What’s happening in markets?
US equities (US500.I and USNAS100.I): markets decline but well off session lows
US equities declined on weak Chinese trade data and Moody’s downgrade of 10 US regional banks and putting Bank of New York Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade. The weaker-than-expected Chinese exports and imports stirred up concerns about the Chinese economy and its spill-over effect on the global economy. Moody’s said the downgrade and review for the downgrade are to reflect the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses. Major indices however managed to recover to close well off their session lows. The S&P500 shed 0.4% to 4,499 and the Nasdaq 100 slid 0.9% to 15,273. The KRB Bank Index, after falling as much as 3.9% in New York morning, ended 1.2% lower. The SPDR S&P Regional Banking ETF (KRE:arcx) dropped by 1.3%.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): yields decline on weak Chinese data, US bank downgrades, and Italian bank tax
Treasuries rallied in Asian and London hours on Tuesday following weak Chinese trade data, US bank downgrades, and a windfall tax on Italian banks which saw stock markets lower. Philadelphia Fed President Harker (FOMC voter) said the Fed could hold rates steady “absent any alarming new data between now and mid-September”. The USD42 billion 3-year note auction met with strong demand, with the yield stopped 1.8bps richer than the level at the auction deadline and a strong 2.9x bid-cover ratio. The Treasury will auction USD38 billion 10-year notes today. The 2-year yield closed 1bp lower at 4.75% while the 10-year yield slid 7bps to 4.02%
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hang Seng Index extended decline
Hong Kong’s Hang Seng Index declined 1.8% on Tuesday. China property stocks plummeted as investors were concerned about the liquidity stress in Country Garden (02007:xhkg) as the property group missed two coupon payments of USD22.5 million in total due Aug 6. The company has a 30-day grace period before being considered a default. The shares of Country Garden shed 14.4%. The Hang Seng Tech Index fell 2.8%, driven by weaknesses in China Internet stocks and EV names. Meituan (03690:xhkg), JD.COM (09618:xhkg) and Bilibili (09626:xhkg) shed 3%-4%. Nio (09866:xhkg) plunged 5.1%. Southbound flows registered HKD7.3 billion net buying.
In the A-share market, property and auto stocks were also the top losers. Meanwhile, pharmaceuticals rebounded. Coal mining, oil and gas, and chemical stocks gained. The CSI300 Index slid 0.3%. Northbound flows were a net sale of RMB6.8 billion.
FX: USD gains on a risk-off session and hedge fund selling in JPY
The US dollar strengthened against all the 10 major currencies on a risk-off day triggered by weak Chinese exports and imports in July and Moody’s downgrade of US banks. Despite a fall in US Treasury yields, USDJPY added 0.6% to end the New York session at 143.38, reportedly driven by hedge-fund buying USDJPY. EURUSD gained 0.4% to 1.0956.
Crude oil: WTI swings from an intra-day 2.5% loss to a 1% gain
Following the weak Chinese trade data, WTI crude oil fell at one point by nearly 2.5% to USD79.90 but managed to rally to end the day 1% higher at USD82.75. The large intra-day swing to higher prices was driven by Saudi’s reaffirmation of commitment to output cut and headlines saying Ukraine might strike Russian facilities if the latter blocked Ukrainian ports.
What to consider?
The Coming Stagflation Light
SaxoStrats' latest analysis points towards the emergence of a stagflation phase in the upcoming Q4 of 2023, which is projected to have its most significant impact during the first and second quarters of 2024. Both the US and global economies seem to be on the brink of entering this stagflationary period. Our assessment suggests a 1/3 probability that both the Federal Reserve (Fed) and the European Central Bank (ECB) might opt to decrease interest rates within Q4 in the current year, while a higher likelihood of 2/3 is anticipated for such rate cuts to materialize in the subsequent Q1-Q2 period of 2024. In the financial markets, we foresee the S&P index experiencing a decline, possibly reaching levels between 4,045 and 4,050 in the months ahead. For more comprehensive insights into this projection, we encourage you to delve into Steen Jakobsen's latest article titled "The Coming Stagflation Light," where Saxo's Chief Investment Officer (CIO) elaborates on the nuances of this evolving economic landscape.
China's export and import contraction deepens
China's exports in USD terms were in contraction of -14.5% Y/Y for July. This decline is more pronounced when compared to the -12.4% drop observed in June. The contraction in exports was broad-based by destination amid the ongoing global manufacturing slowdown. Imports in USD terms unexpectedly deepened their contraction to -12.4% Y/Y in July as compared to the -6.8% decline in June amid weak domestic demand.
Italy hits banks with a windfall tax
Italy announced a new windfall profit tax on domestic banks which saw shares of Italian banks tumble. The Italian government subsequently clarified that the new tax will not exceed 0.1% of a bank’s assets.
China's July inflation projections: CPI dips, PPI contraction eases
The median of market forecasts indicates that China's July CPI inflation is projected to be -0.4% Y/Y, as compared to 0% in June. This anticipated decrease marks the first instance of consumer price deflation on a year-on-year basis since February 2021. This deflation is likely to be primarily influenced by the considerably high base observed in July 2022 and a significant sequential decline in food prices. Conversely, there is an expectation for non-food prices to have picked up in July.
On the other hand, a recovery in material prices, coupled with some improvement in the output price components of the July manufacturing PMI, has led economists to project a smaller contraction of -4% Y/Y in the PPI for July, in contrast to the -5.4% recorded in June.
China’s new loans and aggregate financing are expected to slow in July
Economists surveyed anticipate a deceleration in July's new RMB loans to around RMB 780 billion. This follows a robust surge to RMB 3,050 billion in June but remains higher than the RMB 679 billion recorded in July 2022. Despite regulatory encouragement for increased lending by banks, subdued loan demand is expected due to a gradual economic rebound and challenges in the property sector. Aggregate financing is projected to moderate to approximately RMB 1,100 billion in July from June's RMB 4,220 billion, partially attributed to seasonal factors.
Investing in China’s high-quality development initiatives
China's economic strategy is now focused on high-quality development, emphasizing technology, innovation, food security, and social stability over short-term stimuli. China aims to address technological chokepoints and achieve self-reliance. The elevation of scientists to influential roles in the political landscape reflects their recognition of the interplay between governance, science, and national development goals. Investors have intriguing avenues to participate in China's technological renaissance through A-share ETFs. These investment vehicles offer access to China's technological ecosystem beyond consumer-facing technology companies listed in Hong Kong and overseas. To learn more, read our latest article here on this subject.
For a detailed look at what to watch in markets this week – read our Saxo Spotlight.
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