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The Week in Global Markets
Financial markets summary:
– EUROPE: Stocks finished this week higher across all major European equity markets, while government bond yields declined across the board, including in Germany, France and the UK. The fall was for multiple maturities but in the UK, yields ticked up for the short end due to the upside GDP growth surprise, released this week. There were indications that both the ECB’s and BoE’s job could be getting more complicated going forward, as rate cuts may need to be delayed given signs of accelerating wage growth on the continent and uncomfortable economic strength in the UK. The euro and the pound appreciated against the US dollar.
– UNITED STATES: The S&P 500, the Dow and the Nasdaq all made new all-time highs this week. The sectoral breakdown of the S&P 500 shows that only communication services declined 1.65%, while all other sectors gained, led by Real estate and Utilities. The Russell 2000 advanced at the biggest pace since November 2023. The Q2 earnings season also kicked off this week, as major financial institutions (Wells Fargo, JPMorgan Chase and Citigroup) announced their profits for the quarter. Overall, earnings expectations are higher for Q2 compared to Q1. Notably, the June CPI release showed that MoM headline prices fell for the first time since May 2020, while core prices still rose but by less than expected. This also led to the fed funds futures market repricing the probability of the first rate cut and the number of rate cuts for this year.
– ASIA-PACIFIC: The yields on 10-year JGBs ticked down a bit as the yen recovered some of its lost value against the US dollar and market participants likely reflected on the soft US inflation data and its implication for Fed and BoJ’s next moves. It is expected that the BoJ likely intervened in the FX markets to support its currency, but this is yet to be officially confirmed. Stocks advanced on the week, with the Nikkei 225 gaining 0.68% and the TOPIX rising 0.63%. In China, both the Shanghai Composite and the CSI 300 rose this week, as the yuan appreciated against the dollar and export data showed better results for June than expected. However, imports declined, reflecting a weakness in domestic demand, and inflation was positive but slower than expected.
– BITCOIN: The largest crypto mostly remained in a range of around $57k-$59k this week. There was a report by Glassnode, highlighting that the recent drop in BTC was instrumental in driving some of the biggest losses for short-term holders since the bear market of 2022. It was also revealed this week that the official BTC account of the German government sold off all of its holdings (50,000 Bitcoin), acquired largely as a result of asset seizures. This likely played a major role in keeping the price of BTC below the $60k mark.
policy rate overview
The Bank of Korea kept its key interest rate unchanged at 3.5% for the 12th consecutive meeting, as expected. The decision was unanimous but the outlook for future rate moves diverges. A few members seem ready to support the first cut in the next 3 months. The country’s headline inflation slowed to an 11-month low of 2.4% in June and the economy has clearly slowed down. Despite some signs of financial stress in the system, the central bank is unlikely to rush with rate cuts and is dependent on the Fed’s policy pivot. The BOK expects South Korea’s economy to grow 2.5% this year, with inflation forecast to average 2.6%; it expects economic growth to slow to 2.1% in 2025, with inflation likely to ease to 2.1% as well.
highlights from Germany
Trade balance conceals economic weakness
German international trade balance expanded more than expected in May as both exports and imports declined, the latter outpacing the former. The numbers: trade balance up 12.2% MoM; imports down 6.6% MoM, exports down 3.6% MoM.
Region-wise, the exports to all major trade partners (the rest of the EU, the US, China and the UK) dropped. Imports declined from other EU countries and the UK, but increased from the US and China. Overall, these developments are another confirmation of the persistent weaknesses in both the German economy itself and foreign demand for German exports.
Insolvencies keep rising more than expected
Preliminary data show that regular corporate insolvencies filed in Germany rose by 6.3% in June. Final data for April indicate that the number was 33.5% higher than April 2023, while consumer bankruptcies were 27.9% higher.
Significantly more large companies got into financial difficulties in H1-2024 compared to H1-2023, with real estate companies, auto suppliers and mechanical engineering companies being particularly severely hit. 162 companies with a turnover of more than €10m got into financial difficulties so far this year – an increase of 41% compared to the same period last year. Meaning the number of insolvencies has gone up much more than the 30% increase that restructuring experts had already expected at the start of the year. Of the 279 companies examined that had to file for bankruptcy in 2023, only 35% could be saved by the end of H1-2024 – through a sale to an investor or because creditors agreed to an insolvency plan.
Expectations paint a mixed picture
The average 12m inflation expectations of German households stayed above the 3% mark again in June. The 12m value is 3.2%, the expectation for 3y ahead increased to 3.7%, while the one for 5y ahead declined to 3.6%. 38% of individuals expect inflation to rise within the next year, 44% expect no change, 18% expect a decline. Expectations for real estate price developments over the next 12 months rose again slightly in June to 4.3%. Expectations for rents, credit card interest rates and savings interest rates all declined.
highlights from Europe
Increasing services production
Production in the service sector went up 1.1% MoM in both the euro area and the EU in April. On an annual basis, the increase was 4.8% in the euro area and 4.2% in the EU. Across service categories, the monthly increase was across the board except for accommodation and food services, while the annual increase was driven by all categories except for real estate activities at EA level and accommodation and food service at both EA and EU levels. The highest monthly increases were recorded in Croatia, Greece and France. The largest decreases were observed in Malta, Romania and Finland. The highest annual increases were recorded in Luxembourg, Malta and Lithuania, while the highest decreases were in Romania, Denmark and Hungary.
highlights from The United States
Inflation down to 3%
Headline CPI (before seasonal adjustment) finally declined to 3% YoY and was negative -0.1% MoM (seasonally adjusted) in June, while core CPI reached 0.1% MoM and 3.3% YoY. The index for gasoline fell 3.8% YoY, which more than offset the increase for shelter which rose 5.2% YoY. Energy fell 2% MoM, while the index for food was up 0.2% MoM. This means that core inflation excluding the shelter component has now been negative for 2 months in a row.
PPI higher than expected
Producer prices exceeded expectations due to a surge in trade services: headline PPI rose by 0.2% MoM and 2.6% YoY. Core PPI was 3% YoY, which was the highest reading since April 2023. Trade services (i.e. wholesale and retail margins) contributed 0.37pp to the headline PPI change, which likely indicates profit margin expansion. In contrast, the index for final demand goods decreased 0.5%.
Higher probability to Sep-24 rate cut
As a result of the lower-than-expected inflation reading, all eyes will now be on the PCE. However, the fed funds futures market already repriced the probability for the next cut. As is visible from the CME FedWatch tool, it is now close to 90% that the first time the Fed will cut rates will be in September. Overall, the market is now pricing in 3 rate cuts for this year, but this could be too optimistic. Even after the PPI release, the numbers stayed this high.
Given the update of the economic projections in June, the Fed might have effectively lowered the bar for rate cuts, as the unemployment rate forecast was revised up, while the PCE projection was revised down.
highlights from The United Kingdom
Growth accelerates
The ONS estimate for May is for a monthly real GDP growth of 0.4% and 0.9% on a 3m/3m basis. This was mainly driven by a 1.1% growth in services output (0.3% MoM). Production output grew by 0.2% MoM and 0% 3m/3m. Construction output grew by 1.9% MoM and fell by 0.7% on a 3m/3m basis. Therefore, all 3 main sectors of the British economy contributed positively to GDP growth in May.
“Professional, scientific and technical activities” was the largest positive contributor to the rise in services output in this 3m period, growing by 2.5% in the three months to May 2024. The next largest contribution came from administrative and support service activities, which grew by 3.2%, and from human health and social work activities where output rose by 1.7%.
The largest contribution to the growth in May 2024 was a 0.4% growth in manufacturing. Water supply, sewerage, waste management and remediation activities, and mining and quarrying also grew by 0.4% and 0.1%, respectively. These were partially offset by a fall of 1.9% in electricity, gas, steam and air conditioning supply.
Eight out of the nine construction sectors saw growth in May 2024. The main contributors to the monthly increase were a 2.8% increase in new housing work, with both private and public new housing output increasing on the month, infrastructure new work which rose by 3.5% in May 2024 and non-housing repair and maintenance, which grew by 2.1%, on the month.
Author: Nikolay
Founder of MoneyCraft
