The news that Joe Biden has pulled out of the Presidential Election did not come as a surprise but the timing was surprise. The effect on the outcome of the election on November 5th is less certain with both the democrats and Republicans claiming it will improve their chances. What is clear is that the outcome is less certain for now, until the dust settles and Kamala Harris, who is way out in front and has been endorsed by many senior Democrats and donors, secures the Democratic nomination.
The effects on the markets may see some of the Trump trades placed over the past few weeks unwound. Trump is ahead in the polls but this news will undoubtedly lead to some movement, with Democrats hoping their election chances have been boosted by Sunday’s news.
Other news out overnight is the surprise cut in interest rates by the PBOC, by 10 basis points on the 1 and 5-year loan rates. Not that meaningful as the PBOC want to stimulate the economy but also have one eye on the value of the Renminbi, which has fallen 2.45% versus the US Dollar this year.
What happened last week.
(A forex, index, and commodity market review)
A significant week for equity markets in the US with tech stocks registering sharp falls whilst smaller cap stocks rallied sharply. Analysts described this as a violent rotation out of the megacap equities, which have dominated stock Market moves over the past 20 months, into smaller cap companies and some of the less fancied sectors.
Weekly change (amount change and percentage change on the week)
FTSE -60 -0.72%
DAX -544 -2.91%
DOW +293 +0.58%
S&P -112 -1.99%
NASDQ -811 -3.98%
NIKKEI -1,562 -3.78%
Hang Seng -812 -4.45%
The tech focused Nasdaq slumped 4% last week as investors rushed out of the megacap stocks and into smaller cap stocks last week with the Russell 2000 index, which contains small cap stocks that have been unloved throughout the last year and a half whilst the megacap stocks had surged.
The catalyst was comments made by Trump, when he suggested Taiwan had been stealing America’s semiconductor business and that it should pay the US for the defence of its country. Alarms bells rang and the Taiwanese stock market shuddered with some notable fallers. Amongst them was TMSC, a chip manufacturer, that supplies chips to Nvidia and Apple. TMSC is Asia most valuable listed company and had surged over the past year on the back of the AI boom.
The mood quickly spilled over into the US with the semiconductor and the more broader NASDAQ and S&P500 suffering significant losses. On Wednesday last week the NASDAQ posted its largest one-day fall since December 2022. Over the week, the NASDAQ lost 4%, its biggest weekly fall since mid-April.
The prospect of a interest rate cut in September with the possibility of two more by year-end also helped small cap sentiment. Traditionally smaller cap stocks benefit when interest rates are declining because they tend to have higher debts when compared to their larger cap peers. However, large cap stocks have significant cash piles which have benefited from interest rates being maintained at the current levels throughout this year, when analysts expected up to 7 cuts at the start of the year.
The mood has shifted now, with the Russell 200 gaining 12% over the past 10 days. The gains in the Russell 2000, unlike the NASADAQ and S&P500, are broad based with three quarters of the Russell 2000 rising over the past week.
Conversely, the NASDAQ fell 4% last week whilst shares in NVIDIA fell 14% following the better than expected inflation posted on July 11th.
The prospect of a Trump victory in the Presidential race was also helping spur the “Trump trade” which is based on the prospect of trade tariffs and tax cuts. In the event of trump victory, bon traders expect Trump’s plans will; lead to higher inflation and an increase in the supply of longer dated Bonds to fill the hole created by Trump’s tax cutting agenda. This Trump Trade could well suffer bouts of uncertainty with Biden pulling out. The polls over the next two weeks will determine if these Trump trades have further to go.
UK markets continue to tread water as the new Labour administration find their feet. Already there are signs that Labour are considering above inflation pay awards recommended by an Independent Pay Review body, to nearly 2 million teachers and NHS workers. The IFS said that if wages were increased by 5.5% with inflation at 2%, the government would need to either raise taxes or cut spending. The pressure will also mount on the government with pay reviews being considered for police officers, prison staff, the armed forces and civil servants.
EURUSD -0.23 -0.21%
GBPUSD -0.75 -0.57%
USDJPY -0.62 -0.33%
A quiet week for the foreign exchange markets with little to drive the major currencies.
Gold +46 +1.96%
UK OIL -3.03 -3.38%
US OIL -2.79 -3.28%
Oil markets fell sharply last Friday with Brent Crude down over $2 on the day, whilst registering a fall of 3.4% over the week. China is the largest global oil importer and their economy continues to struggle. Last weeks quarterly GDP data was less than forecast, coming in at 4.7% versus 5.1% expected. The combination of China’s economic challenges and Europe’s tepid growth provides little room for an increase in oil consumption.
Overnight, the PBOC surprised markets by cutting the 1 and 5 year loan rates by 10 basis points. More in desperation than anything else which may not help the broader economy, which needs greater rate cuts, as it just prolongs to agony in the real estate sector.
Data and events in the coming week
(What traders need to look out for in the week ahead)
A quieter week for data with no major rate decisions but more data on inflation for the FOMC to ponder. Plus we have Manufacturing and services data from the major western economies.
Monday
China 1 and 5-year loan rates. Cut by 0.10% in a surprise move. The first cuts in over a year. Limited impact for now.
Tuesday
No major data releases
Wednesday
Eurozone, UK & US Flash Manufacturing and Services PMI data. A measure of the performance of both sectors that make up the overall economy. Manufacturing typically much smaller than services sectors in the developed world. Expect modest up-tick in both apart from lower expectations for services in the US. Euro, Sterling and US Dollar sensitive with any significant miss / outperformance.
Canada BoC rate decision. Expect cut of 0.25% to 4.5%. following better than expected inflation data from last week. CAD very sensitive to this announcement.
Thursday
Germany German IFO business Climate survey. Large survey of manufacturers, builders, wholesalers, services, and retailers. Little change as the German economy continues to under perform. EURO sensitive.
US Advance GDP reading for Q2. The first of three readings. An improvement from Q1 which was adjusted to 1.4% on the final reading. All a far cry from the 3.4% in Q4 2023. Does not cause much reaction due to historical nature of data.
Friday
US Core PCE price Index. The Fed’s preferred measure of inflation. Expected +0.2% month-on-month. Should keep expectations on track for 0.25% in September. USD and US and global assets sensitive.
