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The Week in Global Markets
Financial markets summary:
– EUROPE: While the German DAX stock index gained 0.4% this week, the pan-European indices Stoxx 50 and Stoxx 600 retreated accompanied by the benchmark French, Italian and Swiss indices, as well as the FTSE 100. This was likely caused by continuing political uncertainty on the old continent, especially concerning the French and UK elections, as well as the policy rate path taken by the ECB which seems to be leaning towards a more cautious approach to rate cuts. German, French and UK government bond yields rose, with the spread of French over German yields rising further. The euro appreciated a bit against the USD and the CHF and GBP, while the pound depreciated a bit against the dollar.
– UNITED STATES: The S&P 500 and the Dow ticked down a bit, while the Nasdaq gained a little this week, as growth stocks performed better than value stocks. Most component sectors of the S&P were in decline (the largest drop was in Utilities, Materials and Consumer Staples) except for Energy and Communication Services. Small caps were the best performers of the week. The Federal Reserve published the results of its regulatory stress test, announcing that all 31 banks subject to it have passed the severely adverse scenario. Overall, the aggregate CET1 capital drop under stress (-2.8pp) this year was more than the previous 6 stress tests. In addition to that, the Fed seems to be considering less strict additional capital requirements for banks compared to what was discussed last year after the regional banking crisis, which benefitted KBW Nasdaq Bank Index. PCE inflation data showed that both headline and core inflation slowed further, in line with expectations. Longer-term yields on US Treasuries rose, with the 10y yield up by 15bp.
– ASIA-PACIFIC: The depreciation of the Japanese yen continued this week, reaching levels beyond 160 yen per dollar and boosting export-driven businesses. As a result, the Nikkei 225 and the TOPIX stock indices climbed 2.6% and 3.1%, respectively, while 10y JGB yields increased to 1.06%. Analysts expect that policy tightening will likely continue while the government might step in to defend the currency in the FX markets once again. In China, both the Shanghai Composite Index and the CSI 300 Index declined as stocks suffered likely due to deteriorating consumption as indicated by slower profit growth and sales of shares by foreign investors. This was probably also a reflection of some deterioration in the earnings outlook in some sectors and lower-than-expected quarterly profits.
– BITCOIN: There was some volatility this week as the BTC price in USD fell by over 5% at the start of the week below the $60k mark but later recovered and is currently at around $61.5k. Bitcoin investment products saw around $600m in outflows. Additionally, CoinDesk reported that a wallet linked to the U.S. Government moved about $240m worth of seized BTC to a Coinbase Prime address, igniting concerns among traders that the digital assets will likely be sold.
policy rate overview
The Czech National Bank cut its policy rate for the fifth consecutive time this week. It is now down by another 50bp to 4.75%. Even though inflation did go back down to target in February, it rebounded and the last reading for May was 2.6% YoY. This cut was more significant than expected and analysts predict that the central bank will likely ease the pace of rate cuts for the next meeting. The bank’s governor indicated that inflationary risks remain, including higher salary demands, price growth in services and revived loan activity in the real estate market.
The Central Bank of Mexico maintained the target for the overnight interbank interest rate unchanged at 11%. The central bank stated that annual headline inflation in the country increased from 4.65% to 4.78% between April and the first half of June, however, core inflation, which better reflects the inflation trend, continued to fall from 4.37% to 4.17% during the same period. It was expected that headline inflation projections for the end of the year would be revised upwards, but estimates for core inflation decreased slightly.
The Swedish Riksbank kept its key interest rate at 3.75% in the expectation that inflation would be 2% this year vs. a previous forecast of 2.3%. GDP is estimated at +1.1% vs. the earlier forecast of 0.3% in 2024. This means ever closer alignment with the target (to be reached in 2025) with subdued economic growth. The central bank statement indicated that, despite favorable trends, such as inflation excluding energy prices falling to 3%, recent data shows a slight uptick above expectations, suggesting potential volatility. In that context, the policy rate might be reduced two or three times in the latter half of the year if current inflation projections hold, though uncertainties related to external inflation, geopolitical tensions, currency fluctuations, and domestic economic recovery could affect future rate expectations.
The Turkish Central Bank left its policy rate at 50%, even though inflation increased last month to over 75% YoY. The Monetary Policy Committee remained confident in its statement that in H2 disinflation will continue and the rate would fall back to the 40%s given the base effects. Since March, the Erdogan administration has been applying its straight-line USDTRY rate policy. It has been drawing a line around the 32-level.
highlights from Germany
Business climate deteriorates unexpectedly
The Ifo business climate index for June confirmed what we saw in the PMI release last week: a worsening of sentiment as expectations fell, despite an unchanged assessment of the current economic situation. The outlook was more pessimistic in manufacturing and trade, while it was brighter for the service and construction sectors. However, the current situation was assessed as worse in construction due to lack of orders, and in wholesale and retail trade due to worsened consumer demand. Manufacturing companies were particularly concerned by the declining order backlog. The heatmap indicates that all sectors are either in crisis or slowdown mode, while the traffic light cycle indicator moved back down to amber territory, showing a likely further slowdown ahead. The cycle clock is still in the crisis quadrant.
Consumer recovery interrupted
German consumer confidence edges back down in Jun/Jul on worsening income and economic expectations and a slight decline in the willingness to buy. The sentiment of German consumers is yet to return to more normal levels, as there are still setbacks related to inflation, overall economic uncertainty and real income growth. The main reason for the moderate decline in income expectations is likely to be the rise in the inflation rate: in an open survey, 62% of respondents mentioned rising prices as the main reason for their income pessimism. The current reluctance to buy is also largely due to rising prices and missing planning security – people are more likely to build up reserves for emergencies or similar, which are therefore also not available for consumption. The hopes of Germans for a rapid economic recovery in the course of this year were dampened in June. After four consecutive increases, the economic indicator lost 7.3pt and fell to 2.5pt. In the eyes of the consumer, any recovery in H2-24 will be a weak one.
highlights from Europe
Stable economic expectations, worse employment indicators
According to the EC’s business and consumer survey results for June 2024, Economic Sentiment remains broadly stable in the EU and the euro area. The sideward trend of the ESI reflected broadly stable confidence in industry, construction and among consumers, while confidence in services and retail trade dipped somewhat. For the largest EU economies, the ESI improved markedly for Spain and more moderately for the Netherlands, while it deteriorated for France and Italy. The ESI remained broadly stable for Germany and Poland. The Employment Expectations Indicator accelerated its gradual decline towards its long-term average. The decrease reflects markedly lower employment plans in retail trade and construction and, to a lesser extent, in services, partly counterbalanced by more optimistic plans in the industry sector. Consumer unemployment expectations worsened slightly further.
CES shows inflation expectations keep declining
According to the May-24 Consumer Expectations Survey by the ECB, median expectations for inflation over the next 12 months edged down further to 2.8%, the lowest since Sep-21, while 3y-ahead expectations declined further to 2.3%. Inflation perceptions and expectations remained relatively closely aligned across income groups. Expectations for nominal income growth decreased slightly to 1.2%, while expectations for nominal spending growth over the next 12 months declined to 3.3% – aligned closely across income groups.
GDP growth expectations for the next 12 months remained unchanged at -0.8%, while expectations for the unemployment rate 12 months ahead decreased to 10.7%. Consumers continued to expect the future unemployment rate to be only slightly higher than the perceived current unemployment rate. The lowest income quintile continued to report the highest expected and perceived unemployment rate, as well as the lowest economic growth expectations.
Home prices are expected to increase by 2.6% over the next 12 months, the same as in the April survey. Households in the lowest income quintile continued to expect higher growth in house prices than those in the top income quintile (3.3% vs. 2.0% respectively). Expectations for mortgage interest rates 12 months ahead fell slightly to 4.9%, with the lowest-income households expecting the highest mortgage interest rates.
highlights from the United States
PCE and core PCE keep trending downward
May PCE inflation came in line with expectations. Core PCE at 2.57% is close to target and trending lower. “Supercore” PCE rose only by 0.1% in May, which is the smallest monthly increase since August 2023. Health Care was the dominant contributor, and 5 of the main subcategories declined. This indicates that the Fed might be ready to do their first rate cut in July, which might be a more convenient timing considering that waiting for the end of Q3 or Q4 would coincide with the US presidential election.
Durable goods orders barely moving
In May, durable goods orders increased by 0.1% MoM vs. an expected fall of -0.5%. This was driven by solid demand for computers and related products (+1.3%) and transportation equipment (+0.6%), notably defense aircraft and parts: (+22.6%). However, excluding transportation, durable goods orders were down 0.1% vs. +0.2% expected. Orders declined for communications equipment (-1.6%); capital goods (-0.5%); machinery (-0.5%) and electrical equipment, appliances, and components (-0.4%). Orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, fell by 0.6%. Shipments declined by -0.4% MoM, while the core shipment figure was -0.5%.
highlights from the United Kingdom
Broadly unchanged risks to the UK financial system but risks of sharp asset price correction persist
The latest Financial Stability Report by the Bank of England indicates that the risk environment has not changed much since Q1-24 overall. However, since the prices of many assets such as shares and bonds remain high relative to historical norms, and some have continued to rise, investors still expect the economy to recover and inflation to fall. They are placing less weight on risks, such as geopolitical developments or continued high inflation, that might cause weaker growth or interest rates to stay higher than expected. These risks make it more likely that there could be a sharp correction in asset prices that could make it more costly and difficult for UK households and businesses to borrow.
Global vulnerabilities in the commercial real estate (CRE) segment remain significant: US CRE borrowers have considerable short-term refinancing needs and a number of overseas banks with large exposures to CRE, in the US and other jurisdictions, experienced significant falls in their equity prices earlier in the year. Stresses in global CRE markets could affect UK financial stability through several channels, including a reduction in overseas finance for the UK CRE sector. CRE prices have continued to decline since December in many countries, and are below their pre-Covid levels in the UK and euro area. This reflects the continued effect of higher interest rates, as well as structural factors such as the shift to more remote working, and falls in the prices of some buildings driven by differences in energy efficiency. The continued impact of higher interest rates, increasing vacancy rates in certain parts of the sector, and tightening in CRE lending standards are likely to continue to drag on CRE prices globally.
Policy uncertainty could increase existing sovereign debt pressures and interact with pressures on public sector debt levels in major economies, geopolitical risks, and risks associated with global fragmentation. These factors and their potential interaction make the economic outlook less certain and could lead to market volatility, including in sovereign debt markets, as already observed in response to the unexpected news of French parliamentary elections over the summer. Geopolitics is consistently cited by market participants as a key risk to financial stability; geopolitical risks were the most commonly cited ‘number one’ source of risk in the 2024 H1 Systemic Risk Survey. Developments in the Middle East, including disruption to shipping through the Red Sea, or further escalation of conflict in Ukraine, could disrupt global trade and supply chains and cause sharp moves in commodity prices. Such moves can lead to rapid increases in liquidity demand in the system of market-based finance.
The aggregate household debt to income ratio fell by 1.3% in 2023 Q4, having also fallen by 1.3% in 2023 Q3. Consistent with this, many borrowers report an increase in their savings buffers. But many mortgagors coming to the end of fixed-rate deals will see increased borrowing costs as they have yet to refinance onto higher rates. While most fixed-rate mortgages have repriced since mortgage rates started to rise in 2021 H2, the full impact of higher interest rates has not yet passed through to all mortgagors. Over 3 million, or 35%, of mortgage accounts are still paying rates of less than 3%; the majority of whom will have their fixed rate expire before end-2026. For the typical owner-occupier mortgagor rolling off a fixed rate between June 2024 and end-2026, their monthly mortgage repayments are projected to increase by around £180, or around 28%.
Author: Nikolay
Founder of MoneyCraft
