Powell Comments Shed Little Light on Rate Path, Markets In Europe and China Struggle

Alexander Garcia
09 Jul, 2024
Miami

Benchmark indexes on Wall Street inched higher as investors reviewed comments from Federal Reserve Chair Jerome Powell.  

Stock market indexes continued to advance higher for the sixth week in a row ahead of earnings season and optimism about artificial intelligence applications-linked spending. 

The S&P 500 index and the Nasdaq Composite advanced more than 0.3% and traded at new record highs after mega-cap stocks inched higher. 

Nvidia advanced 3%, Apple gained 0.6%, Meta gained 0.9%, and Amazon added 0.3%, but Microsoft decreased 0.3%. 

Fed Chair Powell delivered his semiannual testimony on monetary policy before the Senate Banking Committee, and reiterated the central bank's commitment to finely balance the policy to support economic activities and employment.  

In prepared remarks, Fed Chair Powell stressed that inflation has slowed but prices are still rising faster than 2% target rate, and lowering rates too soon could stall or reverse the progress made so far. 

On the other hand, "reducing policy restraint too late or too little could unduly weaken economic activity and employment," Powell added. 

Fed Chair Powell is scheduled to appear on Wednesday before the U.S. House Financial Services Committee. 

Powell's remarks come before the release of consumer price inflation data on Thursday and producer price inflation on Friday. 

Despite eleven rate hikes over 2022 and 2023, inflation has still stayed well above the 2% target rate and shows no signs of easing, and record high food, transportation, and home prices have pushed millions of families into cost-of-living crises. 

While Fed Chair Powell talks tough on inflation, the surge in inflation and record prices were started by the Federal Reserve by pumping trillions of dollars during the pandemic years in the name of avoiding economic depression.

Earnings season kicks off this week with earnings from PepsiCo, and leading banks including JP Morgan, Citigroup, Wells Fargo, and Bank of New York Mellon are set to report.

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.2% to 5,584.31, and the Nasdaq Composite rose 0.4% to 18,466.78.

The yield on 2-year Treasury notes edged higher to 4.65%, 10-year Treasury notes increased to 4.29%, and 30-year Treasury bonds edged lower to 4.48%.

WTI crude oil decreased $0.38 to $81.83 a barrel, and natural gas prices edged up 3 cents to $2.40 a thermal unit.

Gold decreased by $2.47 to $2,364.57 an ounce, and silver rose 17 cents to $31.02. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 105.04.

 

U.S. Stock Movers 

BP plc declined 4% to $35.01 after the British oil company announced an impairment charge of up to $2 billion and weaker refining margin in the second quarter. 

The oil explorer and refiner said the after-tax impact of the charge could be between $1 billion and $2 billion, primarily linked to a review of a refinery in Germany and other worldwide assets. 

The company added weaker refining margins are likely to negatively impact earnings between $500 million and $700 million, primarily because of the narrower margin differential in the U.S. refining. 

Refining margins are likely to be adversely impacted "mainly relating to weaker middle distillate margins and narrower North American heavy crude oil differentials, and a higher level of turnaround activity, partially offset by the absence of the first quarter Whiting refinery outage of around $0.5 billion. 

The oil trading result is expected to be weak following a strong result in the first quarter," the company said in a regulatory filing in the U.K. 

The company said its capital expenditure plans of $16 billion are likely to be evenly split between the first and second half, and it estimated $1.2 billion of payment in 2024 related to the Gulf of Mexico oil spill. 

Nvidia Corp. soared 3.9% to $132.88 after KeyBanc increased its target price for the stock to $180. 

 

Europe Indexes Turns Lower Amid Political Uncertainty and Debt Worries 

European markets turned lower after investors reassessed the political landscape in the UK and France, and bond yields stayed near two-month highs. 

Benchmark indexes in London, Paris, and Frankfurt eased on the worry that the hung parliament in France may lead to political gridlock for several months. 

The centrist alliance led by President Emmanuel Macron, the recently formed Popular Front, and the National Rally Party formed three leading blocs, but neither group won a clear majority. 

Market participants are worried that if the political impasse drags on beyond a month, the CAC-40 index may decline between 5% and 20% from its current level, putting additional pressure on the euro. 

The euro held stable and the French bond yield hovered near a two-week high, but France is likely to go through several months of political instability before a new government is established. 

If parties fail to agree on a prime minister, President Macron may appoint a technocrat leader, avoiding a political impasse. 

On the economic front this week, France, Germany, and Spain are set to release their inflation updates.

 

Europe Indexes and Yields

The DAX index decreased by 1.4% to 18,223.94; the CAC-40 index fell by 1.6% to 7,508.66; and the FTSE 100 index declined by 0.7% to 8,139.81. 

The yield on 10-year German bonds edged lower to 2.54%. French bonds inched lower to 3.16%; the UK gilts inched lower to 4.16%; and Italian bonds decreased to 3.92%.

The euro edged lower to $1.08; the British pound inched higher to $1.28; and the U.S. dollar weakened to 89.82 Swiss cents.

Brent crude increased $1.12 to $84.62 a barrel, and the Dutch TTF natural gas fell by €0.97 to €31.17 per MWh.

 

Europe Stock Movers

Saint Gobain SA decreased 2.2% to €76.06, and the construction material maker said it has completed the acquisition of Australia-based building materials maker CSR for A$4.3 billion. 

CSR is saddled with at least $187 million of asbestos-related liabilities, as the company was a leading blue asbestos miner. 

Dassault Systems declined 4.5% to €33.75 after the engineering software company lowered its 2024 earnings outlook. 

PageGroup declined 5.7% to 398.37 pence after the UK-based recruitment company said fiscal year earnings in the current year are likely to drop as much as 50% from a year earlier. 

Indivior plunged 35% to 760.0 pence after the UK-based drug maker lowered its annual earnings outlook and said it was discontinuing production of Perseris, a schizophrenia drug. 

The drugmaker revised down its 2024 revenue outlook to between $1.15 billion and $1.22 billion from the earlier guidance range of between $1.24 billion and $1.33 billion.

The company lowered its adjusted operating profit range between $285 million and $320 million from the previous estimate of between $330 million and $380 million.

 

Strength In Tech Stocks and Weakness In Yen Pushes Japan Indexes to New Highs 

Japan's benchmark indexes soared to new record highs, pushed by tech stocks and persistent weakness in the yen. 

The Nikkei 225 gained 2% and the Topix index jumped 1% following the enthusiasm about artificial intelligence and related technologies. 

Market sentiment was also bolstered after the S&P 500 and the Nasdaq Composite closed at new record highs in overnight trading in New York. 

Investors also digested the current account surplus and the persistent weakness in real wages in May, released on Monday. 

The Bank of Japan said M2 money supply increased 1.5% to 1.257 trillion yen in June from a year earlier, and M3 money supply rose 1.0% to 1.63 trillion yen, slower than 1.3% in the previous month. 

Investors are looking forward to the release of machinery orders later in the week amid high expectations of a rebound in new orders. 

The yen traded around 160.65 against the U.S. dollar, and the yield on 10-year Japanese government bonds was near 1.09%. 

Investors are hoping that the Bank of Japan will provide clarity about the future interest rate path and the central bank's government bond purchase plan at the end of the two-day next policy meeting on July 31. 

 

Japan Stock Movers 

The Nikkei 225 stock average jumped 2% to 41,580.17, and the Topix index gained 1% to 2,895.55. 

Tech stocks were among the leading gainers in Tokyo's trading on Tuesday. 

Tokyo Electron, Advantest, Disco Corp., and Screen Holdings jumped between 2% and 4%. 

Hitachi Ltd. jumped 5.4% to ¥3,834.0 after the conglomerate announced its plans to integrate artificial intelligence-based industrial solutions. 

Leading exporters traded mixed amid weakness in the yen. 

Canon advanced 1.8% to ¥4,511.0, and Sony Group jumped 5.2% to ¥14,605.0. 

However, Panasonic declined 0.2% to ¥1,319.0, and Mitsubishi Electric edged up a fraction to ¥2,740.50. 

Fujikura Holdings soared 11.3% to ¥3,439.0, and Furukawa Electric gained 4.4% to ¥4,081.0. 

 

China Deflation Worries Dominate Shanghai and Hong Kong Trading 

China stocks were under pressure ahead of the release of several key economic indicators, including inflation updates, this week. 

The Hang Seng index and CSI 300 index struggled to get their footing amid market jitters before the release of closely watched inflation updates released by the statistics bureau on Wednesday. 

China's consumer price inflation is estimated to increase by at least 0.3%, and the producer price index decreased by 0.7% in June, according to a survey conducted by Ticker.com. 

Producer prices are likely to decline for the 21st month in a row as manufacturers struggle with overcapacity in several key industries and weak domestic demand. 

Later in the week, the National Bureau of Statistics is scheduled to release international trade, money supply, and foreign direct investment data. 

The Chinese economy is struggling amid weak consumer sentiment, sustained capital flight, and ongoing weakness in the property and job markets. 

Meanwhile, Chinese policymakers are scheduled to meet on Monday for the much-delayed third plenum, which could lead to the announcement of new economic reforms and market-supportive measures. 

Investors have lowered their expectations for deep and meaningful reforms that could stop the capital outflow and revive consumer sentiment. 

 

China Stock Movers 

The Hang Seng Index declined 0.3% to 17,478.72, and the CSI 300 index rose 0.1% to 3,406.16. 

Tingyi Holding decreased 3% to HK $9.83 after the maker of instant noodles raised prices on 12 products. 

Investors are worried that the price hike may backfire because of weak consumer demand amid high job market uncertainty. 

Anta Sports declined 2.7% to HK $69.55 after cautious comments from Citigroup raised the prospects of a lower stock price. 

Three new companies were listed on stock exchanges in China. 

Fangzhou Inc. increased to HK $4.82, and the online disease management platform priced its initial public offering at HK $4.50 per share. 

Baiwang Co. Ltd. increased a fraction to HK$36.05, and the enterprise software solution provider priced its initial public offering at HK$36 per share and raised HK$228.87 million. 

China Shenzhen International Warehouse Logistics Closed-end Infrastructure Fund, a real estate investment trust, priced its public offering and raised 1.2 billion yuan, or $160 million. 

China Shenzhen International traded at 2.45 yuan on the first day of its trading in Shenzhen.