Summary: US equity markets trade steady after bets on a one-percentage point July rate hike was scaled back following comments from Fed’s Waller and Bullard, thereby supporting a less inverted US yield curved while pausing the dollar following its run up to multi-year highs against the Japanese yen and the euro. The strong dollar remains a key focus from a risk appetite perspective and its movements need to be watched closely. The commodity sector remains under pressure from raised growth worries after China’s Q2 real GDP grew by just 0.4% YoY. Biggest losers on the week being coffee, wheat, copper and crude oil.
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US stocks recovered from a 2% slump on Thursday after Fed Governor Waller and Bullard dialed back expectations for a 1 percent rate hike on July 27, thereby softening worries that a more aggressive pace of rate hikes could trigger a recession. The tech-heavy Nasdaq climbed amid gains in giants like Apple and Intel. Before the comments mentioned propped up the market, stocks had dropped on disappointing earnings from banking titans JP Morgan and Morgan Stanley.
Chinese property developers, banks and internet companies traded weak on adverse news headlines. Chinese property and bank names were lower on concerns about the deterioration in the quality of mortgage loan portfolios and the woes of uncompleted housing construction projects in China. Buyers of 235 stalled housing projects have told banks that they would stop making mortgage instalment payments. Alibaba (09988:xhkg) plunged nearly 4% after the WSJ reported that executives from the Alibaba’s cloud division had been summoned by Shanghai authorities regarding a reportedly huge data security breach of a Shanghai police database hosted at Alicloud. Hong Kong’s Hang Seng (HSI.I) and China’s CSI300 (000300.I) fell 1.7% and 0.5% respectively as of writing.
The Japanese yen has paused after reaching a 24-year low against the dollar this week, this after the market dialled back expectations for a one percent rate hike on July 27. As bond yields in other countries, especially in the US, have moved up, the yen has increasingly been challenged by the Bank of Japan’s policy of yield curve control keeping the upside for 10-year Japanese government bond yields limited to 0.25%. The euro meanwhile continues to trade close to parity with a brief drop below on Thursday being rejected. With US rate hikes potentially accelerating and the ECB stuck in neutral amid a sharp European economic slowdown, the market has not yet given up the idea of a break lower towards the next key support level around €0.96. The market will be watching developments in the European gas market, not least whether supplies on the Nord Stream 1 pipeline will resume next week following maintenance.
Led by copper which has suffered its worst weekly rout since the early stages of the pandemic in 2020. Since hitting a record high in March the price High Grade copper (HGc1) has slumped by 37% to levels last seen in late 2020. From a technical perspective the price has reached support at $3.14, the 61.8% retracement of the 2020 to 2022 rally, and further weakness may trigger an additional selling response from traders. Rio Tinto Group, meanwhile, has issued a grim warning about the prospects for the global economy, pointing to war, inflation and tighter monetary policy, as well as coronavirus lockdowns in China.
China’s Q2 real GDP grew 0.4% YoY, and declined 2.6% QoQ, much weaker than the median (+1.2% & -2% respectively) from forecasts in Bloomberg’s survey. However, there were quite a few economists calling for even worse numbers and the whispering numbers circulating among traders were even weaker. Since Q2 included the horrible month of April in which much of the country was put under partial or full lockdown, market participants tend to look past this lagging indicator and focus on the strength of recovery since late May when cities across the country gradually reopened. Retail sales, industrial production and fixed asset investment rose 3.1%, 3.9% and 5.8% respecting in June. The performance of retail sales was better than expectations. The 13.9% YoY rise in auto retail sales was particularly notable.
After failing to solicitate supports from coalition partner, Five Star Movement, in a crucial household support bill, Italian prime minister Mario Draghi handed resignation to President Mattarella yesterday. Although Draghi can still push through the bill, but he announced to step down following the former prime minister Conte led Five Star Movement from his national unity government. After an hour-long meeting with President Mattarella, Draghi agreed to address the parliament on Wednesday July 20 to avoid a snap election.
If JPMorgan results were anything to go by, their results were weaker than expected, and its outlook was grimmer than market forecasts. As warned previously by JPMorgan’s CEO, Q2 investment banking fees fell 54% (more than expected) and the group added $428 million to the pile of cash put aside for potential bad debts/defaults. It also suspended share buy backs to preserve cash - given its outlook is dimming. This reflects what we may see from investment banking ahead with aggressive rate hikes lowering demand for credit/borrowing. Essentially, we don’t think you can bank on banking stocks turning around, until the Fed changes its stance. Citi and Wells Fargo’s results will be watched closely on Friday.
The iron ore price (SCOA,SCOQ2) in APAC fell to a new low, weighing on the biggest miners' shares, with the commodity price falling below $100 for the first time since December 2021. It comes as China’s GPD target of 5.5% was somewhat declared unachievable, after Q2 GPD growth hit 0.4% (a 2-yr low). Secondly, there’s fears of bad debt rising and property growth grinding lower as many people has stopped paying mortgages for unfinished construction projects. The property investment sector adds 20% to China’s GPD. The iron ore price has now fallen 54% from May 2021, implying profit growth for BHP (BHP), Rio Tinto (RIO) and Fortescue Metals (FMG) in the 2022 financial year could fall significantly.
Pinterest Inc (PINS) rallied 16% to $20.42 in after hour trading on the back of WSJ reporting Elliott Management has taken more than 9% stake in recent months. 52 weeks low is $16.14 that was traded on 24 May this year and the stock is nearly down 50% YTD.
A $1.9 Trillion Options Expiration Is Crucial Moment for Stock Hedgers
A preview of Q2 earnings releases over the next two weeks can be read on the trading platform or here.
Economic calendar highlights for today (times GMT)
0800 – EU June CPI Harmonized
1230 – US July Empire Manufacturing
1230 – US June Retail Sales
1230 – US June Import Prices
1315 – US June Industrial Production
1400 – US July University of Michigan Sentiment
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AI: The good, the bad, and the bubble
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