Rate Cut Expectations Boost Small Cap Indexes, European Markets Extend 2-day Rally

Alexander Garcia
11 Jul, 2024
Miami

The easing of inflation in June boosted hopes of a rate cut in the near future, and traders swapped big tech stocks with smaller companies.

Benchmark indexes, dominated by large tech companies, accelerated their decline in the afternoon, and U.S. Treasury yields edged lower after the release of June consumer price inflation data. 

The S&P 500 index and the Nasdaq Composite dropped more than 1% after consumer price inflation dropped to a three-year low level, but prices are still rising faster than the 2% target set by the Federal Reserve. 

Consumer price inflation eased for the third month in a row to 3.0% from 3.3% in May, the lowest since June 2023, the U.S. Bureau of Labor Statistics reported Thursday. 

Core inflation, which excludes volatile food and energy prices, eased to an annual pace of 3.3% in June from 3.4% in May and extended its decline after peaking at 6.6% in September 2022. 

Treasury yields also eased after the release of the June inflation data, and traders upped their bets that the Federal Reserve is more likely to cut rates after its September policy meeting. 

High-growth tech stocks were among the leading decliners, and home builders and home renovation retailers edged higher in the hopes that lower interest rates would spur more demand. 

Nvidia, Broadcom, Qualcomm, Microsoft, and Meta dropped between 2% and 4%, and Home Depot, Lowe's, D.R. Horton, Lennar, and NVR advanced more than 1%. 

The Russell 200 index, the widely followed index tracking smaller companies, soared 2% and extended this year's gains to 4.9%, but the index has lagged the large-cap market index. 

The S&P 500 index, which tracks mega and large-cap companies, has soared more than 86%, surpassing the 34.7% increase in the Russell 2000 index over the five-year period to July 10, 2024. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index increased 0.1% to 5,640.04, and the Nasdaq Composite fell 0.1% to 18,646.76.

The yield on 2-year Treasury notes edged higher to 4.52%, 10-year Treasury notes increased to 4.18%, and 30-year Treasury bonds edged lower to 4.39%.

WTI crude oil decreased $0.29 to $81.81 a barrel, and natural gas prices edged down 3 cents to $2.29 a thermal unit.

Gold decreased by $36.27 to $2,408.85 an ounce, and silver rose 65 cents to $31.50. 

The dollar index, which weighs the U.S. currency against a basket of foreign currencies, edged lower to 104.23.

 

U.S. Stock Movers 

Costco Wholesale declined 3.5% to $853.66 after the warehouse membership club operator raised annual subscription feel in the U.S. and Canada by $5 and premium membership by $10. 

MicroStrategy jumped 7.2% to $1,400.36, and the largest corporate holder of bitcoin announced a 10-to-1 stock split on Thursday. 

The company announced two classes of stock, Class A and Class B, to make its stock more accessible to investors and employees. 

Delta Air Lines declined 5.8% to $44.11, and the international air carrier reported weaker-than-expected quarterly results. 

The airline said net income in the second quarter dropped 30%, despite revenue reaching a record high. 

The company also estimated a lower-than-expected increase in revenue in the current quarter and estimated earnings per share in the third quarter to range between $1.74 and $2.0. 

Pfizer jumped 0.5% to $28.45, and the drugmaker said it will continue making its daily weight-loss pill following encouraging data in early-stage trials. 

PepsiCo decreased 0.6% to $162.16 after the snack and beverage company reported mixed quarterly results. 

Revenue increased 0.8% to $22.5 billion from $22.3 billion, net income advanced to $3.1 billion from $2.8 billion, and diluted earnings per share rose to $2.23 from $1.99 a year ago. 

WD 40 Company increased 2.8% to $225.90, and the lubricant maker reported better-than-expected fiscal third quarter results. 

PriceSmart edged slightly higher to $78.27 after the membership warehouse retail chain reported fiscal third-quarter results that were ahead of market expectations. 

 

Sharp Divisions Keep French Parties From Forming the Next Government 

European markets advanced for the second day in a row after falling in three previous sessions as investors attempted to look beyond the brewing political crisis in France. 

Benchmark indexes in Paris, London, and Frankfurt edged up more than 0.3%, and France's political turmoil shows no sign of easing. 

President Emmanuel Macron's Renaissance party appears to be heading for a division, and the newly formed Popular Front is heading for infighting as lawmakers haggle to agree on a new government. 

Moreover, President Macron's letter published in regional newspapers reiterated that "no one" won the snap election and urged parties to form a "broad" coalition, confirming sharp divisions among members of parliament. 

France's hung parliament has forced parties of various ideologies to set aside their differences to form a coalition government. 

The Centrist-Renaissance party and its Ensemble bloc (168 seats) are likely to form an alliance with Les Republicains (66 seats), and five independent candidates, totaling 239, could form a minority government in France's 577-member parliament. 

French political turmoil is likely to worsen in the weeks ahead as the nation prepares for the Summer Olympics, but the ongoing political crisis also stokes fears of France weakening its influence in the European Union. 

On the economic front, Germany's consumer price inflation was confirmed at 2.2% in June, following a 3-month high of 2.4% in May, the Federal Statistical Office, or Destatis, confirmed Thursday. 

Real GDP in the UK edged up 0.4% in May after showing no growth in April, the Office for National Statistics reported Thursday. 

 

Europe Indexes and Yields

The DAX index increased by 0.7% to 18,534.56; the CAC-40 index rose by 0.7% to 7,627.13; and the FTSE 100 index rose by 0.4% to 8,223.34. 

The yield on 10-year German bonds edged higher to 2.54%. French bonds inched higher to 3.20%; the UK gilts inched higher to 4.16%; and Italian bonds increased to 3.86%.

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 $0.23 to $85.30 a barrel, and the Dutch TTF natural gas rose by €0.39 to €31.06 per MWh.

 

Europe Stock Movers

Hugo Boss increased 1.4% to €39.92, and Frasers Group increased its stake in the fashion company. 

Suedzucker AG fell 6.3% to €12.81 after the sugar producer reported a first-quarter profit decline of 45% from a year earlier. 

Fielmann Group AG increased 3.3% to €43.05 after the German eyewear company reported positive first-half results and estimated an improved operating earnings margin in 2024 and 2025. 

Severn Trent rose 4.2% to 2,727.0 pence after the water management and distribution company said its financial performance is in line with management expectations. 

The company also confirmed its capital investment plan for the current year to range between £1.3 billion and £1.5 billion. 

John Wood Group decreased 0.9% to 205.20 pence after the oil service company reported a 6% decline in the first half ending in June. 

 

Nikkei 225 Hits Third Consecutive High, Core Machinery Orders Unexpectedly Declined

The Nikkei 225 index closed at a new record high, and the Topix index inched higher to a new 34-year high as investors backed up tech stocks.

The enthusiasm surrounding artificial intelligence-linked chip and equipment stocks and expectations that the Federal Reserve is closer to cutting rates supported the market advance. 

Traders also bet that the Bank of Japan is more likely to taper its monthly Japanese government bond buying to 3 trillion yen from the current 6 trillion yen purchase amid pushbacks from large banks. 

The yen drifted lower to a new record three-decade low of 161.62 against the U.S. dollar on the worry that the Bank of Japan is still not ready to adjust rates higher and close the yield gap with U.S. bonds. 

The sharp decline in the yen has got small and medium-sized businesses worried because they can't pass on higher prices to consumers and have to import at a at a higher cost, denting their profit margins. 

On the economic front, Japan's core machinery orders, which exclude large-ticket orders like ships and power-generating equipment, rose 10.8% from a year ago in May, when orders rose paltry 0.7%. 

Orders declined 3.2% from the previous month and accelerated the fall from 2.9% in April to 857.8 billion yen, the Cabinet Office reported Thursday. 

For the second quarter ending in June, orders are likely to decline 1.6% from the previous quarter and fall 2.8% from a year ago to 2.58 trillion yen. 

 

Japan Stock Movers 

The Nikkei 225 closed at a record new high and crossed 42,000 for the first time, and the stock average and the Topix index advanced for the third consecutive day in a row this week. 

The Nikkei 225 stock average increased 0.9% to 42,224.02, and the Topix index rose 0.7% to 2,929.17. 

Tech stocks traded mixed, and Tokyo Electron gained 0.6%, but Advantest and Screen Holdings declined more than 1.5%. 

Softbank Group added 0.8% to ¥11,920.0 after artificial intelligence-linked stocks, including Broadcom, Nvidia, and Qualcomm, jumped as much as 2% in overnight trading in New York. 

NTN, Trend Micro, and Nitto Denko gained more than 3%. 

Mercari Inc. declined 3% to ¥2,324.0. 

 

China Stocks Rebound After Regulators Imposed Additional Curbs On Short Sellers 

Stocks in Shanghai and Hong Kong jumped after securities regulators took additional steps to support markets amid weak economic data and a lackluster earnings outlook. 

The Hang Seng index and the CSI 300 index jumped between 1% and 2% after the China Securities Regulatory Commission lifted the margin requirement for short selling. 

The new margin requirement was raised to 100% from the current 80% for individual investors and to 120% for hedge funds. 

The regulatory agency also places additional restrictions on quant-trading firms to root out market speculators. 

The move from the regulatory agency comes after the state-backed financial firm's intervention petered out and the Hang Seng index dropped 11% from its peak in May, wiping out most of the gains since late January. 

Despite the current move by the regulatory agency, benchmark indexes are expected to resume their downward slide amid weak earnings expectations, a protracted property market slump, and weak consumer demand. 

Chinese Communist Party policymakers are scheduled to meet Monday for the four-day third plenum, where party leader Xi Jinping is expected to announce the policy framework for the next five years. 

The much-delayed policy meeting is likely to deliver a broader outline for economic reforms, a boost for technology development, and new incentives for foreign investors. 

However, market expectations for deep economic reforms are low. 

 

China Stock Movers 

The Hang Seng index soared 1.8% to 17,792.04, and the CSI 300 index added 1% to 3,464.53. 

Electric vehicle makers soared in active trading, and Li Auto, BYD, and Xpeng jumped between 2% and 7%. 

Baidu, Meituan, Alibaba Group, JD.com, and Tencent Holding advanced between 1.5% and 4%.