Global Markets Report - 27 July

Australia

Australian shares are uncertain this morning following cautious trading in the US. In a broadly expected move, the Federal Reserve raised interest rates by another 25 basis points. While a recession now seems less likely to economists, investors remain uneasy about the outlook for inflation and monetary policy.

ASX futures edged down 3 points, or less than 0.1%, as of 6:00am on Thursday.

US stocks hesitated on Wednesday following the Federal Reserve’s decision to raise interest rates by 25 basis points. The Dow Jones Industrial Average notched a 13th consecutive advance for the first time since January 1987.

The Dow wavered between small gains and losses throughout the day, eking out a 0.2% increase after Powell, the current Fed chair, suggested the central bank might consider pausing rate hikes at its September meeting.

The S&P 500 edged less than 0.1% lower, while the tech-heavy Nasdaq Composite fell 0.1%. Meanwhile, the Canadian S&P/TSX Composite leaned slightly higher, adding 10 points.

Since the Fed began a series of 10 straight rate increases between March 2022 and this May, stocks have tended to fall after Powell emerged from central bank meetings to explain the group's rationale to the market. Investors seemed less certain after today's widely telegraphed increase.

Powell hedged his outlook for the Fed's September meeting, pointing to the possibility that the lagging effects of tightened lending conditions may slow wage growth or loosen the labor market.

In commodity markets, Brent crude oil fell 0.9% to US$82.92 a barrel while gold gained 0.4% to US$1,973.67.

Australian government bonds were lower, with the 2 Year yield declining to 3.95% and the 10 Year yield dropping to 4.01%. US Treasury notes were higher, with the 2 Year yield increasing to 4.84% and the 10 Year yield rising to 3.86%.

The Australian dollar leaned lower to 67.65 US cents from its previous close of 67.90. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, edged down to 95.61.

Asia

Chinese shares ended lower, reversing Tuesday's gains after policymakers vowed to step up efforts to boost the economy Monday. Investors were searching for more details about Beijing's policy support. Developers led the gainers. Greenland gained 2.9% and Seazen rose 3.3% after China's top leadership suggested more support for the real estate sector. Among the losers were software makers and auto producers. Beijing Kingsoft Office Software declined 4.2% and BYD Co. dropped 0.9%. The benchmark Shanghai Composite Index ended 0.3% lower at 3223.03. The Shenzhen Composite Index fell 0.5% and the tech-heavy ChiNext Price Index slipped 0.1%.

Hong Kong stocks ended the session lower, as the market retreated from a rally in the previous session, driven by investor enthusiasm for Beijing's promise of policy stimulus. The benchmark Hang Seng Index fell 0.4% to settle at 19365.14. Property and real estate management companies led the downturn, as the sector retreated from big gains on Tuesday. Country Garden Services slid 7.7% and Longfor shed 3.3%. Consumption-related stocks also weighed, as car dealer Zhongsheng Group fell 5.05% and sportswear maker Li Ning lost 2.15%.

The Nikkei Stock Average of Japan closed flat at 32668.34 as gains in tech and pharmaceutical stocks helped offset losses in automakers. Z Holdings gained 2.1% and Ono Pharmaceutical advanced 1.7%, while Nissan Motor fell 1.2% and Subaru declined 1.9%. The broader market index Topix fell 0.1% to 2283.09. Investors were focused on the Federal Reserve's rate decision later in the day.

India's Sensex index rose 0.5% to close at 66707.20, led by industrial-related stocks, as robust quarterly results boosted hopes for earnings growth. The best performer on the benchmark index was Larsen & Toubro, which climbed 3.3% to close at a record INR2,646.55 after it reported a 46% rise in 1Q net profit and announced a share buyback. Other top advancers included ITC Ltd., which added 2.1%, and Reliance Industries, which gained 1.8%. Tata Motors edged 0.2% higher after it posted a 1Q net profit, compared with a net loss a year earlier. Meanwhile, Bajaj Finance fell 2.3% and Bajaj Finserv dropped 1.4%.

Europe

European stocks dropped after mixed trading in Asia and ahead of the U.S. Federal Reserve's interest rate decision later. The pan-European Stoxx Europe 600 and the German DAX fell 0.5%, while the French CAC 40 slipped 1.4%. Luxury goods, automotive and banking stocks were among the biggest fallers.

"Markets are now looking towards tonight's Fed rate decision," IG analysts wrote. "Expectations are for a 25 basis-point hike, but the key will be the press conference and any hints that more rate hikes are in prospect."

London’s FTSE 100 index declined 0.2% to 7677 points as investors remained cautious. The top gainers on the UK’s benchmark index were manufacturing company Rolls-Royce, up 19.2% after posting a stronger-than-expected 1H performance, and retail and technology company Ocado Group, up 4.6%. The biggest losers were financial company NatWest Group, down 3% after its CEO resigned, and Lloyds Banking Group, down 2.8% following weaker-than-expected 2Q pre-tax profit.

North America

US stocks hesitated on Wednesday following the Federal Reserve’s decision to raise interest rates by 25 basis points. The Dow Jones Industrial Average notched a 13th consecutive advance for the first time since January 1987.

The Dow wavered between small gains and losses throughout the day, eking out a 0.2% increase after Powell, the current Fed chair, suggested the central bank might consider pausing rate hikes at its September meeting. The S&P 500 edged less than 0.1% lower, while the tech-heavy Nasdaq Composite fell 0.1%. Meanwhile, the Canadian S&P/TSX Composite leaned slightly higher, adding 10 points.

Since the Fed began a series of 10 straight rate increases between March 2022 and this May, stocks have tended to fall after Powell emerged from central bank meetings to explain the group's rationale to the market. Investors seemed less certain after today's widely telegraphed increase.

Powell hedged his outlook for the Fed's September meeting, pointing to the possibility that the lagging effects of tightened lending conditions may slow wage growth or loosen the labor market.

"It is certainly possible that we would raise," said Powell, who has cited Paul Volcker's fight against inflation in the face of darkening economic conditions. "It's also possible that we would hold steady."

Volcker's Fed in the early 1980s boosted the federal-funds rate above 20%, helping lead to a recession that pushed up unemployment and weighed on stock markets. As central bankers have this time pursued a steep, but smaller, set of increases -- the rate on Wednesday was lifted to a range between 5.25% and 5.5% -- the American economy has largely held strong.

That has slowly but surely led a growing cohort of investors to come around to the possibility that the good times in markets might keep rolling.

"Risk appetite is off the charts," said Eddy Vataru, chief investment officer of total return at Osterweis.

The influx of investment in the first half of 2023, fueled by excitement about innovations in artificial intelligence, largely went to large-cap technology stocks. It has more recently broadened to industrial firms, as seen with the Dow's recent run.

Boeing was the blue-chip index's best performer, jumping 8.7%, after it said that customers including Air India, Riya Air and Ryanair booked new orders for jets. Industrial conglomerate 3M bagged a 2.6% gain, Home Depot rose 1.4% and Coca-Cola edged 1.3% higher.

Microsoft fell 3.8% after investors focused on falling cloud-computing demand rather than better-than-expected earnings.

So far, second-quarter corporate earnings have largely exceeded Wall Street's projections. About 78% of the 152 S&P 500 companies that have reported results have outperformed earnings expectations, according to data firm Refinitiv, up from a 66% clip across average quarters since 1994.

Those earnings beats have ranged from technology companies, such as Google-owner Alphabet, which rose 5.8% today, to energy firms focused on throwing off cash to shareholders in the form of dividends or buybacks.

"Everyone is watching for a recession," said Jeff Muhlenkamp, portfolio manager at Muhlenkamp & Co. "Nobody is seeing it."

Muhlenkamp's growing optimism about the economy stems in part from the performance of equipment and machine makers that supply capital-intensive sectors like manufacturing. As those and other industries have held strong, Muhlenkamp has placed additional bets in home-building stocks that have similarly weathered tightened lending conditions.

"It is really surprising how rapidly that turned around," he said of the housing market. Shares in residential construction firm PulteGroup rose 1.1% on Wednesday.