What’s happening in markets?
US equities (US500.I and USNAS100.I): Stocks rebound as S&P 500 and Nasdaq recover; Berkshire Hathaway surges
Stocks rebounded on Monday, recovering from the sharp decline in the previous week. Both the S&P 500 Index and the Nasdaq 100 Index showed resilience by registering gains of 0.9%, reaching 4,518 and 15,407, respectively. As news headlines were quiet and over 80% of the S&P500 constituents had reported Q2 results, investors tended to sideline, waiting for the CPI data this Thursday.
Tesla (TSLA:xnas) had a notable intraday swing, initially experiencing a loss of over 4% following the departure of its CFO. However, the stock managed to pare some of these losses and settled 1% lower. Meanwhile, Berkshire Hathaway (BRKb”:xnys) gained 3.6%. This surge propelled the company's stock past its previous high set in March 2022. The strong performance was attributed to Berkshire Hathaway's Q2 earnings, which surpassed estimates, primarily driven by the robust performance of its insurance segment.
Treasuries (TLT:xnas, IEF:xnas, SHY:xnas): bear steepens ahead of the refunding
While the 2-year notes finished Monday nearly unchanged, the rest of the yield curve sold off, with yield rising under renewed bear-steepening pressure ahead of large supply from the USD103 billion refunding auctions, plus corporate issuance this week. Kicking of the refunding today is USD42 billion 3-year notes. The 10-year yield rose 5bps to 4.09%, narrowing the 2-10-year spread to -67.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): Hong Kong indices trade flat amidst low volume; pharmaceutical stocks slide
Major Hong Kong indices traded sideways with the lowest volume in nearly two weeks. The Hang Seng Index, Hang Seng China Enterprises Index, and Hang Seng Tech Index all ended the session unchanged. Southbound mainland flows amounted to a net purchase of HKD4.4 billion. Leading the gainers were food and beverage stocks, with Haidilao (06862:xhkg) surging 4.9% and Budweiser (01876:xhkg) rising 3.7%. Riding the strong uptrend in crude oil prices, CNOOC (00883:xhkg) added 2.6% and PetroChina (00857:xhkg) gained 1.8%.
Pharmaceutical shares saw the most significant losses on Monday, extending the decline from the previous week due to investor retreat following increased Chinese authorities' anti-corruption efforts in the industry. Hansoh Pharmaceutical (03692:xhkg) suffered a 10% drop. Country Garden (02007:xhkg) and Country Garden Services (06098:xhkg) plunged more than 7%, driven by concerns about the property group's liquidity. Similarly, in the A-share market, pharmaceuticals and property led the losses, contributing to a 0.8% decline in the CSI300. In terms of northbound flows, there was a net sale of RMB2.5 billion.
FX: Yen under pressure as long-end yields continue to climb
Large funding auction kept the long-end of the US yield curve under pressure and that saw yen being the G10 underperformer once again. USDJPY rose back above 142.40 from lows of 141.52 with focus on US CPI this week to gauge how far Treasury yields could go. GBPUSD was back higher to test the 1.28 handle with BOE likely remaining as the last hiker in the G7 pack. BoE Pill, in a Q&A, said inflation remains much too high and he has seen a lot of news on inflation persistence, but caveated that there is risks on both sides on UK inflation. Pill warned there are risks the UK hasn't raised rates enough.
Crude oil: weighed by the risk off tone
While crude oil market remains underpinned by ongoing supply concerns, the risk off sentiment overnight weighed on oil prices. Crude oil prices however rebounded in the Asian morning as focus turned to EIA’s short-term energy outlook due later today. Traders are also bracing for the CPI release on Thursday and focus is also on China data that starts to kick in from today with July exports.
Gold: plunged on rising yields
As long-end Treasury yields continue to climb, gold is coming under pressure. XAUUSD dropped from $1945 to lows of $1931 before finding support. Holdings in bullion backed exchange traded funds have also been falling and are at their lowest level in more than three years. However, central bank buying remains strong. China’s central bank added to its gold reserves for the ninth straight month in July. Total stockpiles now sit at 2,137t, with around 188t added since purchases began in November.
What to consider?
US used car prices slumped in July
US used vehicle prices decreased by 1.6% MoM in July to the lowest levels since April 2021, and registered a decline of 11.6% YoY. With a weight of 2.7% in CPI, the sustained decline in used car prices continues to push downward pressure on inflation due this week. However, it is worth noting that price declines are slowing month after month, and suggests that the pace of slowdown in inflation may moderate as well.
Slowing monthly earnings and spending in Japan
Japan’s wage growth slowed in June with nominal wages rising 2.3% YoY from 2.9% YoY in May while real wage growth saw a sharper contraction of 1.6% YoY from -0.9% YoY previously. Household spending, meanwhile, slumped by 4.2% YoY in June from -4.0% YoY in the previous month. The deeper decline in real earnings may weigh on consumption and puts more weight on the BOJ’s case that inflation is supply-driven. This continues to make a case for the Bank of Japan to continue with its easy monetary policy.
Moody’s downgrades 10 US regional banks and puts Bank of NY Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade
Moody’s announced to downgrade 10 US regional banks, including M&T, Amarillo National Bank, Old National Bancorp, Commerce Bank, Associated Banc-Corp, BOK Financial Corporation, Webster Bank, Prosperity Bank, Fulton Bank, and Pinnacle Financial Partners. Additionally, Moody’s put Bank of New York Mellon, US Bancorp, Northern Trust, and Truist Financial under review for downgrade. Moody’s said the rationale for the actions is to reflect the ongoing strain in the US banking sector, including increased funding pressures and potential regulatory capital weaknesses. For some of these banks, Moody’s also cited rising risks associated with commercial real estate exposures as an additional reason for the actions.
China's export contraction is expected to deepen in July
The median forecast from economists regarding China's export growth in USD terms is a contraction of 13.2% Y/Y for July. This decline is more pronounced when compared to the 12.4% drop observed in June. The export sector might face headwinds due to the ongoing global manufacturing slowdown and the restrictions on China's access to high-end chips. Conversely, import growth in USD terms is anticipated to show a minor improvement, with a Y/Y decline of -5.6% projected for July, as compared to the -6.8% decline witnessed in June. Nonetheless, this anticipated uptick may be attributed to elevated commodity prices rather than a smaller contraction in volume.
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