Sentiment, Flows of Funds and Valuations Drive Equity Markets
Equity markets play a central role in any free-market economy. They are the place where corporations raise capital and where savings are invested in the productive economy through ownership of corporate capital.
Equities give investors a share of the net assets of a corporation, including the goodwill of intangibles, as well as a share of the future flow of net earnings, which are themselves broken down into operational margin, Earnings before Interests, Taxes, Depreciation and Amortisations, as well as Free Cash Flows.
Equity Markets are, by definition, a leveraged call on the health of the economies and industrial sectors in which the corporations operate. When economies thrive, revenues and profits grow, future earnings prospects grow as well, and mechanically stock prices tend to anticipate that growth. Conversely, when economies contract, revenues tend to decline, margins tend to compress and earnings can decline, with all being reflected in the decline in stock prices.
Macro trends and their anticipations by investors are therefore paramount to the behaviour of stock markets, as bullish investors will tend to bid up valuations in anticipation of strong earnings growth ahead, while bearish environments will lead to the opposite, taking stock prices lower and valuations compressing.
Sentiment is therefore a key driver of equity markets … And they are far more correlated to sentiment than to the reality of underlying trends, especially when the macro economic environment is unstable or unpredictable.
Analysing flows of funds is another indicator of the health of an existing trend and how far we are or not from turning points.
Equity investors are a mixed-bag. They can be broken down into three categories:
. Long term institutional institutional investors like sovereign funds, pension funds or insurance companies that manage huge amounts of assets and need to be invested with long term objectives. They tend to Buy and hold for the long term and the size of their portfolios does not leave much room for short term trading.
. Retail investors who manage their own retirement funds or enjoy speculating in the markets. They tend to be fickle holders, are very much influenced by the press and sell-side analysts, and over the past decades, the development of low cost online brokerage platforms and of social media forums have led to an increasing participation of that category and influence on the short term behaviour of equity markets.
. Finally, an intermediate category is hedge funds and CTAs who aim at extracting value from the volatility of the markets by making leveraged long or short bets on the direction of indexes or individual stocks.
These three categories of investors do not have the same objectives or time frames and their perception of the markets – or sentiment – may differ considerably over the short term as they are not looking at the same things.
However, equity investors also have a herd instinct and a propensity to project into the future existing short term trends. As a result, rising markets tend to feed on themselves as investors and their sentiment is reinforced by rising prices and Fear of Missing Out leads them to ultimately catch the train, even if rationally they would initially have not, and conversely, falling markets lead investors to bail out with the crowd by fear of experiencing additional losses.
When all three categories above invest in the same markets and stocks at the same time, markets are usually close to a peak while conversely when all three categories hate and have bailed out of the same markets at once, a bottom is usually near. When investors are all-in, there is usually little upside left, and when they are all-out, there is usually little downside left.
Lastly, valuations are the ultimate yardstick when it comes to equity markets although the less reliable in terms of timing the markets in the short term.
Because of the above two components, sentiment and flows of funds, equities rarely trade at what would be see as fair value at any point in time and most market moves are driven by valuation expansion or contraction rather than by the short term evolution of the underlying economic or business situation.
However, valuations, be they Price to Book, Price to Sales, Price to earnings, Price to Earnings growth or Price to cash flow, are significant indicators when it comes to measuring the real risks that investors are taking by going long stocks or markets as richly priced assets have far more downside than assets that trade a cheap valuations and generate strong cashflows and high dividends.
Liquidity is another factor that drives the behaviour of stock – and other asset – markets as excess liquidity tends to pour into the financial markets while contracting liquidity tends to do the opposite.
Since March 2023, global equity markets have seen two radically diverging situations of excesses those indicators, leading to the greatest disconnect between sentiment and reality of the underlying trends we have seen in many years.
This is telling us that we are reaching or have reached major turning points and that the reminder of the year could prove to be extremely volatile…
Western Equity Markets
US, European and Japanese Equities experienced a major rally extension that has taken sentiment to extremes of bullishness, extremes of participation and extremes of valuations never seen when measured in terms of equity premium in July 2023.
Over the past 18 months, sentiment has cycled a full circle from extreme bullishness in December 2021 to extreme bearishness in October 2022 to again extreme bullishness in July 2023.
Equity markets marked a major peak in January 2022, lost 27 % in the next 9 months and recovered by 32 % since October 2022, using the US SP500 Index as a proxy for Western equity markets.
But in truth, over that period of time, the US economy kept growing at a very modest rate of 2 % annualised on average, while corporate earnings entered a recession that is may not be over yet. These wild fluctuations in what proved to be a relatively stable and clear fundamental environment shows how dependent on sentiment equity markets are, and the last four months period of the rally showed all the signs of excesses with the spectacular infatuation of investors with AI and the Seven Magnificent technology mega caps that have recorded spectacular – and speculative – rises despite declining earnings for most over the period.
The October 2022 rally and its extension into July 2023 has been driven by HOPES that Central Banks have achieved the Holy Grail of taming inflation without causing a recession and that corporate earnings would swiftly recover.
Unfortunately this sentiment-driven rally happened in an environment where :
1. Interest rates have risen like never before since the 1980s with short term rates climbing form zero to 5.25 % and bond yields from 0.25 % to 4.3 %, withdrawing liquidity like never before.
2 . The US leading indicators, as compiled and published by the US CBI, post to a clear recession ahead as they have always done in the past.
3. The combination of declining corporate earnings on one hand and the sharp increase in risk free rates on the other hand has created a situation where mots western equity markets, and clearly all the US technology mega caps are trading at NEGATIVE risk premiums, with Microsoft for example trading at a real earnings yield of -2.12 %, a feature never reached in history.
With all the extremes of sentiment, participation and valuations reached in July, the likelihood of a major turning point was extremely high and it happened precisely as we predicted, at the time of the release Q2 earnings, and more precisely to the day on the aug 4th the day of the release of the Uber US equity Apple Inc.
But what is most dangerous is that rallies and extremes built over Hopes rather than facts are at risk of major disappointments … and therefore major sell-off when fully loaded investors realise that they have gotten it wrong…
When Sentiment and flow of funds start reversing while valuations are at extremes, the potential for extremely sharp declines is that much higher as all categories of investors try to bail-out at the same time, the eternal and time proven -cause of crashes..
Michael Burry may not be that wrong in betting the house on a coming crash very soon…
Bonds markets and equity markets tend to be interdependent and this is one of the mots established law of economics and financial markets as the price of money – or short term rates and bond yields – have a direct impact on both corporate profitability, through the cost of servicing their accumulated debt and financing needs and through the rate used to discount the future flows of cash and earnings.
When rates go up – and bond market down – equities are less inclined to rise and when rates decline or stay low for long periods of time – and bond markets go up – equities tend to fare well.
As all investors will remember, the first five months of 2022 were the worst period in 40 years for 40/60 portfolios as both bonds and equity markets fell sharply.
Since October 2022, and because of the unsubstantiated hopes of equity investors about the future, an exceptional DISCONNECT has taken place between equity markets and bond markets.
Western Equity markets have recovered and equity investor recouped most of their losses, but bond markets are still reeling and their investors are still sitting on major losses on their portfolios accumulated over the past decade of abnormally low interest rates.
The following charts using the TLT Bond ETF illustrates the current situation.
While the SP500 has gained 32 % since October 2022, Long dated US bonds are still down 40 % from their November 2021 peak and US, European and Japanese bond yields are all rising at the moment, with the US 10 year yield threatening to reach 5.15 % or more in the coming months.
Not that long ago, only in March, four major US banks, of which 2 of the 20 largest, went bust because of the rise in bond yields and the impact of such a rise on their “hold- to-maturity” bond portfolios, the supposedly safe component of their asset base. In Europe, CREDIT SUISSE disappeared…
Since then, the FED controlled the damage by committing to provide liquidity to the banking system using these loss making bonds at nominal cost, but the problem has all but disappeared and any incremental rise in bond yields just makes the problem more acute.
Someone, be it the banks themselves or the FED, will ultimately have to take the huge losses on these assets accumulated during a period where central banks experimented highly hazardous policies of zero interest rates and quantitative easing.
The risk of another wave of accidents in the banking sector are higher than they have ever been, and even without any accident, the ability of the banking system to provide credit is being severely hampered by rising bi d yields and rising rates, with all the ultimate impact that is bound to have on economic activity.
Investors should not forget that the longest ever rally in equities that started in March 2009, and its irrational extension in 2020 and 2021 were both driven by the extraordinary and unorthodox monetary policies pursued by the Western Central banks to fight the 2008 Great financial crisis first, and by the COVID shock in 2020 2021.
This, together with the structural disinflationary trend that prevailed since 1982 that took bond yields from 18 % in 1982 to zero or negative yields in 2020, propelled equity valuations to levels never heard of in history, as illustrated by the 10 year average CAPE ratio.
Unfortunately, this structural trend in dealing bond yields is now broken, Governments are rushing to issue new debt to plug structural budget deficits and Central Banks can no longer bring rates back to zero as they are fighting a new structural inflationary trend.
Equity investors will, have to come to terms with this new interest rates and liquidity regime, one where bond yields and interest rates are bound to remain high and therefore equity valuations come down to earth, towards their long term 15x PE average, and if history is any guide, even to single digit P/E ratios as was the case in the last inflationary period of the 1980s.
In July 2023, Sentiment, Flow of funds and Valuations all reached extremes in the Western equity markets, marking the peak of what we have always analysed as a bear market rally.
This bear market rally was extended forcefully by bubble makers such as Jim Cramer or Ed Yardeni to unsustainable levels, through a last speculative bubble in AI-related stocks.
In exactly the way the main markets tunrned on August 4th with the Q2 results of Apple Inc, the AI bubble will Strat deflating on August 23rd with the Q2 earnings of NVIDIA.
The coming weeks will see the unfolding of the second leg of the steculat bear market that started ion January 2022 and should take the western equity markets way lower than their October 2022 lows.
This phase will be driven by a sharp decline in the overhyped “Seven Magnificents” technology stocks in the US and the correspondingly overhyped luxury stocks in Europe.
We maintain our targets of between 2800 and 3200 on the SP 500 by the Fourth quarter of 2023 or even an extension into the first quarter of 2024.
By then, Sentiment, Flow of funds and valuations will have cycled back to the other extreme, providing the basis for another equity rally in 2024 / 2025.
Chinese Equities are displaying exactly the mirror image of the Western equity markets, in reverse.
Sentiment is at an extreme of bearishness, flows of funds show that investors are liquidating their assets and are heavily short Chinese equities, and valuations are at extremes of undervaluations.
There again the narrative is disconnected from the reality of the underlying macro and corporate trends.
Today, It is nearly impossible, maybe even literally impossible, to find a positive story about China in the media, especially in the U.S. Searching for “China” in The Wall Street Journal, here are keywords from the results: spillover, deflation, syndrome, problem, fraying, hurt, warning, uninsurable, weaken, struggles, worsening. And Bloomberg: fall, gloom, tough, alarm, contagion, losses, slumping, negative.
Similar bouts of “China is uninvestable” over the past two years have usually been good for intermediate bottoms in those stocks. Everybody seems to hate China, has sold Chinese equities and is short Chinese equities, even technology stocks that are reporting strong results and commanding extremely attractive valuations.
The Western press, and particularly the US, is extremely negatively – and in the US pro-actively – biased against China that is being painted as a threat to the world despite the fickle reality of those threats.
The real fear of the West, is that China, with a completely different governance system, manages to surpass the US or European economic and political mights, something that will in any case happen regardless of the vain and self-defeating attempts to restrain its path of growth and development.
China is the world’s second largest economy and it is powered by a massive consumer market, whose GDP per capita has enormous room to increase and catch-up with the West, save for the fact that it will be on a much larger scale.
In the past decade, China has been transitioning from an export-oriented economy to a consumer-driven economy.
Western commentators tend to forget that Xi Jing Ping was at the helm over the past ten years and he presided over a decade of considerable economic, infrastructural and social development. The large majority of his Government consists of the same people who were at the helm in the past ten years.
China’s society is based on an understanding between the people and the Chinese Communist Party, whereby people stay out of politics for as long as they thrive economically, have better lives, better education, better health and better retirements.
Today, Xi Jing Ping is facing a major crisis of confidence by the people of China and he has only one way out.
As in any economy, Households wealth consist of three things : Real estate, interest bearing financial products, and equities.
In 2020, China chose to break the vicious circle of speculation and accumulation in the real estate sector where the Chinese were parking the bulk of their savings. We see the results of his three arrows policy today with the demise of Evergrande and the travails of all the other real estate developers who are facing a cash crunch to liquidate their stocks of newly-built homes. Contrary to what the Western press says, and as was the case with previous real estate crises in the West, developers coming and going are a normal feature of any economy and do not endanger the economy at large unless real estate has been transferred into a massive speculation of credit products as was the case with the US sub-prime crisis in 2008. This is not the case in China.
The travails of the real estate sector do not pose a systemic risk to China’s financial system. They will result is major bankruptcies and bond holders losses, but will not lead to bank failures.
But the major point here is that a weak real estate market has cancelled the strongest mechanism of wealth creation for the Chinese. The Chinese are now feeling poorer and have stopped becoming wealthier form their real estate investments.
Last week, Zhongzhi Enterprise Group Co., the privately owned manager of interest bearing financial products has come under intense scrutiny after halting payments to thousands of customers, leading to street protests, a rare feat but not unusual in China. China’s regulators have formed a task force as they seek to prevent contagion. The firm has hired KPMG to carry out what is likely to be a protracted restructuring process.
The Western Press has been quick to paint this s a major systemic crisis and call it the “Lehman moment ” of China. But in truth, Zhongzhi Enterprise Group Co., one of the largest “shadow-banking” institution isn China manages barely USD 137 Bln. in a USD 18 trillion economy. Even if it is wiped out, something the Chinese will not allow, contrary to the US with Bear Sterns and Lehman in 2008, the impact will remain limited.
In an environment of relatively low interest rates, the Chinese used to park their liquid savings into those high yielding financial products. They represent a sizeable portion of their savings, but way smaller than their real estate investments.
The main point here however, is that this crisis will highlight the risks of the interest bearing products to the Chinese, making them more prudent with their savings.
As China is entering deflation, interest rates are brought down sharply on both lending and deposits, making bank deposits fart less attractive.
With real estate prices having stopped going up, interest bearing products and bank deposits becoming less attractive, and Chinese equities in a bear market since 2025, the wealth creation machine of the Chinese economic miracle has come to a stop.
It is therefore not surprising to see the Chinese boasting a low morale and the current crisis of confidence, particularly considering the record high youth unemployment.
Xi Jing Ping is facing a dangerous challenge ahead:
After his clamp down on real estate to quash the excesses of the sector, and his attempt to rein in entrepreneurs in the search of Common Prosperity and avoiding a culture of “Billionaires”, flashy wealth and inequalities, and after his strict COVID zero policies, that led to mass protests in the streets, the Chinese are now questioning the efficiency of the XI Jing Ping’s administration and its strategic choices.
As was seen in November 2022, when people started taking to the streets and pointing at Xi Jing Ping himself, the Chinese Communist Party is also extremely pragmatic and is taking the measure of the urgent necessity to boost the morale and restore the mechanisms that allowed the Chinese to get wealthier, for entrepreneurs to invest again, and to reduce unemployment.
The ONLY way forward is the equity markets …
China has 420 million individual investors with brokerage accounts… Chinese equities have been in a bear market since 2015 and are trading at record low valuations both historically and in absolute terms while industrial profits have bottomed.
The only structural way for Xi Jing Ping’s administration to restore confidence and boost both consumption and investments is to boost its equity markets and encourage private enterprise again.
It already started doing the latter, we are on the verge of seeing the former.
Besides all the measures that are currently being rolled out to boost economic activity and equity investments, from lower interest rates to encouraging share buy backs or reducing stamp duty and brokerage red tape, China has ample means to do exactly what the Japanese did to pull out of its decade-long structural deflation and economic morass, use public funds to invest directly into equities and create a positive dynamic again.
Considering the way the Chinese Communist Party functions, and the flagship nature of Xi Jing Ping’s common prosperity policies and desire to avoid the excesses of wealth inequalities, those are decision that take time to get approved within the system.
But as was the case with the swift abandonment of his uberstrategic zero- covid policies in November 2022, when things turn they can turn very quickly, and Xi Jing Ping does not have other choices.
Foreign investors and the foreign press are sick to paint Xi Jing Ping as a Power-hungry dictator…
They tend to forget that his Government and the top ranks of the Chinese Communist Party consist of people who are highly skilled, highly experienced and extremely familiar with economic policies, market mechanisms and the Western models of development.
As we have argued many times in articles over the years, the phenomenal success of China over the past five decades comes from a political governance that is far more efficient than Western democracies and global investors would make a considerable mistake in underestimating their ability to manage the future and steer the nation into its next growth and development phase.
On the macro-economic front, although China is currently seeing a slow down after its strong post-COVID recovery in Q4 2022 and Q1 2023, the economy will still grow at between 4 to 5 % in 2023 – or twice the rate of the US and four times the rate of Europe, its consumer machine is still revving, as testified by the corporate results of online retailers such as ALI BABA or JD.COM, and the tide has turned on corporate profits.
Equities are the only structural, practical and rapid mean to make the Chinese wealthier, feel better and consume and invest again..
Technically, Last week’s 6 % decline in Chinese equities smacks of the beginning a trend-ending liquidation phenomenon. We cannot exclude additional weakness ahead, but we are trading very near to a MAJOR support.
For long term global investors, acquiring world-class giants like ALI BABA, JD. COM or some of the dead cheap automakers, banks our insurance companies at current levels is a no-brainer. The Chinese economy and its flagship corporations are not going to disappear overnight…
Chinese equities are the cheapest they have EVER been. With a PE ratio of 8x on the HSCEI, against 22x for the US SP500 and 32x on the Nasdaq, a P/E of 10x on ALI BABA against 63x on AMAZN, and Chinese equities trading at 2 standard deviation from their long term trend, and the lowest EVER market cap to GDP ratio, the favourite yardstick of Warren Buffet for valuations, Global investors cannot stay out of the second largest and soon to become the world’s largest economy for long.
The following chart shows how Chinese equities are trading at the same levels they were at in 2008 or 2006 while China’s GDP has risen from USD 3 Trillion then to 19 Trillion today.
China’s economy is first and foremost a market economy. It operates on the basis of investments and profits, consumption and savings, wealth and infrastructure.
China boasts the most advanced infrastructure of all the developed nations and has the most balanced public finances. At the Central Government level, its debt to GDP ratio is way below the ratios of Japan, the US or Europe. The Western press is full of articles about the Chinese regions being bankrupt or on the verge of bankruptcy. Unfortunately, this is not a fair account of the realities on the ground and they tend to forget that the State of California has been technically in bankruptcy for years with 368 Billion of debt for only 301 billion of assets and in excess if USD 1 trillion of unfunded pension liabilities in 2019.
In 2023, for the first time in history, the share of the use of the US dollar in global commodity markets has fallen below 50 %. The Yuan has become a currency of choice and will continue to rise. Most central banks of the world are reducing their holdings of US dollars and US Treasuries and increasing either Gold or the Chinese Yuan and Chinese bonds.
As of July 2023, China had USD 3,2 Trillion of Foreign exchange reserves while the US had USD 129 Billion of reserves. China has the world’s largest trade and current account surpluses.
The Chinese Yuan is trading at a significant low, testifying of the wave of asset liquidations by foreign investors – The Chinese cannot invest abroad – and at a major support as well. Its weakness is boosting Chinese exports competitiveness.
When it comes to Chinese equities, Bearish Sentiment is at an extreme, negative flows of funds are also at extremes, and valuations are at compelling extremes.
Last week’s 6 % decline in Hong Kong equities smack of trend ending liquidation and we are nearing a major technical support.
The “Grande Manoeuvres” have started to boost China’s equity markets and kt is our view that we shall soon see a sharp reversal in Chinese equities.
This should mark the the second shoulder of an inverse head-and shoulder marking the structural secular bottoming process before a significant secular bull markets starts.
That bull market will see valuations expanding sharply with the potential for the market to double in the coming 24 months and P/E ratios rising to their fair trend value of 16 x.
Equity markets are all about sentiment, flow of funds and valuations.
July 2023 recorded extremes in all three in the US on the bullish side and in China on the bearish side.
Contrary to the proponents of buy-and-hold strategies, history shows that missing major secular turning points can be devastating for portfolios and performances.
At the end of the day, it all comes down to believing that China will cease to exist, or will continue to thrive …
1.4 Billion consumers, the track record of the Chinese Communist Party over the past 50 years, China’s constant surpluses and technological advance, the quality of its infrastructure and its strategic objective of becoming the world’s largest economy all argue in favour of the latter.
As footnote on the geo-political situation and the Taiwanese issue, China, contrary to the US, has never used its military outside of its borders in the past fifty years, apart from skirmishes at the Indian border, and it has no military or international ambitions.
China could have invaded Taiwan at any point in time over the past fifty years, while it had the military capabilities of doing so. Taiwan is a Chinese – Taiwanese historical political issue that China has always endeavoured to save peacefully.
The economic, cultural and political links between China and Taiwan are considerable and neither side want a war situation. The vast majority of the Taiwanese reject the idea of a war and the upcoming Presidential elections in January 2024 may well see the defeat of the independents camp. The vast majority of the Taiwanese want to keep their lifestyle and freedom while cooperating with China. They all react the idea of a war.
America is playing a dangerous game in interfering in the issue, supporting the radical independentist factions in Taiwan, and flaming the issue.
If a war is to erupt, it will be provoked by the US and not by China.
If a war is to erupt it will be devastating for the US as much as for China, the US has very little chances to prevail and both financial markets will collapse.
Weekly Market Review 19 August 2023
Fed Leaves Door Open to Further Tightening
Most participants continued to see significant upside risks to inflation, which could require further tightening of monetary policy, minutes from the latest meeting showed. However, some participants cited the risks to the economy of pushing rates too far. Policymakers agreed that the level of uncertainty remained high and that future rate decisions would depend on data arriving in the coming months to help clarify the extent to which the disinflation process was continuing. The Fed raised the fed funds rate by 25bps to 5.25%-5.5% in July, the highest since January 2001.
US Mortgage Rates Rise to 21-Year High
The average rate on a 30-year fixed mortgage jumped by 13bps from the previous week to 7.09%, the highest since 2002, as the hawkish outlook for the Federal Reserve underpinned expensive mortgage rates for American consumers. A year ago, the 30-year fixed mortgage rate was at 5.13%. “The economy continues to do better than expected and the 10-year Treasury yield has moved up, causing mortgage rates to climb,” said Sam Khater, Freddie Mac’s Chief Economist. “The last time the 30-year fixed-rate mortgage exceeded seven percent was last November. Demand has been impacted by affordability headwinds, but low inventory remains the root cause of stalling home sales.”
US Industrial Output Growth at 6-Month High
Industrial production in the United States rose 1 percent from a month earlier in July 2023, the most in six months and following and above market expectations of a 0.3 percent increase. Manufacturing output rose 0.5 percent, beating expectations of a flat reading, as the production of motor vehicles and parts jumped 5.2 percent, while factory output elsewhere edged up 0.1 percent. Also, mining output moved up 0.5 percent and the output of utilities climbed 5.4 percent in July, bolstered by a jump of 6.7 percent for electric utilities as very high temperatures in July raised demand for cooling. Capacity utilization went up to 79.3 percent in July, a rate that is 0.4 percentage point below its long-run (1972–2022) average. Data for June 2023 was revised lower to show a 0.8 percent decline instead of the 0.5 percent decrease previously reported.
US Retail Sales Top Forecasts
Retail sales in the US were up 0.7% month-over-month in July of 2023, marking a fourth consecutive rise, and beating market forecasts of a 0.4% increase. It follows an upwardly revised 0.3% gain in June, in another sign consumer spending remains strong despite high prices and borrowing costs. Sales in July likely got a boost from Amazon’s Prime Day. Sales at nonstore retailers recorded the biggest increase (1.9%), followed by sporting goods, hobby, musical instrument and books (1.5%); food services and drinking places (1.4%); clothing (1%); food and beverages stores (0.8%), general merchandise stores (0.8%); health and personal care (0.7%); building material and garden equipment (0.7%); and gasoline stations (0.4%). On the other hand, sales went down at furniture stores (-1.8%); electronics and appliances (-1.3%); motor vehicles and part dealers (-0.3%) and miscellaneous store retailers (-0.3%). Excluding autos, gas, building materials and food services, retail sales surged 1%.
Brazil Economic Activity Rebounds in June
The IBC-Br Index of Economic Activity in Brazil, a leading indicator of output growth, rose by 0.63% from a month earlier in June 2023, largely matching market forecasts, after an upwardly revised 2.05% decline in the prior month. Both the key services sector (+0.2%) and industrial activity (+0.1%) expanded, while retail activity stalled. On a non-seasonally adjusted basis, the country’s economic activity grew by 2.10% compared to June 2022. Considering the second quarter of 2023, economic activity grew by 2.65% compared to the previous quarter and it rose by 3.42% on a yearly basis.
Mexico Retail Sales Growth Above Forecasts
Retail sales in Mexico jumped by 5.9% from the corresponding period of the previous year in June of 2023, picking up from a 2.6% rise in May and well above market forecasts of a 2.9% advance. This was the 28th consecutive month of retail growth and the strongest since January, mainly boosted by sales of textile products, jewelry, clothing accessories, and footwear (+19.4%). Self-service and department stores (+17.5%) also recorded a steep increase, On a seasonally adjusted monthly basis, retail sales rose by 2.3% in June, reversing a 0.5% fall in the prior month and beating market forecasts of a 0.9% increase.
Canada Inflation Rate Rises More than Expected
The annual inflation rate in Canada rose to 3.3% in July 2023 from 2.8% in the previous month and above market expectations of 3%. Energy prices fell less (-8.2% vs -14.6%) mainly due to gasoline (-12.9% vs -21.6% in June) due to a base-year effect. Also, electricity prices rose faster (11.7% vs 5.8%). The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the largest contributor to headline inflation. On the other hand, prices slowed for groceries (8.5% vs 9.1%) due to fresh fruit and bakery products; and traveller accommodation (4.2% vs 12.9%), with prices for travel tours down by 1.2%. Also, cost fell further for natural gas (-15.7% vs -5.8%) and airfares (-12.7% vs -3.5%). On a monthly basis, the CPI rose 0.6% in July, following a 0.1% gain in June, largely a result of higher monthly prices for travel tours, with July being a peak travel month.
UK Inflation Rate Falls to 29-Month Low
Consumer price inflation in the United Kingdom dropped to 6.8% in July 2023 from 7.9% in June, pointing to the lowest level since February 2022 and matching market consensus, mainly due to a slump in fuel prices. Additionally, the core rate, which excludes volatile items such as energy and food, was at 6.9 %, unchanged from June’s reading but remained outside the Bank of England’s 2.0% target, providing the central bank with room to continue the ongoing policy tightening path. Transport prices declined further (-2.1% vs -1.8% in June), pressured by a 24.9% slump in cost of fuels and lubricants. There were also notable downward effects from food and non-alcoholic beverages (14.8% vs 17.3%), furniture and household goods (6.2% vs 6.5%), recreation and culture (6.5% vs 6.7%). and miscellaneous goods and services (6.0% vs 6.5%). On a monthly basis, consumer prices fell by 0.4%, the first decline since January, compared with consensus of a 0.5% decrease and after a 0.1% rise in June.
UK Jobless Rate Highest since 2021 at 4.2%
The unemployment rate in the UK increased to 4.2% in the three months to June 2023, the highest since late-2021 and above market forecasts of 4% and 4% in the previous period. The increase in unemployment was driven by people unemployed for up to 6 months. There was a large net movement from economic inactivity into unemployment, with the economic inactivity rate falling by 0.1 percentage points on the quarter to 20.9%, largely driven by those inactive because they are looking after family or home while those inactive because of long-term sickness increased to a record high. Meanwhile, the employment rate fell 0.1 percentage points to 75.7%, driven by full-time employees and self-employed workers. The estimate of payrolled employees for July 2023 shows a monthly increase of 97K to 30.2 million. In May to July 2023, the estimated number of vacancies fell by 66K.
UK Retail Sales Fall More than Expected
Retail sales in the United Kingdom dropped by 1.2% from the previous month in July 2023, worse than market forecasts of a 0.5% fall, and after a downwardly revised 0.6% growth in June. It was the first contraction in retail trade since March, as sales declined for both food and non-food, reflecting the impact of wet weather and cost pressures. Food trade shrank by 2.6%, reversing from 1.1% growth in June, with supermarkets reporting that the wet weather reduced clothing sales, although food sales also fell back. Non-food trade declined by 1.7%, while sales at household goods stores decreased by 3.8% after rising 0.4% in the prior month. By contrast, non-store retailing sales increased by 2.8%, suggesting that a range of promotions boosted sales. Also, automotive fuel sales climbed by 0.7% following a 0.6% fall in June. On a yearly basis, retail trade shrank by 3.2%, a 16th consecutive month of decline, the steepest decline in three months, compared with forecasts of a 2.1% drop.
German 10-Year Bund Yield Hovers at 1-Month High
The German 10-year Bund yield stood at 2.60%, not far from its one-month high of 2.64% hit earlier amid concerns among investors regarding persistent inflation due to escalating oil and gas costs. The benchmark Brent crude oil hit $88 per barrel last week, the highest since January, and Dutch gas futures jumped 28% in a day. Adding to these concerns, producer prices in the US climbed beyond expectations, while consumer inflation remained significantly above the target level. In Europe, the latest data showed that Euro Area core inflation did not slow down in July as expected, supporting policymakers’ warnings about persistent inflation. Money markets priced in a more than 50% chance of a European Central Bank rate hike by year-end, which would bring the depo rate to 4% and a rate cut by the first half of 2024.
Spain June Trade Gap Smaller than Expected
Spain’s trade deficit narrowed to EUR 2.36 billion in June 2023 from EUR 5.39 billion in the same month last year and smaller than market forecasts of a EUR 4.31 billion shortfall. Imports plunged 9.9% year-on-year to EUR 36.3 billion, amid reduced acquisitions of energy products (-50.3%); non-chemical semi-manufactured goods (-16%); raw materials (-21.9%) and durable consumer goods (-10.3%). Regarding the top import partners, purchases declined mainly from the US (-30.5%) and China (-17.7%). Meanwhile, exports fell at a slower 2.8% to EUR 34 billion, as lower shipments of energy products (-41.2%) and non-chemical semi-manufactured goods (-18.9%) were partly offset by increases in sales of automotive products (+31.1%); food, beverages & tobacco (+5.9%) and capital goods (+4.6%). Among major trade partners, exports fell mainly to France (-3%), Portugal (-2.8%) and the US (-10.2%).
Japan Inflation Rate Above Estimates
The annual inflation rate in Japan was unchanged at 3.3% in July 2023 but was notably higher than market forecasts of 2.5%. Prices continued to rise for food (8.8% vs 8.4% in June), housing (1.1% vs 1.1%), transport (2.2% vs 2.2%); furniture & household utensils (8.4% vs 8.6%); clothes (4.1% vs 3.9%), medical care (2.2% vs 2.4%), education (1.3% vs 1.3%), culture & recreation (4.8% vs 3.5%), and miscellaneous (1.2% vs 1.5%). In contrast, prices of fuel, light, and water charges decreased for the sixth month in a row (-9.6% vs -6.6%), mainly due to electricity (-16.6% vs -12.4%). Meantime, core inflation fell to a 4-month low of 3.1% in July, from 3.3% in June, matching consensus but staying outside the Bank of Japan’s 2% target for the 16th month. On a monthly basis, consumer prices rose 0.4%, the most in three months, after a 0.2% gain in June.
Japan Economy Expands at Annualized 6.0% in Q2
The Japanese economy grew by 6.0% on an annualized basis during the second quarter of 2023, much stronger than an upwardly revised 3.7% expansion in the prior period, easily topping market expectations of a 3.1% increase, a preliminary figure showed. This was the third consecutive quarter of yearly advance and the steepest pace since the December quarter of 2020, largely supported by a strong contribution from net trade, with exports growing the most in two years while imports fell for the third consecutive quarter. Meantime, government spending expanded further amid sluggish business investment and a drop in private consumption.
Japan Exports Fall for 1st Time in 29 Months
Exports from Japan dropped by 0.3% yoy to JPY 8,724.97 billion in July 2023, marking the first decline since February 2021 and compared with market consensus of a 0.8% fall, underscoring weak foreign demand from key markets. Shipments of electrical machinery decreased 7.3% yoy, dragged down by semiconductors (-14.8%) and IC (-13.5%); while those of others fell 0.7%, weighed by scientific, optical instruments. Also, machinery exports fell 4.5%, due to semicon machinery (-26.6%). Sales of manufactured goods were down 2.7%, linked to iron & steel products (-4.9%); and chemical shipments dropped 8.8%, dragged by plastic materials. By contrast, exports of transport equipment jumped 22.7, led by motor vehicles (28.2%) and cars (32.6%). Among trading partners, sales fell to China (-13.4%), Hong Kong (-2.2%), Taiwan (-22.9%), South Korea (-15.2%), Malaysia (-24.8%), Vietnam (-7.2%), and Germany (-0.9%); while rising from the US (13.5%), India (19.7%), Russia (-25.0%), and Australia (13.3%).
China Cuts MLF Rates for Second Time this Year
The People’s Bank of China (PBoC) unexpectedly slashed the one-year medium-term lending facility (MLF) rates by 15 bps to 2.50% on August 15th as it seeks to help an economy that faces risks from a deepening property crisis and weak consumer spending. The decision came after Chinese new bank loans plunged 89% from a month earlier to CNY 345.9 billion in July 2023, the lowest since late 2009. This was the second reduction this year after the central bank lowered the rate by 10 bps on June 13th. The move opens the door to a potential cut in lending loan prime rate (LPR) next week. Meanwhile, the central bank launched a total of CNY 401 billion in MLF loans into the financial institutions, with CNY 400 billion of MLF loans set to expire this month, the operation resulted in a net CNY 1 billion fresh fund injection into the financial institutions. The PBoC also injected CNY 204 billion through a seven-day reverse repurchase operation while cutting borrowing costs by 10 bps to 1.8%.
China Jobless Rate Edges Up to 5.3% in July
China’s surveyed urban unemployment rate inched up to 5.3% in July 2023 from June’s 16-month low of 5.2%. The surveyed unemployment rate of the population with local household registration was 5.3% and that of the population with non-local household registration was 5.2%, of which, the rate of the population with non-local agricultural household registration stood at 4.8%. The jobless rate in 31 large cities and towns ticked down to 5.4% in July from 5.5% in June. The average weekly working hours of employees in enterprises across the country were unchanged at 48.7 hours. Starting from August 2023, the release of urban unemployment rates for youth and other age groups across the country will be suspended, according to the NBS, citing the need to further improve and optimise labour force survey statistics. Looking ahead to 2023, the government has set a target for the jobless rate to be around 5.5%, with the objective of creating approximately 12 million new urban jobs.
China Industrial Output Growth Below Forecasts
China’s industrial production increased 3.7% year-on-year in July 2023, slowing from a 4.4% rise in June and below forecasts of 4.4%, due to softer rises in manufacturing activity (3.9% vs 4.8%) and mining output (1.3% vs 1.5%). Looking at specific industries, output growth eased in various sectors: non-ferrous metals’ smelting and pressing (8.9% vs 9.1% in June); chemicals (9.8% vs 9.9%); electrical machinery and apparatus (10.6% vs 15.4%); metals (1.4% vs 2.4%); computers and communication equipment (0.7% vs 1.2%); and mining and washing of coal (0.4% vs 2%). Meanwhile, production accelerated for the extraction of petroleum and natural gas (4.2% vs 4.1); ferrous metals’ smelting and pressing (15.6% vs 7.8%); rubber and plastics articles (3.6% vs 3%); and food processing (3.0% vs 2.2%). For the first seven months of the year, industrial output achieved a growth rate of 3.8%.
China Retail Sales Growth at 7-Month Low
China’s retail sales increased by 2.5% year-on-year in July 2023, slowing from a 3.1% growth in the prior month and missing market estimates of 4.5%. This was the seventh straight month of increase in retail trade but the softest pace in the sequence, as sales growth moderated for tobacco & alcohol (7.2% vs 9.6% in June); clothes, shoes, hats, and textiles (2.3% vs 6.9%); furniture (0.1% vs 1.2%); and communications equipment (3.0% vs 6.6%). Simultaneously, sales fell for cosmetics (-4.1% vs 4.8%), jewelry (-10.0% vs 7.8%), home appliances (-5.5% vs 4.5%), personal care (-1.0% vs -2.2%), office supplies (-13.1% vs -9.9%), building materials (-11.2% vs -6.8%), oil products (-0.6% vs -2.2%), and automobiles (-1.5% vs -1.1%). For the first seven months of the year, retail trade rose by 7.3%.
Russia Increases Key Rate by 350 bps to 12%
The Central Bank of Russia raised its key interest rate by 350bps to 12% on August 15, 2023, the highest level since April 2022 and said inflationary pressure is building up. On Monday, the ruble tumbled past the 102 level, with President Putin’s economic adviser Maxim Oreshkin blaming a loose monetary policy for a plunging currency. As of 7 August, the annual rate of inflation rose to 4.4% while current price growth rates continue to increase. Steady growth in domestic demand surpassing the capacity to expand output amplifies the underlying inflationary pressure and has impact on the ruble’s exchange rate dynamics through elevated demand for imports. Consequently, the pass-through of the ruble’s depreciation to prices is gaining momentum and inflation expectations are on the rise. According to the Bank of Russia’s forecast, given the monetary policy stance, annual inflation will return to 4% in 2024.
The Week Ahead
Next week will be marked by the Jackson Hole symposium where central bankers of the world meet to discuss the state of the world economies and monetary policies. After last year seminal event that acknowledged the return of inflation and unleashed the most dramatic monetary tightening since the 1970s, this year will pit Central Bankers against a market narrative whereby inflation has been tamed and rates are soon to come down.
Chinese economic data will be followed closely as well as measures taken by the Government to restores confidence.
US 10-Year Treasury Yield Swings Sharply
The yield on the 10-year Treasury slid to 4.22% on Friday, after rising to as high as 4.328% in the previous session, the highest since October 2022 and just a tad below its highest level since 2007. The fluctuation is due to investor concerns about the economic impact of high interest rates. The Federal Reserve’s meeting minutes from July highlighted that there are still risks of higher inflation, suggesting the possibility of more tightening of monetary policy. Despite recent data indicating a decrease in inflationary pressures, a strong US economy and a robust job market are reasons supporting the continuation of high interest rates.
US 10-Year Government Bond
US 2-Year Government Bond
US 30-Year Government Bond
German 10-Year Bund Yield Falls to 2.6%
The German 10-year Bund yield fell to 2.6% after rising above 2.7% in the previous session, driven by worries over higher-for-longer interest rates. In the last Fed meeting minutes, US officials expressed concerns about persistent inflation and said further rate rises could be needed. In Europe, the latest data showed that Euro Area core inflation did not slow down in July as expected but economic data, particularly for Germany, have been pointing to a weak outlook. The ECB raised rates by 25 bps in July as expected but dropped guidance that borrowing costs would keep rising, with President Lagarde saying the September outcome will be either a pause or a hike. Traders are pricing in a roughly 70% chance of another 25 bps rate increase when the ECB next meets in September.
Italy 10-Year Bund Yield Eases to 4.3%
The yield on the Italian 10-year BTP fell to 4.3%, retreating from a five-week high of 4.42% in the previous session, due to growing concerns about the global economy amid the prospect of a prolonged period of elevated interest rates and signs of faltering growth in China alongside its deepening housing crisis. FOMC minutes from July’s policy meeting showed that the US central bank has likely not finished raising interest rates. In Europe, the core inflation rate was confirmed at 5.5% in July, and is now higher than the headline rate for the first time since 2021. In July, the ECB raised rates by 25 basis points, but no guidance was provided, with President Lagarde saying the September outcome will be either a pause or a hike. Locally, the headline inflation slowed to a 17-month low and the core rate hit a 10-month low. Meanwhile, Italy provided further details about its recent tax on banks’ unexpected profits, specifying that the tax would have a maximum cap of 0.1% of their assets.
French 10-year OAT Yield Nears Highest Level Since 2011
The yield on the French 10-year OAT topped 3.2%, closing in on its highest level since 2011 on growing prospects that interest rates will remain elevated for an extended period. In the last meeting minutes, Fed officials highlighted persistent inflation and the possible need of higher interest rates. In Europe, the core inflation rate unexpectedly held steady at 5.5% in July, remaining not far from the record-high of 5.7% seen in March. Domestically, the headline inflation slowed to a 17-month low and the core rate hit a 9-month low. The ECB raised rates by 25 bps in July as expected but dropped guidance that borrowing costs would keep rising, with President Lagarde saying the September outcome will be either a pause or a hike. Traders are pricing in a roughly 70% chance of another 25 bps rate increase when the ECB next meets in September.
Dollar records 5th Weekly Advance
The dollar index eased to around 103.2 on Friday but was still recording the fifth straight week of advance, as minutes of the Federal Reserve’s July meeting showed that policymakers stressed that upside risks to inflation remain, leaving the door open to further policy tightening. However, some participants flagged the economic risks of pushing rates too far, emphasizing that future rate decisions would depend on incoming data. Latest data also showed that the number of Americans filing new claims for unemployment benefits fell last week, pointing to continued tightness in the labor market. The dollar is set to gain against most major currencies this week, but remains down against the sterling as key measures of price growth monitored by the Bank of England failed to ease in July.
Japanese Yen Rises After Inflation Data
The Japanese yen appreciated past 146 per dollar, rising from nine-month lows after data showed the country’s core inflation rate slowed to 3.1% in July from 3.3% in June, but posted above the Bank of Japan’s 2% target for the 16th straight month. Headline inflation was unchanged at 3.3%, defying expectations for a sharp slowdown to 2.5%. Still, the yen traded around levels that prompted Japanese authorities to intervene in the currency markets in September last year. The Ministry of Finance bought $19.5 billion worth of yen to support the currency when it weakened to 145.9 on Sept. 22. The yen has come under constant pressure this year amid widening yield differentials, as other major central banks embarked on an aggressive tightening campaign while the BOJ maintained ultra-easy monetary policy. The currency also weakened even after the BOJ made another surprise adjustment to its yield curve control policy, effectively allowing 10-year JGB yields to rise above the 0.5% upper limit.
CRYPTO – CURRENCIES
Wall Street Books Weekly Loss
The Dow Jones finished slightly higher on Friday, snapping losses in the last four sessions, while the S&P 500 was flat and the Nasdaq fell 0.2% amid worries over higher-for-longer interest rates and fresh credit risks in China. Meanwhile, the earning season continued with results from Keysight Technologies which plunged 13.7% after its quarterly reports missed estimates. Deere and Estee Lauder also declined by 5.3% and 3.3%, respectively on the back of disappointing quarterly results. On the other hand, Applied Materials and Ross Stores gained 3.7% and 5% respectively, after publishing upbeat quarterly reports. Additionally, Evergrande filed for US bankruptcy as recent profit warnings from state developers and Country Garden’s bond payment failure triggered a surge in Chinese private credit costs. On the week, the Dow Jones lost 2%, while the S&P 500 and Nasdaq both marked the third consecutive week of loss falling over 2%.
TSX Ends Flat, Posts Weekly Loss
The S&P/TSX Composite index finished marginally in the green at 19,818 on Friday, following the sharp losses from earlier sessions to book a 2.2% slide on the week amid persistent concerns over tighter monetary policy from North American central banks and systemic financial risks in China. Producer prices in the Canadian economy edged 0.4% higher from the previous month in July, marking the first increase since October of 2022 and consolidating concerns that the fight against inflation is not over. The results were in line with recent worries that the BoC and Fed are likely to extend the period of restrictive monetary policy, hurting rate-sensitive tech companies with Shopify booking a 2.4% slide on the week. The upward pressure came from energy producers advancing 1% on average while risks that the Chinese economy will continue to underperform pressuring lenders and miners in Toronto.
Ibovespa Halts Record Losing Streak
The Ibovespa stock index added 0.3% to finish near 115,400 on Friday, pausing its record-high of 13-session losing streak mirroring global stocks that faced a downturn due to concerns surrounding China’s real estate sector and worldwide monetary policy uncertainties. Concerns of a hawkish stance from the Fed countered optimism that China might introduce supportive measures for its crucial construction industry. Banks outperformed as Itaú Unibanco and Bradesco advanced by 0.8% and 0.6% respectively. The retailer Magazine Luiza was the top performer of the session, jumping 6.4%. Meanwhile, the heavy weight Petrobras gained for the fourth consecutive session, adding 0.2% while the iron ore giant Vale shed 1.1%. Rede (-1.8%) and Weg (-1.7%) booked the top losses of the session. On the Week the Brazilian index lost 1.7%.
European Stocks End Week Lower
European equity markets fell on Friday, extending the sharp losses from the week amid deepening concerns of prolonged hawkish monetary policy from the Federal Reserve and heightened credit risks in China. The German DAX and the benchmark Stoxx 600 were down 0.6% led by mining stocks. Shares with high exposure to the Chinese economy also traded sharply in the red after Evergrande filed for bankruptcy in the US due to contagion from developers’ credit risks triggered by profit warnings and Country Garden’s failure to pay bond coupons. For the week, the German index fell over 2% and the pan-Europan index lost about 1.5%.
French Bourse Falls to Nearly 6-Week Low
The CAC 40 index lost 0.4% to 7,164 on Friday, the lowest since July 10th amid concerns around interest rates globally remaining higher for longer and a waning growth outlook in China due to a succession of discouraging economic indicators. Traders also scrutinize ongoing events in China’s property sector, particularly the news that troubled developer China Evergrande Group has initiated bankruptcy protection proceedings in a US court, constituting one of the largest debt restructuring efforts on a global scale. China-exposed luxury stocks such as LVMH, Hermes and Kering fell nearly 1% each. On the week, the CAC 40 lost 2.4%%.
Spanish Ibex Cuts Some Losses but Ends Week in Red
The IBEX 35 edged down to 9,2167 on Friday, declining for the second session and following its European peers, as investors continued to worry about the interest rates path, while weighing concerning news from China. Evergrande Group, one of China’s largest real estate development companies, has filed for bankruptcy in a court in New York, affirming the woes of the property sector. Grifols, Inmobiliaria, and ArcelorMittal were the top losers, down by 2.07%, 1.95%, and 1.70%, respectively. Meanwhile, Acciona Energia ended as the most bullish, up by 1.35% after the European Commission approved the creation of a joint venture by Acciona Concesiones, Cobra and Endeavour Energy to design and construct an electricity transmission network infrastructure in the Australian state of New South Wales. Weekly, the index lost 1.77%.
Italian Stocks Down for 3rd Day
The FTSE MIB index declined for the third straight session on Friday, to around 27,788 the lowest since early July, as global markets were rattled by fresh concerns about China’s economic turmoil following news that Chinese real estate giant Evergrande has filed for bankruptcy protection in a US court. Also, uncertainty about the future path of monetary policies continued to weigh on market sentiment. Banca Monte Paschi Siena and Saipem led the losses, down 4% and 2.4% respectively. There were media reports that the ECB is preparing to send a letter to the Italian government on the extraordinary taxation decree on the extra profits of the banks, criticizing the merit and the method for the non-consultation envisaged by the treaty EU. The FTSE MIB retreated 1.7% this week, the third straight weekly drop.
Japanese Shares Fall After Inflation Data
The Nikkei 225 Index fell 0.55% to close at 31,451 while the broader Topix Index dropped 0.7% to 2,237 on Friday, with both benchmarks finishing the week sharply lower, as investors reacted to data showing Japan’s headline inflation rate came in above forecasts in July. Meanwhile, the core inflation print slowed as expected, but remained above the Bank of Japan’s 2% target. Japanese shares also tracked losses on Wall Street this week amid renewed concerns that the US Federal Reserve could keep interest rates higher for longer due to upside risks to inflation. Heavyweight consumer-related and financial stocks led the decline, with losses from Fast Retailing (-1.2%), Sony Group (-1%), Toyota Motor (-1.2%), Mitsubishi UFJ (-0.4%), Sumitomo Mitsui (-0.5%) and Tokio Marine Holdings (-0.3%).
China Stocks Fall on Evergrande Bankrupcy
The Shanghai Composite fell 1% to close at 3,132 while the Shenzhen Component dropped 1.75% to 10,459 on Friday, as investor sentiment took a hit after Chinese real estate giant Evergrande filed for protection from creditors in a US bankruptcy court. The benchmark indexes also declined for the second straight week as the absence of meaningful measures from Beijing to support China’s faltering economy disappointed markets. Meanwhile, Chinese Premier Li Qiang said on Wednesday the government would work to achieve its economic targets for this year, calling for expanding domestic demand and boosting consumption. All sectors declined on Friday, with sharp losses from heavyweight firms such as The Pacific Securities (-2.1%), Wuliangye Yibin (-2.8%), Kunlin Tech (-7.8%), Zhongji Innolight (-4.3%), Inspur Electronic (-3.7%) and ZTE Corp (-3.5%).
Hang Seng Enters Bear Market
Equities in Hong Kong tanked 375.78 or 2.05% to end at 17,950.85 on Friday, plunging by 5.9% for the week which was the third successive drop, pressured by reports that China Evergrande, the debt-ladden developer, filed for bankruptcy Thursday in a US court. The Hang Seng tumbled 20.9% since its peak in January, as China’s faltering economic growth and deepening property crisis sapped sentiment and stoked signs of contagion. Additionally, Nomura Holdings cut the 2023 growth forecasts for China to 4.6%, on weak July data and ongoing downward spiral in the economy. Meantime, US futures were slightly lower, due to rising long-term Treasury yields and an indication of more tightening by the Fed. Traders now anticipate next week’s gathering of US policymakers at Jackson Hole in Wyoming to gauge Fed sentiment. Losses were across the board, amid sharp losses from tech, consumers, and property. JD Health (-13%), Alibaba Health (-10.3%), KE Holdings (-6.3%), JD.Com (-5.4%), and Li Ning (-4%).
Oil prices are more than 2% lower this week, snapping a seven-week streak of gains, with WTI crude futures trading below $81 per barrel, as China’s weakening economy and fears of further US interest rate hikes outweighed signs of tightening global supplies. Weaker-than-expected economic data and a deepening property sector crisis in China added to concerns about the country’s faltering economy, with a surprise rate cut from the central bank failing to appease the market. Minutes of the Federal Reserve’s July meeting also showed that US policymakers stressed upside risks to inflation that could warrant a prolonged period of restrictive monetary policy or even another rate hike. Meanwhile, investors remain cautious amid signs of tightness in the market after OPEC+ majors Saudi Arabia and Russia curtailed supply.
US natural gas futures fell more than 2% to $2.54/MMBtu on Friday, extending this week’s loss to over 7%, driven by prospects of lower demand into next week and strong production. US gas demand, including exports, is expected to be little changed from 103.7 billion cubic feet per day (bcfd) this week to 103.8 bcfd next week, below Wednesday’s forecast. On the supply side, output so far in August is nearly unchanged from last month and not far from a monthly record of 102.2 bcfd in May. Meanwhile, the latest EIA report showed that US utilities added 35 billion cubic feet (bcf) of gas into storage last week, compared with a five-year (2018-2022) average increase of 41 bcf as hot weather kept cooling demand high. Gas flows to US LNG export plants have been falling so far in August mainly due to reductions at Venture Global LNG’s Calcasieu facility in Louisiana.
Gold broke down below $1,900 an ounce on Friday and was set to decline for the fourth straight week, weighed down by a strong dollar and Treasury yields as minutes of the Federal Reserve’s July meeting suggested further interest rate hikes could be ahead due to upside risks to inflation. Latest data also showed that the number of Americans filing new claims for unemployment benefits fell last week, pointing to continued tightness in the labor market. Elsewhere, data showed that Japan’s core inflation rate slowed as expected in July but remained above the Bank of Japan’s target for the 16th straight month. Investors also monitored China’s real estate sector after top developer Evergrande filed for protection from creditors in a US bankruptcy court.
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