The Risk of a Wider War In the Middle East Weigh On Global Stock Markets

Alexander Garcia
26 Aug, 2024
Miami

Stocks turned lower in afternoon and lost early momentum as investors rotated to energy and small-cap stocks. 

Stocks opened higher in Monday's trading, and benchmark indexes approached record highs after Fed Chair Powell signaled a possible rate cut in the future. 

U.S. stocks escalated their advances in Friday's trading after comments from Fed Chair Powell suggested a possible rate cut in the future. 

Fed Chair Jerome Powell suggested that a policy adjustment is needed and a possible rate cut is likely; however, Powell fell short of indicating the amount and timing of future rate cuts. 

Investors were quick to bid up stocks following Powell's comments and interpreted that the central bank is likely to begin interest rate cuts as early as September 19, after the next policy meeting. 

Despite the market's enthusiasm for possible imminent rate cuts, inflation is still well anchored in the economy and has stalled near the 3% level for several months, well above the Fed's target of 2%.

Any premature rate cut would only stoke inflationary forces to rebound later in the year and also dent the Federal Reserve's credibility. 

The Federal Reserve's talk of declaring victory sounds hollow to most Americans when prices are still rising from a higher base.

Moreover, policymakers have no plans or intention of bringing down the sky-high home prices and cost of living experienced by most families. 

While the Federal Reserve takes credit for bringing inflation down from near 9%, it was the Federal Reserve's reckless printing of money during the COVID-19 pandemic that drove inflation to a four-decade high in the first place. 

The Federal Reserve has lifted rates 11 times over 2022 and 2023, yet inflation is stalled at 3% and shows no sign of easing, and home prices, wages, food prices, and the cost of various personal services are still rising faster than 4%. 

In the week ahead, investors are looking forward to the release of U.S. durable goods orders, metropolitan home prices to continue to rise at an elevated pace of above 5%, and a second estimate of the second quarter GDP to confirm the preliminary estimate.

Investors are also looking forward to the release of personal income, outlays, and the PCE Price Index, the alternative measure of inflation.

Durable goods orders jumped 9.9% from the previous month in July, reversing the downwardly revised 6.6% decrease in the previous month, the Census Bureau reported Monday. 

Orders rose 10.4% after excluding defense orders and excluding transportation orders by 0.2%. 

The latest data contrasted with the prevailing narrative that the manufacturing sector is losing steam, and transportation orders soared 34.8% from the previous month. 

However, from a year ago, new orders declined 1.4% in July, orders excluding transportation increased 1.4%, and excluding defense fell 1.2%. 

Nondefense capital goods orders, excluding aircraft orders, which is generally seen as a barometer for business spending, decreased 0.1% from the previous month and edged up 0.5% from a year ago. 

 

U.S. Indexes and Treasury Yields

The S&P 500 index decreased 0.2% to 5,623.35, the Nasdaq Composite decreased 0.8% to 17,738.37, and the Russell 2000 index rose 0.4% to 2,227.58. 

The yield on 2-year Treasury notes edged lower to 3.92%, 10-year Treasury notes decreased to 3.81%, and 30-year Treasury bonds inched higher to 4.10%.

WTI crude oil increased $2.40 to $77.23 a barrel, and natural gas prices edged down 4 cents to $1.97 a thermal unit.

Gold fell by $12.62 to $2,521.49 an ounce, and silver increased by $0.14 to $29.97.

The dollar index, which weighs the US currency against a basket of foreign currencies, edged higher to 100.80.

 

U.S. Stock Movers

Boeing declined 0.7% to $173.69, and NASA said it plans to use SpaceX to bring back two astronauts from the International Space Station. 

Earlier, Boeing had repeatedly said its aircraft were safe for the return journey; however, NASA did not agree with Boeing's assessment. 

Nvidia Corp. jumped 0.3% to $129.78, and the advanced chip designer is scheduled to release its quarterly earnings on Wednesday as investors are looking for signs of capital spending by leading mega-cap tech companies. 

Uber Technologies declined 1.7% to $72.97, and the online ride-hailing platform was fined $324 million by Dutch regulators for transferring driver data to the U.S. 

Nordstrom was nearly unchanged at $21.75 ahead of the luxury retailer's quarterly results on Tuesday after the close of regular trading hours. 

The retailer reported revenue increased 4.8% from a year ago to $3.34 billion in the previous quarter, and analysts are estimating the company to report at least $3.89 billion in revenue and adjusted earnings per share of 73 cents in its latest quarter. 

PDD Holdings dropped 29% to $98.70 after the parent company of China-based Temu lowered its revenue and earnings growth expectations for the current quarter amid intensifying competition and the need for higher capital expenditure on new projects. 

Revenue rose 86% to $13.4 billion, or 97.1 billion yuan, and adjusted earnings per ADS rose to $3.20, or 23.24 yuan, from 10.157 yuan a year ago. 

 

European Markets Lacked Direction Ahead of Key Inflation Data 

European markets traded mixed in Monday's trading after advancing in the previous three consecutive sessions amid a lack of domestic catalysts. 

Benchmark indexes in Paris, London, and Frankfurt lost early morning momentum amid rising tensions in the Middle East. 

Israel conducted a massive "preemptive" strike with 100 jets on Hezbollah-controlled military installations in southern Lebanon. 

Israel's military said it conducted the strike on early Sunday morning at 5:00 a.m. after it detected Hezbollah rocket launchers were preparing to attack central Israel. 

While the Lebanese group said it launched hundreds of rockets and drones targeting locations in northern Israel,. 

Following the exchange of fire, British Airways suspended all flights from Israel, and Air France said it would halt all flights to Tel Aviv and Beirut until Monday. 

Last week, Delta extended its flight suspension until the end of October, following a similar announcement by American Airlines. 

Gold continued to trade higher and traded above $2,500 an ounce amid expectations of a dovish interest rate outlook in the U.S. and Europe. 

 

Europe Indexes and Yields

The DAX index decreased by 0.1% to 18,617.02; the CAC-40 index rose by 0.2% to 7,590.37; and the FTSE 100 index advanced by 0.5% to 8,327.78. 

The yield on 10-year German bonds edged lower to 2.23%, French bonds inched higher to 2.94%, the UK gilts edged lower to 3.91%, and Italian bonds inched down to 3.58%.

The euro edged down to $1.11; the British pound inched higher to $1.31; and the U.S. dollar weakened to 84.65 Swiss cents.

Brent crude increased $2.02 to $81.10 a barrel, and the Dutch TTF natural gas roes by €1.12 to €37.73 per MWh.

During this week, investors are looking forward to the release of Germany’s second quarter GDP, inflation rates in the Euro Area, Germany, and Spain, the jobless rate in Italy, and retail sales in Spain. 

The release of inflation and second-quarter GDP data would provide additional insights into the inner workings of the economy ahead of the monetary policy announcement on September 12. 

Investors are concerned about the European Central Bank's rate decisions, and most are looking for a rate cut of 25 basis points, but many are also expecting the central bank to hold rates steady. 

 

Europe Stock Movers

Bakkafor PLC declined 0.5% to 155.0 pence after the Faroese salmon farming company's second quarter revenue was below market expectations. 

Oil exploration companies advanced following higher crude oil prices and rising tensions in the Middle East. 

TotalEnergies SE jumped 0.6% to €62.56, Eni SpA gained 1.1% to €14.76, Repsol SA added 2.2% to €12.91, BP plc increased 0.7% to 429.31 pence, and Shell PLC advanced 0.9% to €32.59. 

Banks and insurance companies were among the leading decliners amid mixed trading in Europe. 

UniCredit SpA decreased 0.3% to €36.42, Banco Santander fell 0.4% to €4.34, Deutsche Bank declined 0.7% to €14.59, and Societe Generale eased 0.2% to €21.44. 

Luxury stocks in Paris advanced despite the market weakness in mainland China, and the yield on the Chinese 10-year bond hovered at a record low of 2.14%. 

Hermes International SCA added 1.1% to €2,202, LVMH gained 0.3% to €682.90, and Kering SA increased 0.1% to €260.30. 

BMW added 0.6% to €84.94, Mercedes-Benz Group gained 0.6% to €62.48, and Volkswagen Group added 0.3% to €97.24. 

 

Japan's Rate Uncertainty Weighed On Stocks 

Stocks in Tokyo reversed the previous session's gains despite Friday's advance in New York as investors reacted to the strengthening yen. 

The Nikkei 2225 stock average and the Topix index fell 1% after the yen advanced and investors reassessed their rate outlook following comments from Bank of Japan Governor Kazuo Ueda. 

The yen advanced to 144.13 against the U.S. dollar after BoJ Governor Ueda said in a testimony to lawmakers on Friday that the central bank is ready to raise rates if ongoing economic data support the move. 

The prospect of a higher interest rate in Japan, coupled with a negative rate outlook in the U.S., supported the yen's advance for the second week in a row. 

A stronger yen dampens the earnings outlook of Japanese exporting companies and also forces speculators to unwind the yen carry trade. 

Investors remained on the sidelines amid the growing possibility of a rate hike at the end of the next policy meeting in Tokyo. 

U.S. Federal Reserve Chair Jerome Powell sent his clearest signal so far: that the central bank is ready to adjust its monetary policy and may lower rates if there is ongoing economic data.

Powell did not say the amount and timing of the rate cut, but traders are anticipating at least a 25 basis point rate cut after the policy meeting on September 19, followed by additional rate cuts of at least another 50 basis points over the next policy meetings in 2024. 

The dovish comments from Fed Chair lifted market indexes by as much as 1.4% in New York in Friday's trading, but that also raised the prospect of more yen carry trade unwinding in Tokyo, putting additional pressure on stocks.

 

Japan Stock Movers 

The Nikkei 225 stock average decreased 0.9% to 38,024.32, and the Topix index declined 1% to 2,657.0. 

Tech stocks were among the leading decliners in Monday's trading in Tokyo, and SoftBank, Disco Corp., Screen Holdings, Tokyo Electron, Advantest, and Lasertec declined between 0.5% and 2.5%. 

Retailers were under pressure following the yen's rise, as a higher yen dampens tourist spending at Japanese stores. 

Isetan Mitsukoshi dropped 6.3% to ¥2,180.0, Seven & I declined 0.7% to ¥2,041.0, and Mercari dropped 3% to ¥2,269.0. 

Mitsubishi UFJ Financial dropped 1.9% to ¥1,495.50, Sumitomo Mitsui fell 3.2% to ¥9,578.0, and Mizuho Financial declined 2.6% to ¥2,995.0. 

Toyota Motor declined 3.5% to ¥2,589.50, Honda Motor decreased 2.9% to ¥1,533.50, and Nissan Motor fell 4% to ¥422.80. 

 

Weak Outlook Kept Gains In Check In Hong Kong, Shanghai Indexes Traded Down 

Stocks in Hong Kong advanced but fell in Shanghai amid lingering worries about economic growth and corporate earnings. 

The Hang Seng index advanced 0.8% in the hopes that the Hong Kong Monetary Authority would lower rates in about three weeks following a possible rate cut in the U.S. 

Federal Reserve Chair Jerome Powell sent his clearest signal so far: that the central bank is ready to adjust its monetary policy and may lower rates if there is ongoing economic data.

Powell did not say the amount and timing of the rate cut, but traders are anticipating at least a 25 basis point rate cut after the policy meeting on September 19, followed by additional rate cuts of at least another 50 basis points over the next two policy meetings in 2024. 

The Hong Kong Monetary Authority would follow similar rate cuts to keep the Hong Kong dollar parity with the U.S. dollar. 

The prospect of an imminent rate cut in Hong Kong lifted the benchmark Hang Seng index, but market sentiment remained weak in mainland China markets. 

Investors have been shunning stocks amid a weak economic outlook and a lack of earnings visibility, and investors are pouring new assets into exchange-traded funds, or ETFs, that track investments in Japan and the U.S. and snapping up luxury properties in Shanghai and Beijing. 

Stock turnover in China's stock markets dropped to a four-year low, according to the data released by the China Securities Regulatory Agency, amid the waning effect of market-supportive measures released by policymakers in May. 

The 10-year China government bond yield hovered near a record low of 2.14%, as investors prefer steady income from bonds over persistent losses from stocks. 

Meanwhile, the PBoC held its one-year medium-term loan facility rate at 2.13% on Monday, after lowering rates in the previous month. 

 

China Stock Movers 

The Hang Seng index advanced 0.8% to 17,756.09, and the CSI 300 index fell 0.1% to 3,324.89. 

Tech stocks advanced in Monday's trading in Hong Kong, tracking gains in Friday's trading in New York. 

Baidu increased 1.9% to HK $83.75, Meituan added 0.6% to HK $108.20, and Tencent Holdings gained 1% to HK $379.40. 

Alibaba Group Holding decreased 0.6% to HK $82.15, and the e-commerce marketplace is set to change its Hong Kong listing to a dual-primary listing on August 28. 

Property stocks in Hong Kong advanced following the prospect of rate cuts in the U.S. starting as early as mid-September. 

Longfor Group Holdings gained 2.6% to HK $8.71; China Resource Land added 0.9% to HK $21.85; Sun Hung Kai Properties gained 3.5% to HK $74.40; and Henderson Land Development advanced 3.8% to HK $23.0.