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Global Market Report - 01 August

Lewis Jackson  |  01 Aug 2022Text size  Decrease  Increase  |  
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Australia

Australian shares are poised to rise after Wall Street extended its rally into Friday and notched the best month’s performance since late 2020.

ASX futures were up 46 points or 0.7% at 6906 as of 8.00am on Monday, pointing to a rise at the open.

Overseas, the S&P 500 rose 1.4%. The Dow industrials added 1% and the Nasdaq Composite advanced 1.9%. All three gauges had their best month since 2020. The S&P 500 gained 9.1% in July, while the Dow Jones Industrial Average rose 6.7%, the strongest monthly showing for each index since November 2020. The tech-heavy Nasdaq Composite climbed 12% for its best month since April 2020.

Investors have taken comfort in recent days from the idea that slowing economic growth might encourage the Fed to raise rates at a slower clip. They also have been encouraged by positive signals during earnings season, as expectations for quarterly profit growth rose over the past month.

But money managers and strategists are also debating whether stocks can hold on to the recent gains in the face of continued monetary tightening and worrisome signals about the economy. Many are skeptical.

"It seems like the market has prematurely declared victory over inflation," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. "It's completely out of step with what the Fed and Chair Powell laid out this week."

In commodity markets, Iron ore fell 3.4% to US$125, Brent crude oil declined 0. 5% to US$103.44, while gold was flat at US$1781.70.

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Bonds rallied sharply across the yield curve to end the week, with the yield on Australian 2 Year government bonds falling to 2.39% while the 10 Year dropped to 3.05%. Overseas, the yield on 2 Year US Treasury rose slightly to 2.88% and the yield on the 10 Year US Treasury notes slipped to 2.65%.

The Australian dollar rose to 69.89 US cents, up from 69.86 at the previous close. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies declined again to 97.77.

Asia

Chinese shares declined, with the Shanghai Composite Index falling 0.9% to 3253.24, down 4.3% this month. The Shenzhen Composite Index lost 1.0% and the ChiNext Price Index was 1.3% lower. Investors were relatively cautious in July, and corporate earnings should drive market divergence in August, China Galaxy Securities says in a note. Pharmaceuticals, liquor makers and property developers were lower. Shanghai Fosun Pharmaceutical slid 5.0% and WuXi AppTec weakened 2.9%, while Wuliangye Yibin retreated 4.7% and China Vanke gave up 2.5%. But auto makers outperformed, with Great Wall Motor gaining 1.9% and SAIC Motor 0.7% higher.

Hong Kong's Hang Seng Index ended the day 2.3% lower at 20156.51, and down 7.9% this month, dragged by a selloff in tech stocks amid tensions between China and the US over Taiwan. Hang Seng Tech Index fell 4.9% to 4331.19. Alibaba Group was among the worst performers, declining 6.1% after a WSJ report that billionaire Jack Ma plans to relinquish control of fintech giant Ant Group. Among other tech stocks, Meituan lost 6.2% and Xiaomi dropped 5.1%. Concerns over China's rising number of Covid-19 cases also weighed on sentiment for consumer stocks. Budweiser Brewing Co. APAC plunged 8.2%, sportswear company Li Ning fell 4.2% and hotpot chain operator Haidilao dropped 2.1%.

Japan's Nikkei Stock Average edged 0.05% lower to close at 27801.64, erasing its earlier gains as losses in regional equity markets and the yen's marked strength weighed on the benchmark index. Among individual movers, Nissan Motor dropped 4.8% after its 1Q net profit fell 59% on year. Murata Manufacturing sank 2.7% after 1Q net profit dropped 2.6% on year. Earnings are in focus. Daiichi Sankyo fell 1.8% after its 1Q net profit missed Y25.61 billion net profit expected in a Quick poll of analysts.

Europe

European stocks rose, lifted by upbeat corporate earnings and better-than-expected eurozone economic growth data. The pan-European Stoxx Europe 600 gained 1.3%, the German DAX added 1.5% and the CAC 40 advanced 1.7%.

The eurozone economy grew 0.7% quarter-on-quarter in 2Q versus the 0.1% expected in a WSJ survey of economists. That eased "fears of an impending contraction in the region," IG analyst Joshua Mahony writes.

London’s FTSE 100 closed up 1.06% Friday in a strong end to the week, pushing above the 7400 mark for the first time since early June on strong performances from banks and the mining sector.

It's been another positive week for markets in Europe, with investors taking comfort from earnings numbers that have by-and-large been better than expected, despite concerns about the growth outlook, CMC Markets UK chief market analyst Michael Hewson says in a research note.

"The gains seen this month have offered a welcome respite, while the belief that central banks may have to pare back the number of rate hikes they can deliver is also helping, pushing yields sharply lower, and improving the attractiveness of stocks in general," Hewson says.

North America

Major stock indexes rose Friday to end their best month since 2020, clawing back some of their losses from a dismal first half.

The S&P 500 gained 9.1% in July, while the Dow Jones Industrial Average rose 6.7%, the strongest monthly showing for each index since November 2020. The tech-heavy Nasdaq Composite climbed 12% for its best month since April 2020.

Investors have taken comfort in recent days from the idea that slowing economic growth might encourage the Fed to raise rates at a slower clip. They also have been encouraged by positive signals during earnings season, as expectations for quarterly profit growth rose over the past month.

But money managers and strategists are also debating whether stocks can hold on to the recent gains in the face of continued monetary tightening and worrisome signals about the economy. Many are skeptical.

"It seems like the market has prematurely declared victory over inflation," said Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. "It's completely out of step with what the Fed and Chair Powell laid out this week."

On Friday the S&P 500 rose 57.86 points, or 1.4%, to 4130.29. The Dow industrials added 315.50 points, or 1%, to 32845.13. The Nasdaq Composite advanced 228.09 points, or 1.9%, to 12390.69. All three gauges ended the week with gains.

Still, the major indexes are deep in negative territory for 2022, after the S&P 500 ended June with its worst first half since 1970. The benchmark is now down 13% for the year.

Conflicting economic signals are forcing investors to chart their paths forward without a clear view into how business conditions will develop in the months ahead. Data Thursday showed the US economy shrank for a second quarter in a row, meeting one popular definition of a recession. At the same time, employers have continued to add jobs and the unemployment rate has remained low.

"It's this odd dynamic of having a really strong labor environment with a weaker economic environment," said Michael Vogelzang, chief investment officer at Raleigh, N.C.--based Captrust. "I just don't think anybody can really truly understand where this is going to come out without more data."

Data Friday showed robust growth in consumption and wages, potentially keeping pressure on the Federal Reserve to raise interest rates to bring inflation under control. Worker pay and benefits rose 1.3% in the second quarter -- a near record pace -- and consumer spending rose 1.1% in June, accelerating from May.

Friday's gains were broad-based, with nine of the S&P 500's 11 sectors advancing. The energy group led with a gain of 4.5%, while the consumer staples segment brought up the rear with a decline of 0.7%.

Among individual stocks, Procter & Gamble shares fell $9.15, or 6.2%, to $138.91 after the maker of Gillette razors and Ariel laundry products said buyers were starting to cut back spending following months of rapid inflation.

Amazon.com shares jumped $12.67, or 10%, to $134.95 after the tech company said quarterly revenue grew faster than analysts had expected. Apple shares added $5.16, or 3.3%, to $162.51 after it reported that iPhone sales continued to grow in the recent quarter.

High energy prices propelled Chevron to record earnings of $11.6 billion in the second quarter, pushing shares up $13.39, or 8.9%, to $163.78. Fellow oil giant Exxon Mobil posted a profit of $17.9 billion, lifting the stock $4.29, or 4.6%, to $96.93.

In the bond market, the yield on the benchmark 10-year US Treasury note edged down to 2.642% Friday from 2.680% on Thursday. Yields move in the opposite direction of bond prices, and have fallen in recent weeks on expectations the Fed will soon slow the pace at which it is raising interest rates.

The yield on the two-year US Treasury, meanwhile, settled Friday at 2.897%. That extends a span in which the shorter-term bond has traded at a higher yield than its longer-term counterpart, a situation known as an inverted yield curve that is seen as a warning of a potential recession.

Investors are closely focused on any hint from the central bank about the future path of monetary policy.

After raising its benchmark interest rate by 0.75 percentage point for a second straight meeting Wednesday, the Fed indicated that at some stage it will likely ease off to gauge the effects of higher rates on the economy. About 73% of S&P 500 companies that have reported quarterly results have beaten profit forecasts, soothing money managers who feared earnings would begin to slide.

But many investors remain cautious about the outlook for the economy and stocks. With inflation at a 40-year high, some say central banks in the US and elsewhere will remain in a hurry to raise rates. The data showing the US economy shrank for a second quarter in a row added to the nerves.

"The key takeaway is that they're not falling off a cliff," said Brian O'Reilly, head of market strategy at Mediolanum International Funds, of earnings. "Consumer demand is still relatively strong."

Nonetheless, Mr. O'Reilly said he thinks the bounce in stocks will fade. "We're still facing a pretty dicey economic backdrop," he said, adding that there are few signs that inflation is peaking.

is a reporter and data journalist with Morningstar. Tweet him @lewjackk or get in touch via email

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