The content of this post does not constitute financial advice. It is intended for information and education purposes only.
MoneyCraft recommends the PiQ Suite (Affiliate Link): MoneyCraft subscribers receive a promo code for 6 months FREE subscription to the PiQ Suite
The Week in Global Markets
Financial markets summary:
– EUROPE: The weekend in global markets began with a selloff, as equities, cryptocurrencies and other risky assets plummeted and volatility spiked in the wake of the liquidation of the yen carry trade. The main driver for these developments was the weak jobs data for the US last Friday and the increase in the Japanese interest rates – the latter funding asset purchases offering better returns. Government bond yields in the euro area increased, likely supported by worries about the weakness of the economic recovery. Declining retail trade volumes indicated that the consumer is not recovering as much as hoped. Most main stock indices finished the week actually higher, including the pan-European Stoxx indices, except for the FTSE MIB and the Swiss SMI. The UK FTSE 100 also declined week-on-week. Positive news about the German industrial output was offset by the negative developments in the German and Eurozone construction sectors, which remain in a dire state. Both the euro and the pound strengthened against the US dollar.
– UNITED STATES: During this week we observed significant volatility in the US stock market, with the biggest correction in nearly 2 years on Monday, followed by a recovery which led to the major indices finishing the week only slightly lower compared to last week. The S&P was down about 10% on Monday, and the Nasdaq Composite was down 15.81% from its peak, while the CBOE Volatility Index VIX briefly reached 65.73 on Monday, its highest reading since the Covid crash of March 2020. Most likely, the covering of short positions combined with some stock buybacks supported the recovery after Monday. However, the rout this week finally made obvious to everyone that the Fed faces a dilemma – the narrowing of the interest rate spread between the US and Japan, caused by the BoJ hike, has put the Fed in a trap. It can either keep rates higher for longer in order to avoid further narrowing and deterioration of the situation (which is why the BoJ tried to calm the markets, coming out stating that it will not do further hikes while the markets are so volatile), i.e. causing further selloff; or it can try to cut in order to avoid a domestic recession. Most likely financial markets will remain volatile and unexpected moves can take place as long as the unwind of the yen carry trade, which has not yet finished, goes on.
– ASIA-PACIFIC: The Japanese Nikkei 225 saw the greatest drop since Black Monday 1987 this week, but like other stock markets, it did manage to recover by the end of the week, ending just 2.46% lower. BoJ deputy governor Uchida calmed the situation by ruling out another short-term interest rate hike amid the unstable market conditions. After those comments, the yen weakened to over 146.6 per USD. As investors repriced the new monetary policy outlook, the yield on the 10-year JGB fell to 0.86%. Chinese stock markets also declined, with the Shanghai Composite and the CSI 300 both in the red this week. Inflation seems to have picked up pace in July, but this was attributed mainly to seasonal factors. Exports rose less than expected due to lower global demand and the manufacturing PMI was in contraction territory.
– BITCOIN: Bitcoin’s price reached its lowest level since February and briefly fell below the $50k mark to $49,111.10, along with the global selloff across risk assets. Other cryptos dropped sharply as well. However, in parallel to the recovery in the stock market, BTC then jumped again to over $60k (at the moment around $60.2). Just like in other financial markets, crypto analysts emphasize that the focus is now on the Fed and its next steps which will certainly affect BTC prices. The rebound led to new speculations that BTC may finish the year around the $100k mark.
policy rate overview
Despite a rebound in inflation, Mexico’s central bank decided to go through with another rate cut this week, lowering its policy rate from 11% to 10.75%. The official statement provided a justification based on the risks to economic growth and limited price increases (mainly impacting energy and food components). Markets were surprised by this decision and analysts pointed out that the pressure on the peso has increased, with this likely being a policy error. The forecast for full-year inflation was revised up to 4.4% (headline) and 3.9% (core).
The Reserve Bank of India (RBI) kept its policy rate at the 6.5% level, in line with market expectations. This was done to retain the focus on fighting inflation as the bank has described it as “stubbornly high”. Growth remains resilient and inflation has been trending downward but there is more progress needed to achieve the target. There are expectations that a policy change could be introduced in October, with rate cuts likely to begin in December.
The Reserve Bank of Australia (RBA) also left rates unchanged and kept its hawkish tone, while the market remained hopeful for a rate cut by year-end. The governor’s statement indicated that inflation remains too high and that it will yet take some time to hit the target. Hence, policy will need to be “sufficiently restrictive” until the Board is confident that inflation is moving sustainably toward the target range.
highlights from Germany
A rise in industrial output
German industrial production rose MoM in June, according to provisional data, but is still down YoY and on QoQ basis:
– Overall industry: +1.4% MoM / -4.1% YoY / -1.3% QoQ;
– Main driver: auto industry where output grew +7.5% MoM after falling 9.9% in May.
Another more significant positive contribution was the manufacturing of electrical equipment with 5.2% growth. Production of capital goods rose by 2.5% and that of intermediate goods by 2.1%. BUT production of consumer goods declined by 2.4%. Energy production was up 2.9% and production in construction rose by 0.3%. Production in energy-intensive industrial branches rose by 1.4%.
Trade surplus drops
Germany’s trade balance dropped more than expected (-18.1% MoM) to €20.4bn in June as exports declined (-3.4% MoM) and imports increased slightly (+0.3%). Region-wise:
– Trade with EU: exports down 3.4%; imports up 1%;
– Trade with US: exports down 7.7%; imports down 6.5%;
– Trade with China: exports up 3.4%; imports down 4.9%;
– Trade with UK: exports down 0.6%; imports up 11.1%.
Manufacturing orders increase
New orders in manufacturing in Germany were up 3.9% MoM, while still down -11.8% YoY and -1.4% QoQ in June in real terms. Excluding large orders, the increase was 3.3% MoM and 1.4% QoQ. The increase was mainly driven by domestic orders going up 9.1%, while foreign orders only increased a little (0.4%). Sector-wise, the main contributors to the increase were:
– the automotive industry (+9.3% MoM);
– manufacturing of fabricated metal products (+9.8% MoM);
– manufacturing of other transport equipment (+11.7%).
The expectation is that the large auto and ammunition orders included in the first two items will reverse next month. Orders in the manufacturing of computer, electronic and optical products declined 7.9% MoM. New orders in the capital goods sector were up 9.2% MoM. New orders were down in both the intermediate goods sector (-1.5% MoM) and the consumer goods sector (-7.1% MoM).
Real turnover in manufacturing was down 0.9% MoM ((seasonally and calendar adjusted) and 5.0% YoY.
Construction slump continues but slows down
The decline in construction activity decelerated in July, according to the PMI survey – especially in commercial building activity and civil engineering projects. However, residential construction took an even bigger hit in July vs. June. The construction sector is not out of the woods yet. Construction companies lost even more orders in July than in June, and expectations were the most pessimistic for 4 months. Given that building permits for residential projects in May were down almost 25% vs. 2023, the gloomy outlook isn’t surprising. Panelists in the survey commented on a general lack of customer inquiries and tender opportunities, with the high cost of construction work said to be a factor.
highlights from Europe
The European consumer is yet to recover
The volume of retail trade was down by 0.3% MoM and YoY in the euro area and down by 0.1% MoM (up 0.1% YoY) in the EU in June. The monthly decline was driven by the food/drinks/tobacco category in both the EA and the EU, and by non-food products as well in the EA. Among member states for which data are available, the largest monthly decreases in the total retail trade volume were recorded in Croatia, Austria, Latvia and Lithuania, while the biggest increases were in Romania, Bulgaria and Denmark. The annual decreases was highest in the food category, and the countries in which the biggest declines were recorded were Belgium, Estonia and Austria.
Further decline in construction activity
The July PMI indicates that there was another marked drop in new orders driving a stronger fall in construction sector output. The rate of decrease in output accelerated slightly MoM to the fastest in 6 months. There were substantial contractions in housing activity, which was once again the worst-performing of the three monitored segments. Lower new orders sparked a further round of job shedding, as employment fell at a slightly sharper rate. Orders declined the fastest in Germany, as did the workforce. The turnaround seen in the past months in Italy has now reversed – and all 3 major countries are now in a worse situation again. Constructors are not seeing a light at the end of the tunnel – the expectations index shows growing pessimism instead.
highlights from The United States
US household debt grows to $17.8tn in Q2
Total household debt rose by $109bn, as mortgage balances were up $77bn (to reach $12.52tn), auto loans increased by $10bn to reach $1.63tn and credit card balances increased by $27bn to reach $1.14tn. The volume of mortgage originations remained low, primarily due to subdued refinancing activity. Homeowners continued to increase balances on home equity lines of credit (HELOC) as an alternative way to extract home equity; HELOC limits rose by $3bn, marking the 9th consecutive quarterly increase.
Aggregate delinquency rates remained unchanged from the previous quarter, with 3.2% of outstanding debt in some stage of delinquency. Delinquency transition rates for credit cards, auto loans, and mortgages increased slightly. Over the last year, approximately 9.1% of credit card balances and 8.0% of auto loan balances transitioned into delinquency. Early delinquency transition rates for mortgages increased by 0.1pp yet remain low by historical standards.
Lending standards remained at the tighter end for all loan categories in July
Compared with the July 2023 survey, banks reported easier levels of standards for most loan categories except residential real estate (RRE) loans, for which levels of standards were comparable with July 2023. Tighter standards and unchanged demand were reported for commercial and industrial loans. Tighter standards and weaker demand for all commercial real estate (CRE) loan categories. Banks reported basically unchanged lending standards and unchanged demand for home equity lines of credit (HELOCs). Moreover, standards reportedly tightened for credit card and other consumer loans but remained basically unchanged for auto loans, while demand weakened for auto and other consumer loans but remained basically unchanged for credit card loans.
highlights from The United Kingdom
A spike in construction activity
The latest PMI results show that construction activity increased at the fastest pace in 26 months in July, with new orders on the rise. Firms ramped up purchasing activity and raised staffing levels for the 3rd month in a row. All 3 categories of construction saw activity increase in July as work on housing projects returned to growth. Commercial activity increased solidly, but the fastest expansion was seen in civil engineering activity, where the rate of growth quickened to the sharpest in almost two-and-a-half years. Alongside a general improvement in market demand, there were also reports that customer confidence had strengthened, making them more willing to release previously paused projects.
Author: Nikolay
Founder of MoneyCraft
