Summary:
Last Week Review
• US IN RECESSION? LET’S WAIT AND SEE… Wall Street has calmed down and regained its bullish vigor after the global sell-off that occurred last Monday due to the release of lower than expected Nonfarm Payroll (Jul) data triggered fears of the US being hit by a recession or hard-landing (instead of soft-landing as expected by the Fed).
• The unwinding of carry trade positions, led by the Japanese Yen globally, also forced investors to profit-take positions in tech stocks that had risen high. The S&P 500 Index, which was hit by a 3% drop on Monday, eventually recovered and closed flat for the week where it only edged down 0.05%, while the DJIA lost 0.6%, and the NASDAQ only depreciated 0.2%.
• At the time of Monday’s sell-off, the CBOE Volatility Index (or Wall Street’s “fear gauge”) had skyrocketed to highs equivalent to the early days of the Covid-19 pandemic in March 2020, before flattening out again by the end of last week. Gradually, market participants assessed that the US recession fears were somewhat exaggerated as the Non-Manufacturing PMI proved to be still expansionary, where the Services sector supports 2/3 of the US economy. Finally, on Thursday the Initial Jobless Claims data provided further relief as the figures indicated that the labor market was not as loose as expected, as jobless claims came in lower than expected (actual: 233k vs forecast: 241k vs previous: 250k).
• Also on Thursday, US Federal Reserve officials reiterated their belief that Inflation is low enough to allow for future interest rate cuts, but said they will make decisions on the size and timing of such cuts based on economic data over time. Although markets will still be quite nervous until next month, market surveys expect the Fed to cut rates at the September 17-18 FOMC Meeting, with a 51% chance of a 50 bps cut, and 49% for a 25 bps cut, according to the CME FedWatch Tool.
• ASIA & EUROPE MARKETS: The rebound in ASIAN markets last week was quite impressive. After the Nikkei recorded its second biggest drop in history and third biggest gain in 24 hours, the index ended last week down only 2.5%. Other benchmark indices fared better – the MSCI Asia outside Japan index and the MSCI World index ended flat, and the MSCI Emerging Market index gained 0.2%.
• Speaking of Global PMIs, Asian majors such as Japan & China, as well as major players in Europe such as Germany, Eurozone, and the UK were still able to post Composite and Services PMIs in the expansionary realm, in line with the US. German Factory Orders and Industrial Production from Europe’s number one economy even managed to increase significantly in June, maintaining economic strength in continental Europe.
• Meanwhile, China’s economy is still stumbling a bit as their Export data in July proved to be weak and failed to meet expectations, while Imports that increased above estimates were predicted due to high demand for crude oil. As such, Chinese Inflation (July) managed to pick-up to 0.5% yoy above expectations of 0.3%; while German CPI appears stuck at 2.3% yoy on the way to the ECB Target of 2%.
• COMMODITIES: OIL prices closed up over 3.5% on a weekly basis as positive economic data and signals from Fed officials that they could cut interest rates as soon as September eased fears of sluggish global demand, while the potential escalation of Middle East Conflict continues to raise the risk of supply disruptions.
• BRENT gained more than 3.5% last week, while US WTI jumped more than 4%. The Russia-Ukraine conflict also continued as Moscow moved additional tanks, artillery and rockets into the southern region of Kursk on Friday as it fought for the 4th consecutive day in retaliation to a surprise attack from Ukrainian forces.
• Meanwhile, a weaker US Dollar as the Fed’s rate cut projections are increasingly materializing helped the demand side as oil became cheaper for foreign or non-US buyers. Another price-supporting sentiment came from Libya’s National Oil Corp which announced force majeure at the Sharara oil field since Wednesday, where they gradually reduced production due to protests.
This Week’s Outlook
• Investors will be watching US Inflation data on Wednesday for fresh clues as to the potential magnitude of interest rate cuts expected by the Federal Reserve in September. Markets are likely to remain volatile, while the Earnings Reports of US retailers such as Home Depot & Walmart will be watched for clues on the strength of consumer spending. Market participants will be very sensitive to signs of whether market strength can be sustained, or if they should be prepared to surf the waves of high volatility again.
• July US CPI data is expected to show that inflation continues to approach the Fed’s annual target of 2%. A reading that shows only a slight decline could ease concerns that the Fed has thrown the economy into chaos by keeping interest rates high for too long.
• However, a weak report could raise recession fears, potentially triggering fresh market volatility. The economic calendar also includes retail sales figures for July as well as the weekly report on initial jobless claims.
• Investors will also get a chance to hear comments from several Fed officials including Atlanta Fed President Raphael Bostic, Philadelphia Fed President Patrick Harker and Chicago Fed President Austan Goolsbee, who are expected to give further indications that they are more confident the current inflation rate is cool enough to lower interest rates.
• Next week’s focus will include how much more liquidation of global CARRY TRADE positions remains. Concerns regarding the widening MIDDLE EAST CONFLICT and the upcoming US ELECTION also add to the high volatility factor. FINANCIAL REPORT season enters its final stages with the majority of companies having reported their quarterly financial results.
• ASIA & EUROPE MARKETS : various important data coming out of : JAPAN (2Q GDP), CHINA (Industrial Production) UK (employment, July Inflation, 2Q GDP)), GERMANY (ZEW Economic Sentiment) and EUROZONE (2Q GDP). Domestically, Thursday will see the announcement of INDONESIA’s Trade Balance (Jul).
• Speaking of CARRY TRADE, in the currency market, US futures data on Friday showed that hedge funds cut their Japanese Yen short position in the week to August 6 by 62,000 contracts. This was the largest weekly bullish swing in the Yen since the Fukushima disaster in February 2011, and the third largest since 1986 equivalent data. If this is representative of the wider currency market, you could say the Yen ‘carry trade’ has been largely liquidated.
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