Summary:
Last Week Review
• A WEEK OF SLUMP FOR THE TECHNOLOGY SECTOR dragged down the NASDAQ and S&P 500 in the worst week since April, while the Dow Jones, which set record after record last week thanks to sector rotation, posted a weekly gain. Moreover, when on Friday the world was confronted with the worldwide crash of Microsoft operating systems due to a software glitch from cyber security firm CROWDSTRIKE, which caused operational disruptions in a number of industries such as airlines, banking, and healthcare; further emphasizing that the Technology sector also has vulnerable factors for its fall, contrary to the AI hype that has been supporting its appreciation.
• Meanwhile, the sentiment on September’s rate-cut is quite optimistic, as financial markets have already priced in a 93.5% chance that the Fed will implement a rate-cut at its September meeting (as quoted from CME FedWatch Tool); even as US Retail Sales (June) and Philadelphia Fed Manufacturing Index (Jul) were seen soaring significantly above expectations, which in turn means that consumers still have healthy spending power while Inflation is able to flatten = completing the soft-landing symptoms. Initial Jobless Claims which rose by 20k to 243k for the latest week, is not yet considered an indication of the weakening labor sector that the Fed wants to see, due to seasonal factors. As a result, the DOLLAR INDEX crept back up and pressured OIL prices.
• Furthermore, CHINA releasing 2nd quarter GDP figures at 4.7%, weaker than expected 5%, also raised concerns about sluggish global oil demand. The latest news is that traders are monitoring the possibility of ceasefire negotiations in GAZA; making oil prices slump to the lowest point since mid-June. GOLD, on the other hand, rallied to a record high of USD 2483 thanks to the Fed’s increasingly feasible rate cut prediction in September, although it seems quite hesitant to go straight to USD 3000 (as predicted by economists) from this position.
• QUARTER 2 FINANCIAL REPORT season has seen 70 S&P500 companies report results, of which 83%
posted above-consensus results, according to the LSEG survey. Analysts now see aggregate S&P 500
earnings growth of 11.1% yoy, a better figure than the 10.6% forecast on July 1.
• U.S. POLITICAL MAP: Following the firing of Donald Trump in the previous week, the US presidential election turmoil was colored by US President Joe Biden’s decision to withdraw his candidacy, after dwindling support from his own party, the Democrats. Biden, whose health and leadership skills were in doubt at the ripe old age of 81 (compared to Trump’s 78), finally handed over the nomination to Kamala Harris, who is currently the US Vice President.
• JCI climbed 0.21% last week, accompanied by Foreign Net Buy of IDR 1.9 trillion (all markets). INDONESIA reported its 50th consecutive month of Trade Balance (June) surplus at USD 2.39bn, albeit lower than expected and the previous month at USD 2.9bn; due to weaker Export growth than rising Imports. BI’s RDG still decided to keep interest rates in place at 6.25%.
This Week’s Outlook
Here are some of the focuses that market investors need to monitor this week:
• It will be a busy week for financial markets with US Inflation data expected to reinforce the consensus of a rate cut in September. Earnings season will heat up with reports from several major companies and a number of European banks. Meanwhile, PMI data from the Eurozone will clarify the path to the next rate cut by the European Central Bank.
• Friday’s US INFLATION DATA will test market expectations that the Federal Reserve will almost certainly cut interest rates in September. Economists expect June’s PERSONAL CONSUMPTION EXPENDITURES (PCE) PRICE index to rise 0.1% for the second consecutive month, which would lower 3-month annualized Core Inflation to the slowest pace this year, below the Fed’s 2% target.
• As the FINANCIAL REPORT Season heats up, optimistic investors are hoping solid corporate performance will arrest the decline in Technology stocks that has cooled the US stock rally this year, where companies like Tesla, Alphabet (GM & IBM notwithstanding), will kick off the first set of “Magnificent Seven” mega-cap stock reports that have underpinned market gains since the start of 2023. As for the S&P 500 Technology sector, it has fallen nearly 6% this week as rising expectations of interest rate cuts and Donald Trump’s second run in the 2024 Presidential Election rotate money out of this year’s winning sector and into the laggard sector.
• THE EUROPEAN BANKING SECTOR is also enjoying an uptick in profits and share prices are facing reality this week as the second quarter earnings season from Deutsche Bank (GERMANY), Lloyds Banking Group (UK), BNP Paribas (FRANCE), Banco Santander (SPAIN), and UniCredit (ITALY) comes under the spotlight. Key to the outlook is net interest income, which surged on the back of rising interest rates. However, this party may not last long as the ECB signals further rate cuts and the BANK OF ENGLAND prepares to ease monetary policy. Investors are also keen to see how lenders perform as political uncertainty increases – FRENCH bank stocks fell sharply during the recent elections.
• While economic growth in the EUROZONE remains sluggish, strength in the services sector driven by tourism becoming more dominant, has kept price pressures (Inflation) high. This has posed a challenge for the ECB, so Wednesday’s PMI data will be closely watched after the central bank held rates at 3.75% last Thursday and refrained from giving any further indication in that regard and based all decisions on economic data. As for the ECB, which lowered borrowing costs for the first time in 5 years last June, it sees inflation moderating. The market strongly expects a rate cut in September, supporting Euro Zone stocks, government bonds, and the Euro currency for now; but also increasing the threat of PMI results that could change the ECB’s view.
• OIL prices settled at their lowest level since mid-June at Friday’s close as traders eyed a possible ceasefire in Gaza, while a strong US DOLLAR also pressured non-US buying interest. The war in Gaza has caused investors to include a risk premium when trading oil, as geopolitical tensions threaten global supplies. If a ceasefire is reached, the Iranian-backed Houthi rebels have an excuse to scale back their attacks on commercial vessels in the Red Sea, which they claim is in solidarity with the Palestinians (Hamas).
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