On Monday, stock markets were in a shaky mood as poor Chinese economic data fueled concerns about the sustainability of Wall Street’s advance. At the same time, the dollar dropped against the yen as traders were compelled to exit abruptly unfavourable short positions.
As new viral outbreaks weighed on demand, China’s official industrial activity indicator decreased in July, and the Caixin PMI likewise fell short of expectations.
While Japan’s economy expanded at its slowest rate in 10 months, South Korean activity shrank, marking the first of this behaviour in two years.
That was not encouraging for the plethora of other PMIs that were coming this week, namely the significant ISM survey from the United States. Additionally, the July payrolls estimate on Friday would also indicate a further decline.
Furthermore, central banks in the United Kingdom, Australia, and India are all anticipated to raise interest rates again this week. At the same time, U.S. data released on Friday indicated persistently high inflation and wage growth.
At its meeting in August, the Bank of England is anticipated to increase interest rates by 50 basis points. Barclays analysts cautioned that the main reason is probably the rise in energy prices.
They also said that rather than looking for signs of slowing growth, central banks should concentrate on the ongoing strength of inflation and the tight labour markets. This would contradict the previous market sentiment that “bad news is good news.”
The caution was clear from the practically flat performance of MSCI’s broadest index of Asia-Pacific shares outside of Japan (.MIAPJ0000PUS).
South Korea (.KS11) remained unchanged, while South Korea’s Nikkei (.N225) gained 0.5 percent and China’s blue chips (.CSI300) increased by 0.4 percent.
Nasdaq futures and S&P 500 futures both declined by 0.4 percent. Both FTSE futures and EUROSTOXX 50 futures experienced a 0.3% loss.
Even while U.S. corporate results had largely outperformed lower expectations, analysts at BofA noted that only 60% of the CDS—or the consumer discretionary sector, had disclosed and that it was currently facing the greatest pressure due to consumer concerns about inflation.
Their bull market signifiers also suggest that it is too soon to declare a bottom because, according to a report from BofA, historically, market bottoms were marked by the activation of over 80% of these signs as opposed to only 30% at the moment.
Furthermore, bear markets typically concluded following a Federal Reserve cut, and that is most certainly at most a minimum of six months away given that the BofA house view anticipates the first cut in 3Q23.
Bond markets were also strongly rising, with U.S. 10-year rates falling by the most since the pandemic’s beginning last month, by 35 basis points. Yields were previously at 2.670 percent, a significant decline from the peak in June of 3.498 percent.
The significant inversion of the yield curve indicates bondholders are more negative about the economic prospects than their stock counterparts.
The dollar, which lost weight for a second consecutive week last week to rank at 105.650 on a bundle of major currencies, down from its most recent peak of 109.290, has benefited somewhat from the reversal in yields.
Against the yen, where traders had been heavily short and were forced out by the abrupt turnaround, there was the largest fall. After dropping significantly by 2.1 percent the previous week, the dollar was lower by 0.5 percent at 132.52 yen.
The dollar performed slightly better than the euro, which hardly advanced last week and is currently dealing with a European energy crisis. The euro recently traded at $1.0221 and is aiming for $1.0278, a significant resistance level.
Capital Economics’ veteran markets economist, Jonas Goltermann, was perplexed by the market’s dovish reaction to the 75-basis-point Fed rate hike last week. In any case, gold, which sat at $1,760 per ounce after rebounding 2.2 percent last week, has found some solace in the dollar’s decline and the rates’ decline for the time being.