Significant falls in global equity markets as Asian markets react to the deep sell-off in US equities on Friday afternoon. The Japanese Nikkei225 closed down 13% this Monday, its biggest ever one-day fall.
What happened last week.
(A forex, index, and commodity market review)
The risk-off move in global markets intensified towards the end of last week. Global equities suffered further losses last week as US tech stocks continued their fall as megacap results failed to provide support, despite some stocks beating analysts forecasts but there always tended to be a fly in the ointment that investors focussed on.
Two central banks changed interest rates last week with the Bank of England cutting rates by 0.25% whilst the Bank of Japan raised rates by 0.15 to 0.25% in a surprise move.
Weekly change (amount change and percentage change on the week)
FTSE -96 -1.15%
DAX -748 -4.05%
DOW -1,032 -2.54%
S&P -132 -2.41%
NASDQ -629 -3.30%
NIKKEI -3,365 -8.78%
Hang Seng -237 -1.38%
Global equities sold off again last week with the Japanese Nikkei 225 index recording a staggering loss of 8.8%, with Friday’s fall the worst daily fall since 2016, as a perfect storm of negative news caused Japanese investors to book profits in total panic.
The Bank of Japan raised rates by 0.15% to 0.25% partly in support of the Yen which had weakened to more than 160 to the US Dollar at the beginning of July. The surprise move suggests the BoJ are now in a tightening phase, in contrast to other major central banks, with the ECB, BoC and the BoE all cutting rates in the last 6 weeks. The news resulted in a sharp appreciation in the Japanese yen which rallied 5% versus the US Dollar by the close of Friday, the biggest weekly gain by the yen since November 2022.
US markets also fell sharply following poor manufacturing PMI data on Thursday and very disappointing employment data released Friday.
Last week the S&P500 fell 2.4% whilst the NASDAQ lost another 3.3% which is now in a technical correction, having fallen 10% from its highs. The poor economic data combined with underwhelming Q2 earnings reports which failed to support current lofty valuations. Amazon posted better than expected earnings but the margins in their AWS division were lower than expected albeit with better-than-expected total revenue for the quarter. The overall gloom in the market Friday did not help but Amazon fell 9% on Friday following these numbers. Apple managed to buck the trend slightly with forecast beating revenue and earnings which helped Apple to eek out a modest gain whilst the tech sector was crumbling. Intel was another stock in the news, as it announced the scrapping of its dividend and cut in its global workforce of 19,000 which sent its share price 26% lower as investors worried about its poor financial position and failing turn-around plan. Even decent guidance from Arm and Qualcomm in the Q2 earnings reports failed to support their stock prices as the mood turns increasingly negative.
The Non-farm employment change on Friday, which immediately pulled a rug from under equities, came in much lower than expected with just 114K new jobs in July versus 176K consensus, whilst June’s new jobs number was downgraded by 27K new jobs. The news could not have come at a worst time for equities which were being dragged lower by tech which was starting to spread to the wider market. The employment data caused an immediate sell-off as analysts priced in the implications of a much slower jobs market. The news comes just after the Federal Reserve decided to keep interest rates on hold and signalled that rates would be cut at the 18th of September meeting.
The slowdown in the US economy and risk of a recession also hit the small caps, which up until early last week had benefitted from the rotation out of megacap and into this unloved sector. However, the slowdown in the jobs market and much weaker manufacturing activity, sent the Russell 6.6% lower on the week , which is its worst weekly fall in over a year.
Another symptom of the global sell off was the sharp rally in bonds as investors flocked to the relatively safe haven of sovereign bonds. Yields tumbled in all developed markets with the yield on the 10-year Treasury bond tumbling by 0.4% in a week with further fall likely this week as the mood darkens.
UK markets, which are less exposed to the tech sell-off, fell just over 1% last week which was the best performance of all the major indices. The cut in interest rates by 0.25%, the first since 2020 during early stages of the pandemic, supported the property and house building sectors.
The German Dax40, with its raft of tech companies, followed the NASDAQ lower with losses of 4%.
Its highly likely that the markets will remain under pressure as some analysts believe the FED have misjudged the slowdown in the jobs market and should have cut rates last week. Others suggest that the employment print was a one-off. For now, expectations are for the Fed to cut by 0.5% in September with some expecting an emergency cut even before that meeting, which is unlikely, but it depends on market sentiment as much as anything else. By year end, forward rates now imply rates tumbling by 1.25% to 4%. How quickly the mood changes but August often throws up interesting moves, especially when many major decision makers are on holiday.
EURUSD +0.54 +0.49%
GBPUSD -0.63 -0.49%
USDJPY -7.26 -4.72%
The US Dollar has a volatile week with modest gains until Friday when Non-Farm employment data caused a huge shift in interest rate expectations resulting in a big fall on Friday, as the US Dollar closed down 0.5% on the week.
The standout move was the Japanese yen which reacted to the surprise hike in rates by the BoJ last Wednesday. The Yen rallied sharply against the US Dollar, gaining over 7 yen or just under 5% as traders panicked, closing out carry trades that will have suffered significant losses.
Gold +54 +2.26%
UK OIL -2.65 -3.32%
US OIL -2.71 -3.55%
Oil is a bellwether of economic activity so its not surprising to see it fall although a weaker Dollar may help its plight in the medium term. In the short term, this global equity sell off will continue to pressure crude oil.
Gold befitted form the financial markets turbulence and the probability of 1.25% cut in rates by year end. Lower inter rates reduce the funding costs in holding gold.
Data and events in the coming week
(What traders need to look out for in the week ahead)
Little data to discuss this week with Australian interest decision and ISM Services PMI data the highlight.
Monday
US ISM Services PMI – Pickup from July’s low print. Expected at 51.4 versus 48.8 last.
Tuesday
Australia RBA rate decision. Expect no change in rates. AUD sensitive to the announcement.
UK Construction PMI. This sector had been picking up. Last week’s rate cut should help in the medium term.
Wednesday
No key data expected
Thursday
US Weekly Unemployment claims. Following last Friday’s poor employment data, markets will be keen to know if that report will be reflected in the weekly data on unemployment claims.
Friday
China CPI inflation and PPI . China has struggled with low inflation deflation over the past few months. The numbers have been improving but leave little room for businesses to raise prices.
