As we start a new week, let's take a look at the significant events in the global economy over the past week with our weekly financial update, presented by Bas Kooijman, the CEO and Asset Manager of DHF Capital SA.
The U.S. markets experienced a significant decline as investors responded to key economic indicators and earnings reports. Major indices, including the S&P 500 and Nasdaq Composite, saw substantial drops, with the Nasdaq entering a technical correction after falling over 10% from its July high. The Russell 2000 Index, representing small-cap stocks, also retreated sharply. Notably, an equal-weighted version of the S&P 500 performed better than its market-weighted counterpart, indicating a broader market performance beyond major tech stocks.
Companies representing nearly 40% of the S&P 500’s market capitalization reported their Q2 earnings, highlighting substantial capital expenditures aimed at developing artificial intelligence (AI) capabilities. Amazon, Microsoft, Meta Platforms, and Alphabet revealed significant spending plans, leading to notable stock movements, such as Amazon's 11% drop following its earnings call. The labor market data released on Friday showed a sharp cooling, with nonfarm payrolls increasing by only 114,000 in July, the lowest in three months, and private sector job growth at its lowest since October 2021. Additionally, the unemployment rate rose from 4.1% to 4.3%. The Institute for Supply Management’s manufacturing index fell to 46.6, signaling contraction in the sector. Long-term interest rates dropped significantly, with the 10-year Treasury yield falling to 3.79%. The Federal Reserve left short-term rates unchanged, but expectations for future cuts increased, with markets pricing a 73.5% chance of a rate cut in September. This uncertainty influenced the corporate bond market, with high levels of issuance in investment-grade and municipal bonds facing absorption challenges.
The pan-European STOXX Europe 600 Index fell by 2.92%, influenced by weak U.S. economic data. Major indices like Germany’s DAX, France’s CAC 40, and Italy’s FTSE MIB also declined. The UK’s FTSE 100 saw a smaller drop of 1.34%. The Bank of England (BoE) cut its key interest rate for the first time in four years, bringing it down to 5.00%. This decision, passed by a narrow 5-4 vote, was accompanied by a cautious outlook on future rate cuts. T. Rowe Price European Economist Tomasz Wieladek suggested another potential rate cut in November, driven by a revised focus on inflation expectations.
In the Eurozone, inflation rose to 2.6% in July, exceeding expectations. The region's economy grew by 0.3% in Q2, with notable contributions from France, Italy, and Spain, while Germany's economy contracted. The unemployment rate slightly increased to 6.5%, yet consumer confidence improved, reflecting optimism about potential declines in borrowing costs. Japan’s stock markets faced significant losses, with the Nikkei 225 and TOPIX indices falling by 4.7% and 6.0%, respectively. The Bank of Japan (BoJ) adopted a hawkish stance, raising its key interest rate to around 0.25% and outlining plans to taper bond purchases. This marked the BoJ's second rate hike of the year. The BoJ also adjusted its inflation and growth forecasts, with core inflation expected to drop to 2.5% and growth to 0.6% in fiscal year 2024. The strengthening yen, rising to JPY 148.9 against the U.S. dollar, posed challenges for Japan’s export-driven companies, further impacting market sentiment.
Chinese equities presented a mixed picture. The Shanghai Composite Index gained 0.5%, while the CSI 300 fell by 0.73%. Hong Kong's Hang Seng Index dropped by 0.45%. Weak manufacturing data dampened investor sentiment, with the official manufacturing PMI slipping to 49.4, indicating a third consecutive month of contraction. The nonmanufacturing PMI also declined to 50.2. Conversely, industrial profits showed a positive trend, rising by 3.6% year-over-year in June, driven by stronger industrial production and slower producer price declines. However, ongoing weakness in domestic demand has led to speculation about further government measures to stimulate the economy.
The past week highlighted significant economic and market shifts across the U.S., Europe, and Asia. In the U.S., disappointing labor market data and substantial corporate capital expenditures influenced market performance. Europe faced declines driven by global economic concerns and central bank policy changes. Meanwhile, Japan and China exhibited mixed signals, with Japan’s policy adjustments and China’s manufacturing slowdown affecting their respective markets.
