Trail 146 — At Haven’s Door
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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A quick recap of market events before the main story which will dictate markets both in short term and the medium term — the shocking assassination attempt of Donald Trump.
Markets were bullish this week as Fed cut bets grew post the soft inflation print. The CPI declined 0.1% from May, putting the 12-month rate at 3%, around its lowest level in more than three years. Excluding volatile food and energy costs, core CPI increased 0.1% monthly and 3.3% from a year ago. The annual increase for the core rate was the smallest since April 2021. The S&P 500 closed above 5,600 with a late week rally that skipped the big bank stocks amidst earning’s concerns. Treasury 10-year yields declined three basis points to 4.18%. Swap traders have fully priced in a quarter-point Fed cut in September and are targeting more than two reductions this year. Dollar slipped on lower yields. Japanese yen was notably up further supported by speculated intervention by the Bank of Japan. Gold closed above 2,400, while cross asset volatility slipped further.
An assassination attempt will change things a fair bit come Monday. There will be a rush to safe haven currencies — dollar, yen, US treasuries, gold, bitcoin etc. But Trump now has a campaign poster that will undoubtedly seal his re-election bid. His defiant fist pump moment after a bullet grazed his right ear, with the American flag furling in the background is iconic to say the least. So, investors will play the Trump election scenario but picking winners and losers is anyone’s guess. This will likely mean volatility will pick up and, this may not be the end of the violence in the lead up to the elections. Market sentiment will be cautious trying to figure out who Trump’s policies will hurt or benefit, whilst also hoping this kind of political aggression doesn’t repeat.
Race to Replace China
The race to replace China’s top spot in emerging market equity portfolios is heating up, with Taiwan and India running neck to neck as formidable rivals. Thanks to record stock rallies, Taiwan and India now command more than 19% weightings each in the MSCI EM Index. That compares to China’s 22.8%, whose standing has steadily shrunk over the past few years.
Earnings Missteps
The biggest US bank stocks have been trouncing the broader market this year, but their rally got a brake-check once again from earnings results that underwhelmed investors. Wells Fargo & Co. sank 6% for its worst earnings-day drop in more than three years after a net interest income miss. Citigroup Inc. slumped 1.8% as expenses were in focus, even though its markets revenue beat expectations. And JPMorgan Chase & Co. fell 1.2% after its results and steady guidance failed to impress. All three were among the 20 biggest decliners in the S&P 500 Index Friday, a session in which more than 400 of the index’s stocks rose, with Wells Fargo coming in as the day’s biggest loser.
Yen Intervention
Japan likely stepped into currency markets for a third time this year to prop up the yen soon after US inflation figures came out Thursday, according to a Bloomberg analysis of central bank accounts.
The scale of intervention was probably around ¥3.5 trillion ($22 billion), based on a comparison of Bank of Japan accounts and money broker forecasts. The figures indicate that Japan’s currency authorities tried to take advantage of a build-up of expectations for a Federal Reserve rate cut immediately after data showed US inflation cooling broadly.
In The World of Business
This week, U.S. corporate bankruptcy filings surged in June to levels surpassing the early pandemic peak, driven by high interest rates, supply chain issues, and slowing consumer spending, prompting warnings of a potential recession if the Federal Reserve delays rate cuts.
Japan’s tourism boom, driven by a weak yen, is setting new records, and significantly boosting the economy, while raising concerns about over tourism in major cities.
Tesla’s stock has surged due to better-than-expected Q2 deliveries, positioning the company strongly among America’s top firms and raising investor optimism about its future innovations and market strategies.
Bankruptcy Filings
The number of U.S. corporate bankruptcy filings surged in June, surpassing the peak levels seen during the early stages of the pandemic. S&P Global Market Intelligence reported 75 filings last month, up from 62 in May, with the year-to-date total reaching 356, the highest for the first half of any year in the past 13 years. This increase is attributed to high interest rates, supply chain disruptions, and slowing consumer spending.
This wave of bankruptcies underscores broader economic strains, as many companies struggle with accumulated debt amid rising borrowing costs. Nearly 7,000 publicly traded “zombie” companies worldwide, including 2,000 in the U.S., are barely surviving. Economic indicators such as the Institute for Supply Management’s service-sector gauge and rising unemployment rates have led Citi Research to predict multiple Federal Reserve rate cuts starting in September. Economist Claudia Sahm warns that the Fed’s delay in reducing rates could push the economy into a recession, emphasising the need for timely policy adjustments to mitigate these risks.
Japan on Sale
Japan is experiencing a significant tourism boom, with over 14.6 million international visitors between January and May, setting new records and potentially surpassing the 31.9 million tourists from 2019. The influx, driven by a weak yen making travel more affordable, has led to a surge in spending, making tourism Japan’s second-largest “export” after cars.
Despite the economic benefits, the surge has sparked concerns about over tourism, particularly in major cities like Tokyo, Kyoto, and Osaka. Complaints about overcrowding and tourists’ behaviour have led to measures such as potential dual pricing for attractions and increased public transport fares for tourists. However, less prominent cities continue to welcome the influx, offering unique experiences and maintaining sufficient hotel capacity to cater to both domestic and international visitors.
Tesla’s Back
Despite facing fiercer competition than ever, Tesla’s stock has staged a massive rally, erasing year-to-date losses and silencing doubts about its place among the elite “Magnificent Seven” tech giants, including Alphabet, Amazon, Apple, Meta, Microsoft, and Nvidia. In April, when Tesla’s shares dipped to $138.80, critics like CNBC’s Jim Cramer questioned its stature among America’s largest companies. However, bolstered by Q2 deliveries that surpassed expectations, Tesla’s stock surged, closing at $263.26 on Wednesday and pushing its market capitalisation close to $850 billion, making it the eighth-largest U.S. company.
Tesla’s impressive Q2 performance included almost 444,000 vehicle deliveries, a drop of less than 5% from last year, which exceeded analysts’ forecasts of a 9% decline. Additionally, Tesla’s energy storage business reported a record 9.4 gigawatt hours of battery energy storage deployed. Investors are now eagerly anticipating Tesla’s upcoming Cybercab robo-taxi reveal on August 8 and updates on the production of a new, affordable vehicle during the July 23 earnings call. The timeline for these projects will significantly impact Tesla’s market perception and future stock performance.
Until next week
