Global equity markets fell this week amid growing concerns about a slowing US economy. The Institute for Supply Management’s (ISM) manufacturing index slumped, and weekly jobless claims rose, intensifying fears of a potentially harder-than-expected economic landing in the US. Following the data release, the equity market, which has already factored in a 25-basis point rate cut from the Federal Reserve, extended their decline.
During the week, companies accounting for nearly 40% of the S&P 500’s market capitalisation reported their second-quarter earnings, including four of the “Magnificent Seven”—Microsoft, Meta Platforms (Facebook), Apple, and Amazon.com. While the results were mixed compared to consensus expectations, a recurring theme was the anticipation of significant capital expenditures to develop artificial intelligence (AI) capabilities.
The Federal Reserve kept rates steady on Wednesday but noted that recent Q2 inflation readings provided added confidence in inflation control. However, they cautioned that delaying rate reductions could overly weaken the economy. The Fed emphasized that no decision has been made regarding a potential rate cut in September, and future actions will depend on incoming data. Fed funds futures are now pricing in a rate cut in September 2024 as a certainty, with nearly three full cuts expected by the end of the year, up from two cuts anticipated earlier in July.
On Thursday, the US 10-Year yield dropped below 4% for the first time in six months, while the 2-Year yield reached its lowest point in 15 months. The ISM Manufacturing index fell to 46.8 in July, below the consensus estimate of 48.8, marking the seventh consecutive quarter of depressed manufacturing data. Economists do not anticipate significant changes until the Fed begins cutting rates. Attention shifted to Friday’s US jobs report, which has implications for growth and interest rate expectations. The report showed the weakest growth in nonfarm payrolls since April, with unemployment rising to 4.3%, the highest since October 2021.
All the major US equity indexes ended the week lower, the S&P 500 -2.06%, Dow Jones -2.10%, while the tech heavy NASDAQ composite bore the brunt of the tech selloff, closing the week down -3.35%. The NASDAQ composite has pulled back over 10% from its July highs.
In the UK, the Bank of England (BoE) cut lending rates by 25 basis points to 5%, marking the first-rate reduction since the pandemic’s onset. The Monetary Policy Committee (MPC) vote was narrowly divided, with a 5:4 split between cutting and holding rates, signalling the start of an easing cycle for the UK. At the next MPC meeting, a vote will be held to determine the pace of Quantitative Tightening (QT) policy over the next twelve months. The current expectation is for a gradual easing path, with an additional 25 basis point cut anticipated later this year and four more cuts projected for 2025.
In the Eurozone, the economy grew more than expected in the second quarter, with resilient expansion in key countries countering Germany’s unexpected contraction. Gross domestic product (GDP) rose by 0.3% in the three months through June, maintaining the same growth rate as the first quarter. This exceeded the 0.2% median forecast of economists, with both France and Spain surpassing estimates and Italy continuing to grow, thereby offsetting a 0.1% decline in Germany. Meanwhile, German inflation accelerated in July, with consumer prices rising 2.6% year-over-year, up from 2.5% in June. This uptick in inflation could influence the European Central Bank’s approach to future interest rate cuts. Unemployment ticked up to 6.5% in June from an all-time low of 6.4% in May.
Both the FTSE 100 Index and the Euro Stoxx 50 closed lower, down 1.34% and 4.60% respectively.
The Bank of Japan (BoJ) raised its benchmark interest rate and announced plans to reduce bond purchases, signalling a commitment to normalising its monetary policy. The policy rate was increased to approximately 0.25% from a previous range of 0% to 0.1%, as stated on Wednesday. Additionally, the BoJ plans to decrease its monthly bond-buying pace to around ¥3 trillion ($19.6 billion) starting in the first quarter of 2026. Governor Kazuo Ueda’s actions reflect a shift from the ultra-easy monetary policy that included the world’s last negative interest rate, which persisted until March.
In response, Japanese stocks experienced a significant decline, with the Topix index suffering its largest drop since April 2020. The Yen’s sharp appreciation adversely impacted exporters, while the BoJ’s tightening measures increased rates and negatively affected real estate shares.
Off the back of a stronger Yen, the Nikkei 225 index declined 4.67% for the week as export-heavy industries detracted from overall market performance.
Chinese equity markets were mixed this week as investors digested weaker than expected manufacturing data. China’s factory activity continued to decline for the third consecutive month in July, underscoring the economy’s ongoing challenges despite efforts to boost growth. The official manufacturing purchasing managers’ index (PMI) fell to 49.4, as reported by the National Bureau of Statistics on Wednesday, indicating a contraction in the sector. The Chinese economy has largely been driven by investment, but recent developments suggest a shift in focus. At a Communist Party meeting on Tuesday, leaders emphasized the importance of bolstering domestic demand and called for accelerated fiscal and monetary accommodation to support the economy.
The Shanghai Composite index recorded a positive return this week, up 0.50%, while Hong Kong’s benchmark Hang Seng Index slid -0.66% for the week.
Market Moves of the Week:
In South Africa, the South African Reserve Bank (SARB) is set to complete the transfer of $5.5 billion in profits from the nation’s gold and foreign-exchange reserves to the Treasury by mid-August. Governor Lesetja Kganyago announced that as of 1 July, R100 billion had already been transferred to the SARB, with approximately three-quarters of the amount due to the National Treasury for the year already paid out. The final transfers are expected to be completed by mid-August.
Trade data for June, released by the South African Revenue Service (SARS), indicate a modestly rising trade surplus in the second quarter. This is likely to result in a narrowing of the current account deficit from 1.2% of GDP in the first quarter to an estimated 0.7% of GDP in the second quarter.
Additionally, ABSA’s Purchasing Managers’ Index (PMI), compiled by the Bureau for Economic Research (BER), showed an increase to 52.4 in July, up from 45.7 in June. This beat the consensus expectation of a rise to 48.0. Key components of the index also showed improvement: business activity rose to 50.8 from 36.3 in June, new orders increased to 55.4 from 37.9, and inventories slightly declined to 48.5 from 51.9. The data suggests a strong start to the third quarter, following weaker months in May and June.
The JSE ALSI also ended the week lower tracking the risk off sentiment from global peers, down -0.72%. All the major sectors were lower this week, led by Resources down -1.91%, followed by Industrials down -0.45%, while Financials fared best, but still closed in negative territory down -0.15%. The SA Listed Property sector was the outlier this week closing in the green, up 1.72%. The Rand closed relatively flat against the Dollar, ending the week at R18.29/$.
Chart of the Week:
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