. 0.2% is acceptable and should keep the markets calm and interest rate cuts on the table.
Market analysts said further softness in US inflation report could put more pressure on the dollar, which fell to almost a five-month low after recent weak US jobs data. It would also, however, give more weight to a larger cut from the Fed in the September meeting.
On the earnings front, there are still a few major companies left to report. This week we’ll hear from Home Depot, Cisco Systems, Aviva, Balfour Beatty, Deere & Co, JD.com, Walmart and Applied Materials to name a few.
Enjoy the rest of the weekend and we hope next week is a good one.
