What happened last week.
(A forex, index, and commodity market review)
US tech stocks continued to suffer heavy selling pressure last week as the rotation out of big / mega cap tech stocks continues. The much unloved smaller cap stocks are the main beneficiary with the recent fall in inflation implying a near-certain first interest rate cut at the September 18th FOMC meeting. Low interest rates benefit small cap stocks which typically have high levels of debt whilst the mega cap magnificent seven earn vast amounts of interest on their surplus cash, which will reduce when the FOMC start their interest rate cutting cycle.
Weekly change (amount change and percentage change on the week)
FTSE +143 +1.75%
DAX +294 +1.62%
DOW +267 +0.91%
S&P -45 -0.82%
NASDQ -496 -2.54%
NIKKEI -1,397 -3.52%
Hang Seng -302 -1.73%
The sell-off in tech stocks gathered apace last week with both the NASDSAQ and S&P500 suffering their worst day since October 2022 and December 2022, respectively.
All the mega cap stocks, referred to as the Magnificent Seven, suffered significant losses. The EV car maker, TESLA, fell 12.3% last Wednesday following a poor set of quarterly results with profits lower than forecast. Alphabet, the parent company of Google, fell 5% despite just beating analysts forecasts but guidance took the shine of the numbers. NVIDIA, the best performing mega-cap this year, has suffered a sharp drop over the past week as investors rush for the exit on the A1 focussed stocks. NVIDIA fell 6.8% on Wednesday but recovered slightly on Friday, closing down 5% on the week.
Economic data continues to support the first rate at the FOMC September meeting. Service PMI data in the US supports the view of a growing economy whilst the first reading of US Q2 GDP was better than expected with a moderating price index that was reinforced by the Core PCE reading Friday of +0.2% in line with expectations. The Core PCE annualised rate was 2.6%, unchanged from last month.
The data paints a growing economy with moderating inflation, referred to as a goldilocks economy, which will give the Federal Reserve room to cut rates at the September 18th meeting. The odds of a cut are currently an absolute certainty whilst two further cuts of 0.25% are expected in November and December.
Other chip stocks were also sold with Arm Holdings, also listed on the NASDAQ, falling 5.4% last Wednesday whilst the Stoxx Europe 600 Technology Index fell 2.7%. Analysts highlight the huge gains some of these tech stocks have enjoyed this year, but the main reason for this wave of selling is profit taking as we approach the summer holiday season in August.
UK markets had a better week with equities jumping Friday ahead of the MPC interest rate decision this week. Expectations have risen over the past few days with the decisions very much in the balance as the MPC weigh up progress on inflation towards the bank’s 2% target against stronger than expected growth in May and persistent service sector inflation which may tip the balance in favour of no change in rates. The BoE chief economist, Huw Pill, who had been supportive of a rate cut described the recent service sector inflation as showing “uncomfortable strength.”
Whilst the Bank of Canada cut rates last week, the ECB cut rates the previous month and with the prospect of a rate cut in the US in September the BoE could be one of the last major central banks to start cutting rates.
EURUSD -0.26 -0.23%
GBPUSD -0.48 -0.37%
USDJPY -3.65 -2.32%
The US dollar continues to recover over the past week with data pointing to a strong economy with moderating inflation which puts the US in far stronger position than Europe, Japan, and China.
The Japanese yen fell sharply last week as traders rushed to exit carry trades that had been a staple of cheap borrowing. The problem with the carry trade is when the Japanese Yen started to rally the hedging costs outweighed the benefit of the ultra low borrowing costs. The outlook for BoJ policy meeting this week remains uncertain with traders not sure whether the BoJ will raise rates again and cut Japanese Government Bond purchases. Despite weaker than expected inflation reading the Bank of Japan is under pressure to raise interest rates to bolster the yen.
Gold -12 -0.50%
UK OIL -2.04 -2.49%
US OIL -2.34 -2.98%
Economic data out of China and Europe points to weak growth and weaker oil remand, especially from China. Oil reacted to the general weaker economic data with further falls last week. Bent Crude fell 2.5%, hitting 7-week lows. Gold continues to benefit from the prospect of lower US interest rates which makes gold more attractive, especially if the US Dollar also weakens.
Data and events in the coming week
(What traders need to look out for in the week ahead)
A busy week for global markets with the two of the most important releases from the US coinciding in the same week – The FOMC interest decision and US Non-Farm employment data. In the UK, we have the Bank of England’s MPC meeting and the keenly awaited decision on interest rates. In Japan, the BoJ are also meeting and need to demonstrate that they are willing to support the Yen and raise rates, despite lower inflation print this month.
Monday
No key data scheduled for release
Tuesday
US CB Consumer Confidence. Dipping to 99.8 from 100.4
Wednesday
China Manufacturing and Services PMI. Slight weaker expected on both measures.
Japan Bank of Japan intertest rate decision and policy statement. Expect minor increase in rates although decision remains finely balanced. Japanese Yen extremely sensitive to this announcement.
Eurozone Core CPI flash estimate. Expected at 2.8% (Last at 2.9%). Headline expected at 2.4% (last at 2.5%). Euro and Eurozone assets sensitive.
US ADP non-Farm employment change. Expected 166K new jobs.
US FOMC interest rate decision. Anything but an unchanged announcement would be a major surprise. Rates expected to be kept at the 5.25-5.5 band. USD and US assets sensitive to the statement and the press conference that follows 30 minutes after the announcement. USD, US, and global assets sensitive to this announcement.
Thursday
UK The third major central bank policy meeting. The decision is going to close with mixed expectations. A 0.25% cut would signal the start of the more accommodating monetary policy. GBP and UK assets sensitive to the announcement.
US ISM Manufacturing PMI. Signs that the manufacturing sector continues to strengthen. Expected at 49.0 (48.5 last).
Friday
US Non-farm Employment change. 177K new jobs with an unchanged unemployment rate of 4.1%. This data will not have the usual impact, coming just two days after the Fed’s statement on Wednesday evening. It could alter the prospects of rates cut projection in November and December if the data is way off consensus. USD and US assets sensitive.
Quarterly earnings
More tech earnings, amongst many others, this week.
Microsoft Tuesday
Meta Wednesday
Amazon Thursday
