What’s happening in markets?
US equities (US500.I and USNAS100.I): weak data brings growth concerns
US stock markets tumbled on Tuesday, pressured mostly by consumer stocks as macro data pointed towards weakening economic conditions. Treasury 10-year yields reclaimed the key 4% level, and 30-year hit its highest YTD levels. Among the major indices, only the DJIA managed to post some gains, mostly driven by a strong rally in Caterpillar after solid earnings. However the futures opened sharply lower in Asia on US Fitch downgrade.
Earnings were mixed with chipmaker AMD gaining in late trading as it topped estimates and hinted at further progress on AI computing to rival Nvidia. Uber fell 5.7% after its third-quarter guidance overshadowed second-quarter results, missing analyst estimates on both the top and bottom lines.
Hong Kong & Chinese equities (HK50.I & 02846:xhkg): weak China PMI weighed
The rally in China and HK stocks fizzled on Tuesday as Caixin metric showed that China’s manufacturing activity has dipped into contraction in July. HSI still holding above the key 20k mark despite a 0.3% slide. Country Garden slumped 6.3% while EV maker Xpeng was down 4.7%. HSBC rose 1.7% on Q2 profits exceeding expectations.
FX: USD reverses overnight gains on Fitch downgrade down
The US dollar rose higher overnight as US 10-year yields surpassed the key 4% barrier again. However, the Fitch downgrade saw USD starting the Asian session on a backfoot despite a bid to the Treasury futures. AUDUSD plunged lower to test the 0.66 handle on RBA’s hold decision, and China stimulus announcements may be needed to reverse the downtrend. US macro data also pointed towards weakening demand conditions. NZDUSD followed the AUD lower to 0.6130 although some volatility was seen in early Asian hours as NZ jobless rate rose to a 2-year high of 3.6%. EURUSD closed below 1.10 but some gains returned this morning in Asia. GBP eyeing the BOE meeting on Thursday.
Crude oil: largest API inventory draw on record
With US macro indicators mostly indicating weakening demand conditions, the rally in crude oil prices was halted. Technical factors fuelled a selloff as well after recent gains in crude oil prices brought Brent above $85. However, gains returned in late US session and extended in early Asian hours on reports of a huge inventory draw. The API reported crude stockpiles were plunged by 15.4mn barrels last week, the largest weekly draw on record, and focus turns to official data due today.
What to consider?
Fitch cuts US credit rating
Fitch downgraded the US credit rating to AA+ from AAA, citing "repeated debt limit standoffs," expected fiscal deterioration over the next three years and little progress in tackling rising Social Security and Medicare costs. The outlook was changed to stable from watch negative. Janet Yellen criticized the decision as "arbitrary" and "outdated." While equities could be hit on the news, the timing is odd and may mean the news is dismissed. US dollar could however get a safety bid although Gold may have better prospects.
US ISM manufacturing missed expectations, job openings dip
A broad-based weakness was seen in US ISM manufacturing print. Headline missed expectations at 46.4 (exp. 46.8) but rose from the prior 48.1. New Orders helped with the rise, rising from 47.3 from 45.6, albeit still remaining in contractionary territory. Prices Paid rose in July, albeit still sub-50, printing 42.6, up from the prior 41.8 but short of the expected 42.8, showing prices are slowing but not as much as June. Employment saw a steep fall to 44.4 from 48.1, deeper than the expected decline to 48 - showing signs of a loosening labour market in the manufacturing sector ahead of Friday's NFP report. JOLTs Job openings were modestly down in June, falling to 9.582mln – the lowest since April 2021 – from the revised 9.616mln and beneath the expected 9.610mln. the metric again shows that labor market may be loosening but the pace is far too slow for the Fed to convey an end to its tightening cycle.
China Caixin manufacturing PMI dips into contraction
China Caixin manufacturing PMI came in at 49.2 for July from 50.5 in June and 50.1 expected. The dip into contractionary territory despite a slight improvement in official PMI earlier in the week suggests that China stimulus calls will continue to ramp up. The Caixin indicator is mostly reflective of the small and medium-sized firms and export-oriented businesses, and more consumption-related stimulus may be likely.
Reserve Bank of Australia keeps rates on hold
The Reserve Bank of Australia kept the cash rate unchanged at 4.1% on Tuesday, extending its pause for a second consecutive month, while keeping the door open for more rate hikes. However the commentary was relatively dovish and suggests that the bar to raise rates may be significantly high from here. ASX200 extended its gains on the announcement and further uptrend may be unless labor data deteriorates.
Caterpillar hits new high on strong earnings
Strong gains were seen in CAT which rose 8.9% on a strong earnings report and lifted Dow Jones to end in gains of 0.2% despite a selloff in other major indices. Caterpillar EPS leapt 75% to $5.55 a share, nearly a dollar ahead of estimates and even faster than 70% growth in Q1. Sales grew 22% to $17.32 billion, a pickup from 17% growth in Q1 and surpassing expectations of $16.5bn. The outlook was strong as well as it expects full-year adjusted operating profit to be close to the top end of its target range. Caterpillar is thriving amid a $1-trillion federal windfall supporting manufacturing, mining and infrastructure projects.
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