Global Market Update 5-9 Aug 2024

United States:

- Economic Growth and Consumer Spending:

  - US consumers began cutting back on travel and leisure spending, with companies like Disney, Airbnb, and Hilton reporting earnings slowdowns, which raised concerns about the overall health of the economy. This consumer caution, coupled with weak economic data, contributed to heightened market volatility.

  - Debt Securities: The US Treasury yield curve between 2-year and 10-year bonds is close to exiting its prolonged inversion, signalling expectations for the Federal Reserve to ease monetary policy. This movement in the yield curve reflects growing market anticipation of rate cuts as investors seek safety in longer-term bonds.

  - Jobs: Signs of cooling in the labour market, as evidenced by July’s jobs data, prompted discussions among Fed officials about potential interest rate cuts. These concerns added to market anxiety, contributing to a broader sell-off in equities earlier in the week.

  - Political Developments: Kamala Harris securing the Democratic presidential nomination, with Minnesota Governor Tim Walz as her running mate, had limited immediate market impact, but it set the stage for a closely watched general election against Trump.

- Market Impact: US stocks experienced significant volatility, with sharp declines early in the week as concerns about consumer spending and labour market softness weighed on investor sentiment. However, by mid-week, stocks began to claw back some losses, rounding off a week of turbulent trading. The Nasdaq and S&P 500 saw corrections, with particular pressure on tech and leisure sectors.

United Kingdom:

- Economic Growth and Policy:

  - The ONS’s revision of the annual GDP growth for 2022 to 3.8% from 4.3% highlighted a less robust economic recovery, contributing to cautious market sentiment regarding the UK’s economic outlook.

  - Government Policy: Starmer’s government signalled a potential reduction in overseas hiring by tech and engineering companies, raising concerns among investors about the potential impact on sectors reliant on skilled foreign labour. Chancellor Reeves’ exploration of a “Canadian-style” pension model indicated a shift towards more substantial investments in equities and infrastructure, which could have long-term positive implications for UK markets.

  - Labor Policy: The Labour Party’s plans to repeal anti-strike laws and enhance workers’ rights could increase labour costs, potentially weighing on corporate profitability and investor sentiment in the near term.

- Market Impact: UK financial markets experienced moderate fluctuations, with investors reacting cautiously to the revised GDP growth figures and the government’s evolving policies on labour and skilled immigration. The potential for increased domestic investment through pension reforms offered a longer-term positive outlook, though immediate market reactions were muted.

Eurozone:

- Economic Growth:

  - German industrial production’s 1.4% rise in June provided a rare positive surprise for Europe’s largest economy, offering some relief to markets after an unexpected contraction in the previous quarter.

  - Tax and Inflation: Italy’s decision to double the flat tax on foreign income for new residents could dampen demand from wealthy expats, potentially cooling the high-end real estate market. This development contributed to a mixed reaction in European markets, with concerns over inflationary pressures in some regions balanced by signs of resilience in industrial output.

- Market Impact: European markets reacted positively to the German industrial production data, but gains were tempered by ongoing concerns over inflation and taxation policies in Italy. The Eurozone’s economic landscape remains mixed, with markets closely watching for further indicators of growth stability or potential downturns.

Japan

- Monetary Policy and Market Reactions:

  - The BOJ’s recent interest rate hike and the global unwinding of carry trades added to market volatility. Despite this, the BOJ signalled that it would maintain the accommodative monetary policy, which helped stabilize the yen and contributed to a late-week rally in Japanese stocks.

  - Jobs: The rise in real cash earnings by 1.1% in June brightened the outlook for consumption, adding a positive note to Japan’s economic prospects.

- Market Impact: Japanese markets experienced significant volatility, driven by the BOJ’s policy actions and global market dynamics. The yen’s strength against the dollar prompted the unwinding of carry trades, exacerbating market movements. However, positive earnings data later in the week supported a rebound in Japanese equities.

New Zealand:

- Monetary Policy and Jobs:

  - The better-than-expected unemployment rate of 4.6% for Q2 boosted the NZD, with the currency gaining as much as 0.7% against the USD. Investors and economists increasingly expect the Reserve Bank of New Zealand to cut interest rates, which could lead to further currency fluctuations.

- Market Impact: The NZD/USD exchange rate saw gains due to stronger-than-expected labour market data, but expectations of future rate cuts tempered the overall market reaction, with investors remaining cautious.

China

- Regulatory Measures:

  - China’s imposition of controls on the production of fentanyl-related chemicals indicated closer cooperation with the US, which was seen positively by markets. However, broader concerns about China’s economic stability persisted.

  - Economic Data: The Services PMI’s rise to 52.1 in July exceeded expectations, providing a positive signal for the economy and offering some support to Chinese equities.

- Market Impact: Chinese markets responded positively to the stronger-than-expected Services PMI data, though broader concerns about regulatory measures and economic stability kept investor enthusiasm in check.

Switzerland:

- Currency and Export Concerns:

  - The Swiss National Bank faced pressure from exporters as the franc’s rapid appreciation threatened to undermine recent gains in overseas sales. This currency strength posed challenges for Swiss exporters, adding to market concerns about the sustainability of the recovery.

- Market Impact: The Swiss franc’s appreciation led to concerns in the Swiss equity markets, particularly among export-oriented companies. Investors closely watched the SNB’s potential actions to address currency strength.

Artificial Intelligence (AI):

- Corporate Developments and Investments:

  - SK Hynix’s receipt of $450 million in US grants and $500 million in loans to build a chip packaging and research facility in Indiana was seen as a significant step in bolstering US capacity in the AI supply chain, which supported tech sector sentiment.

  - Google’s hiring of Character.AI founders and Super Micro Computer’s strong sales forecast highlighted ongoing corporate investments in AI infrastructure despite broader market scepticism about the returns on these investments.

  - Nvidia and TSMC faced production challenges with new AI chips, raising concerns about supply chain disruptions, while Musk’s lawsuit against OpenAI added legal uncertainty to the AI sector.

- Market Impact: The AI sector continued to be a focal point for investors, with mixed reactions to corporate developments. While ongoing investments supported some tech stocks, production challenges and legal disputes contributed to volatility within the sector.

Electric Vehicles (EV):

- Trade and Market Dynamics:

  - The EU’s likely imposition of tariffs on Chinese EVs in November, coupled with the ongoing decline in Germany’s EV sales after the end of incentives, underscored the challenges facing the EV market in Europe.

- Market Impact: European automotive stocks faced pressure as investors reacted to the potential for increased tariffs and declining sales, particularly in the EV segment. This weighed on broader market sentiment within the automotive sector.