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. stock markets experienced a volatile week, with major indexes closing slightly lower despite recovering from a significant sell-off earlier in the period. The S&P 500 came close to correction territory, having dropped over 9% from its mid-January peak, while the Nasdaq Composite fell by over 15% from its high. The CBOE Volatility Index (VIX), often referred to as Wall Street’s "fear gauge," spiked to levels not seen since March 2020, reflecting the market's heightened uncertainty before stabilizing later in the week.
Several technical factors contributed to this volatility, including programmed trading strategies and a partial unwind of the so-called carry trade, where investors borrow in low-interest-rate environments like Japan to invest in higher-yielding U.S. assets. The recent appreciation of the yen made these trades less profitable, leading to a retreat from positions that had previously been lucrative.
On the other hand, the market found some support from short covering and corporate stock buybacks, which helped cushion the sell-off. The summer vacation season likely exacerbated the volatility, as reduced participation from longer-term investors created thinner trading conditions.
Economic data also played a role in shaping market sentiment. Reports from major companies indicated softening consumer demand, particularly in the travel and food sectors, with companies like Airbnb, Delta, and Yum! Brands reporting slower sales. However, broader economic indicators provided a mixed picture. The services sector remained in expansion territory, and jobless claims fell more than expected, contributing to a brief rally later in the week.
Looking ahead, while fears of an imminent recession are receding, concerns about inflation and the labor market persist. The recent data has fueled expectations that the Federal Reserve might start cutting interest rates soon, potentially as early as September. Meanwhile, bond markets showed some signs of stabilizing, with the yield on the 10-year Treasury note rising and liquidity conditions in the funding markets improving.
European markets had a mixed week, with the pan-European STOXX Europe 600 Index managing to eke out a modest gain, while individual country indexes showed varied performances. Germany’s DAX and France’s CAC 40 posted slight gains, while Italy’s FTSE MIB declined. Concerns over global growth, triggered by weak U.S. data earlier in the week, weighed on sentiment, though a drop in U.S. jobless claims later helped to alleviate some fears. Eurozone government bond yields rose, reflecting the broader market's cautious stance amid economic uncertainties. Retail sales data from the eurozone indicated that consumers are still struggling to recover from inflationary pressures, with sales volumes unexpectedly declining in June. This suggests that demand might remain subdued in the near term, adding to concerns about the region’s economic resilience.
In the UK, the housing market showed signs of revival. Sentiment turned cautiously positive in July, supported by lower interest rates and government initiatives to boost residential development. The Royal Institution of Chartered Surveyors reported the strongest level of expected sales since early 2020, and house prices saw their fastest annual growth since January. Despite these positive signs, the overall economic outlook remains clouded by broader global uncertainties.
Japan's stock markets experienced significant turbulence, with the Nikkei 225 Index and the broader TOPIX Index both posting notable declines early in the week. This sell-off was driven by concerns over a stronger yen and the Bank of Japan's (BoJ) hawkish stance, which included interest rate hikes and plans to taper bond purchases. The unwinding of the yen carry trade added to the market's volatility as investors anticipated a narrowing of the interest rate gap between Japan and the U.S.
However, markets regained some ground by the end of the week, thanks in part to reassuring comments from BoJ officials, who signaled that further rate hikes would be unlikely in unstable market conditions. This helped to ease fears of immediate tightening, with the yen weakening slightly and bond yields adjusting downward.
In China, stock markets declined as concerns over deflationary pressures outweighed a modest increase in consumer prices. The Shanghai Composite and CSI 300 Indexes both ended the week lower, reflecting investor concerns about the broader economic outlook. Despite a slight uptick in consumer inflation, core inflation remained weak, signaling ongoing challenges in sustaining domestic demand. China’s mixed economic data further fueled uncertainty. While the services sector continued to expand, the manufacturing sector showed signs of contraction, and exports fell short of expectations. The trade surplus narrowed, raising concerns about softening global demand, which has been a crucial driver for China’s economy amid its domestic challenges.
As global markets navigate these complex dynamics, investors are closely watching for signs of stabilization or further volatility, particularly in response to central bank policies and economic data releases.
