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The Week in Global Markets
Financial markets summary:
– EUROPE: Major European stock indices retreated this week across the board, including in major markets such as Germany, France, Italy, Switzerland and the UK. This was likely influenced by the negative development in industrial production on the continent, which declined in the 3 biggest economies and EU-wide for the first time since January. Another factor was the ECB’s decision to hold rates steady, accompanied by no clarity on what comes next and when. ECB President Lagarde suggested that growth risks are tilted to the downside and for September, all options are still on the table as inflation is expected to be around the current levels until year-end. The euro and the pound appreciated slightly, while 10-year German yields edged down.
– UNITED STATES: The US stock market was influenced this week by news of likely further export restrictions related to semiconductor sales to China by companies such as ASML and Tokyo Electron, in an effort to limit the Asian country’s access to the latest technologies. As a result, stocks of NVIDIA, TSMC, Broadcom and others dropped sharply; both the S&P 500 and the tech-heavy Nasdaq indices fell, while only the Dow kept rising. Microsoft was also impacted by the massive global IT outages (“blue screen of death“) caused by a faulty software update by cybersecurity firm CrowdStrike. The outage affected consumers and businesses across the globe, including airlines, banks, healthcare providers, telecoms, retailers, etc. In the S&P 500, tech was indeed the biggest loser week-on-week, followed by Consumer Discretionary, Utilities and Communication Services; Energy, Real Estate and Financials gained the most as election probabilities are likely influencing expectations for lighter regulations in these sectors.
– ASIA-PACIFIC: Concerns over the effects of US tech restrictions spilled over to the APAC region, where the major Japanese stock indices Nikkei 225 and TOPIX declined over the week. Expectations are also growing that the BoJ might hike at the end of July as it is also about to provide more information about the end of its bond purchases. The yen appreciated slightly against the US dollar, however, there is still no official confirmation of the suspected government intervention in the FX markets to stem speculative trading in the Japanese currency. Inflation is expected to keep rising, while GDP growth forecasts have been lowered by the government. In China, despite the deepening trade tensions with the US and worse-than-expected growth in Q2, equities advanced this week. Economic weakness seems to persist, as the downturn in the property sector is far from done and retail sales are growing at a pace lower than forecasts predicted.
– BITCOIN: The largest cryptocurrency recovered strongly this week, reaching levels above $67k (currently hovering around $66.8k). CoinTelegraph reported a reduction in selling pressure as large investors (“whales”) are likely exhausted and valuation metrics suggest a positive momentum. Importantly, while the global IT disruption this week had a direct impact on payment transactions in numerous countries, Bitcoin continued to function without any restrictions or problems.
policy rate overview
As the European Central Bank (ECB) left rates unchanged in July, it provided no guidance on what will come next and when. ECB President Lagarde refused to commit to a possible interest rate cut in September, saying that the outcome of the next meeting remained “wide open” and would depend on the latest data. She stated that there is no pre-determined rate path. Q2 growth is expected to be lower than Q1, with subdued investment activity and recovery still going on mainly thanks to services. Risks to growth are tilted to the downside. However, the ECB expects that inflation will likely fluctuate near the current levels for the rest of the year. Growth in labor costs will remain elevated in the near term – wages are still rising at a high rate.
The Central Bank of South Africa also kept its policy rate unchanged at 8.25%, but the Monetary Policy Committee was divided: 4 members had an unchanged stance and 2 expressed a preference for a 25bp rate cut. CPI inflation is still elevated and the governor stated that the risks to the inflation outlook were now on the upside (unlike previously, when they were viewed as broadly balanced). He also said that the committee would like to see a couple of inflation prints fall before easing policy but stressed the bank was not backward-looking.
highlights from Germany
Expectations worsen
Economic sentiment (ZEW) in Germany deteriorated again in July, with expectations declining for the first time in a year. The assessment of the current economic situation ticked up slightly but remains deep in negative territory. The deterioration is attributed to the bigger-than-expected fall in German exports, the political uncertainty in France and the lack of clarity regarding the future monetary policy by the ECB
Downtrend in building permits continues
In May 2024, the construction of 17.8k apartments was approved, meaning 24.2% less than in May-23. From January to May 2024, 89k apartments were approved, or 21.5% less than in the same period last year. The YoY decline was -31.5% for single-family homes, -15.7% for two-family homes, and -21.7% for multi-family homes.
Lending is expected to grow slowly
The Bundesbank monthly report for July provides a projection for credit growth for the next 3 years. The sharp decline in net lending to non-financial corporations in Germany that started in Q4-22 across all categories of banks, maturities and economic sectors was driven by the adverse macro environment (slowdown in economic activity, high inflation rates and rising interest rates). Banks responded to the rapid, steep rise in financial market interest rates by raising lending rates accordingly. Additionally, they tightened their lending policies in view of the increased credit risk on the corporate side. The adverse macro environment and heightened uncertainty about the economic and geopolitical outlook dampened private investment.
The decline in the willingness to invest was a result of how hard German corporates were hit by the economic shock: the sharp rise in energy costs and weak foreign demand weighed on industrial output throughout the euro area but in Germany, the energy price shock hit the industry-based economy with its high dependence on imported energy commodities particularly hard. The weakness in global trade was also felt more strongly in Germany owing to firms’ strong focus on exports. Heightened geopolitical tensions also exacerbated enterprises’ uncertainty with regard to future energy supplies and their cost, as well as disruptions to international trade links.
The strong rise in the interest rate level also led to a postponement of investment in aggregate. More highly indebted enterprises also disproportionately chose to put their investments on hold. This can be explained by the higher debt service and, as a consequence, the increasing relevance of interest rate changes in the event of new borrowing or interest rate adjustments.
A gradual rebound in lending is expected over the course of this year. In recent months, banks’ net lending to firms has largely stagnated. New lending business, i.e. newly concluded loan agreements, excluding redemptions, recently saw slightly stronger lending. Banks surveyed in the BLS noted an increase in the demand for loans for enterprises in Q2, which is expected to continue in Q3. However, the projected increase in the annual lending growth rate is slow and is based on the assumption of a gradual improvement in the macro environment (increase in foreign demand, recovery in private consumption, reversal of interest rate hikes improving financing conditions, but no tangible growth impulse from private investment).
highlights from Europe
Another decline in industrial production
Industrial output was down 0.6% MoM / 2.9% YoY in the euro area, and by 0.8% MoM / 2.5% YoY in the EU. The monthly and annual declines were both driven by the drops in the production of durable consumer goods, capital goods and intermediate goods. Production of energy and non-durable consumer goods increased in both the euro area and the EU. The largest monthly decreases were in Slovenia, Romania and Denmark, while the largest annual decreases were in Romania, Germany and Bulgaria.
Credit standards tighten further
According to the July 2024 euro area bank lending survey (BLS), euro area banks reported a small further net tightening of their credit standards. Banks reported a moderate further net easing of their credit standards for loans to households for house purchases (net percentage of -6%), whereas credit standards for consumer credit and other lending to households tightened moderately further (net percentage of 6%). According to the banks surveyed, access to funding improved for debt securities and, to a lesser extent, for money markets. Access to retail funding remained broadly unchanged, except for short-term funding, which continued to deteriorate slightly in Q2-2024. Over Q3-2024 banks expect access to funding to deteriorate across all segments. Perceived credit risk in banks’ loan portfolios had a moderate tightening impact on bank lending conditions for loans to enterprises and consumer credit in the first half of 2024. The impact was neutral for housing loans. Banks expect the same for the remainder of the year.
Steady current account balance
The current account of the euro area recorded a surplus of €37bn in May-24, unchanged from April. Surpluses were recorded for goods (€33bn), services (€15bn) and primary income (€4bn). These were partly offset by a deficit for secondary income (€14bn). Euro area residents’ net acquisitions of non-euro area portfolio investment securities totaled €513bn and non-residents’ net acquisitions of euro area portfolio investment securities totaled €646bn in the 12 months to May-24.
highlights from The United States
Retail sales up, but not with higher prices
The estimate of U.S. retail and food services sales for June 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $704.3bn, basically unchanged from May, but up 2.3% YoY vs. June 2023. However, after adjusting for inflation, retail sales were actually down about 1% YoY. Sales at gasoline stations dropped 3%, and auto sales fell by 2.3%. Sales also dipped at sporting goods, hobby, musical instrument stores, and bookstores by 0.1%.
A second consecutive month of growth for US industrial production
Industrial production rose 0.6% in June, surprising to the upside. For Q2 as a whole, industrial production increased at an annual rate of 4.3%. Manufacturing output was up 0.4% and 3.4% (annual rate) in Q2. The index for consumer goods went up 1%, with increases in the indexes for most of its components—particularly energy (2.7%) and automotive products (1.7%). The index for materials increased 0.7%, with gains in both its energy and non-energy components. The index for defense and space equipment continued its upward trajectory with a 0.7% rise. Business equipment and construction supplies were the only major market groups to experience declines, with their respective indexes falling 0.4% and 0.1%. Capacity utilization for manufacturing moved up in June to 77.9%, a rate that is 0.4pp below its long-run average.
highlights from The United Kingdom
Flat inflation figures
The Consumer Prices Index including owner occupiers’ housing (OOH) costs (CPIH) rose by 2.8% YoY / 0.2% MoM in June. Without OOH, the CPI rose by 2.0% YoY / 0.1% MoM in June. The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from restaurants and hotels, where prices of hotels rose more than a year ago; the largest downward contribution came from clothing and footwear, with prices of garments falling this year having risen a year ago. Core CPIH (excluding energy, food, alcohol and tobacco) rose by 4.2% YoY, while core CPI rose by 3.5% YoY.
Retail sales decline again
Retail sales volumes in the UK fell across all sectors in June except automotive fuel, with department stores and clothing retailers broadly falling back to their Q1 levels. Overall decline: -1.2% MoM / -0.1% QoQ / -0.2% YoY; however, volumes are still 1.3% below pre-pandemic levels. Non-food stores sales volumes declined -2.1% MoM / -0.5% QoQ, while food stores sales volumes decreased -1.1% MoM / -1.3% QoQ. Non-food retailers suggested that election uncertainty, poor weather, and low footfall affected sales; for food stores, the decline was mainly driven by supermarket sales – as both poor weather and economic conditions had an effect, as consumers showed caution with their spending.
Consumer sentiment rises slowly but remains negative
The GfK Consumer Confidence indicator for the UK rose to -13pt in July, after a fourth consecutive rise. Better attitudes toward major purchases suggest retail optimism, but they still came in below expectations. The main drivers of the improvement were consumers’ willingness to make major purchases (which rose) and a better standing in personal finances. However, consumer behavior remains cautious because of the stagnant view of the economic situation and the “wait-and-see” attitude towards the new government.
Author: Nikolay
Founder of MoneyCraft
