Global Markets Report - 7 August

Australia

Australian shares are expected to open lower this morning following losses on Wall Street. The July jobs report indicated a decelerating but still strong rate of hiring in the US. While many economists interpreted the data as a sign of a successful soft landing, investors were not so upbeat.

ASX futures were down 12 points or 0.2% as of 6:00am on Saturday, suggesting a dip at the open.

All three major US indices dropped Friday to finish the week in the red, with losses spanning financial, technology, and automotive stocks. The Dow Jones Industrial Average fell by 1.1% this week, while the tech-heavy Nasdaq dropped 2.9% and the S&P 500 fell 2.3%.

On Friday, the S&P 500 dropped 0.5% while the Dow and the Nasdaq both shed 0.4%. Canadian stocks bucked the trend, however, with the S&P/TSX index rising 0.6% on Friday.

The drop in bond prices after Fitch's downgrade of the US credit rating left yields on longer-term government debt hovering near their highest levels since last November. That called into question the benefit of owning stocks, drawing traders away from higher-risk equities in recent days.

In commodity markets, Brent crude oil gained 1.0% to US$86.02 a barrel while gold added 0.4% to US$1,941.81.

Australian government bonds were higher, with the 2 Year yield rising to 3.92% and the 10 Year yield climbing to 4.19%. The yield on 2 Year US Treasury notes dropped to 4.78% while the yield on 10 Year US Treasury notes increased to 4.04%.

The Australian dollar moved up slightly, to 65.63 US cents from its previous close of 65.49. The Wall Street Journal Dollar Index, which tracks the US dollar against 16 other currencies, declined to 96.73.

Asia

Chinese shares closed higher with sentiment supported by Beijing as the central bank vowed to ensure reasonably ample liquidity in the banking system. In a briefing Friday, officials from multiple departments said they would step up support for China's 2H economic growth. Gains were broad, with telecoms and software makers leading the market. China Unicom rose 7.45%, China Mobile added 3.5% and Beijing Kingsoft Office Software gained 2.8%. Among the losers were consumer brands and the property sector, which retreated after recent gains. Yonghui Superstores declined 3.0% and China Vanke dropped 0.7%. The benchmark Shanghai Composite Index closed 0.2% higher at 3288.08 and finished the week 0.4% higher. The Shenzhen Composite Index gained 0.5% and the tech-heavy ChiNext Price Index rose 0.95%.

Hong Kong shares ended higher as investor sentiment was boosted by the Chinese central bank's pledge to flexibly use monetary tools to shore up the economy. Technology and communications stocks led gains. Tech giants Alibaba and JD.com climbed 2.2% and 3.1%, respectively. China Unicom was up 2.0%. Among losers, CK Hutchison shed 4.6% after reporting a 1H net profit decline yesterday. The benchmark Hang Seng Index rose 0.6% to settle at 19539.46, while the Hang Seng Tech index was up 2.1%.

Japanese stocks ended higher, led by gains in financial shares, thanks partly to recent increases in government bond yields. Resona Holdings climbed 3.4% and Mitsubishi UFJ Financial Group advanced 1.8%. The Nikkei Stock Average edged 0.1% higher to 32192.75.

Indian shares closed higher, lifted by heavyweight bank and tech stocks, breaking a three-day losing streak. Positive earnings reports boosted investor sentiment in the domestic market against the backdrop of weak global cues, analysts said. Indusind Bank rose 3.3% and Axis Bank was up 1.7%. Tech Mahindra gained 2.9% and TCS climbed 1.3%. Among losers, NTPC declined 1.1% and Tata Motors was down 0.69%. Zomato surged 10.2% after it reported a quarterly net profit for the first time ever. The benchmark Sensex index rose 0.7% to 65721.25.

Europe

European stocks rose after US job data came in slower than expected last month. The pan-European Stoxx Europe 600 advanced 0.3%, the French CAC 40 rallied 0.8% and the German DAX closed 0.4% higher.

"The case for ending the rate-hike cycle got stronger with today's job report," Lazard's Ronald Temple wrote. "Strong, but slowing, job growth suggests the Fed is navigating the tightening cycle well. With inflation down from over 9% to 3% and unemployment near a 54-year low, this is undoubtedly a positive report for the economy overall."

The United Kingdom’s FTSE 100 closed Friday up 0.5%, clawing back gains after a difficult week overall for European markets. The index struggled this week as earnings guidance downgrades and rising long-term yields hit sentiment, but a mixed US jobs report appears to have stabilized sentiment, said CMC Markets UK Chief Market Analyst Michael Hewson.

The job figures have acted as a support to market sentiment, and even slightly stronger wage growth has not alarmed investors, agreed Chris Beauchamp, IG Group's chief market analyst. "A positive tone prevails across markets in the wake of payrolls this afternoon, raising hopes that the mid-week wobble around the US downgrade can be contained," Beauchamp said.

North America

All three major US indices dropped Friday to finish the week in the red, with losses spanning financial, technology, and automotive stocks. The Dow Jones Industrial Average fell by 1.1% this week, while the tech-heavy Nasdaq dropped 2.9% and the S&P 500 fell 2.3%.

On Friday, the S&P 500 dropped 0.5% while the Dow and the Nasdaq both shed 0.4%. Canadian stocks bucked the trend, however, with the S&P/TSX index rising 0.6% on Friday.

The drop in bond prices after Fitch's downgrade of the US credit rating left yields on longer-term government debt hovering near their highest levels since last November. That called into question the benefit of owning stocks, drawing traders away from higher-risk equities in recent days.

"This week's wobble in the fixed-income market kind of woke everyone up, " said Peter van Dooijeweert, head of multi-asset solutions at Man Solutions. "This isn't a free lunch."

The three major US indices are up considerably year to date. But investors are still analyzing if and how the Federal Reserve's interest-rate hikes to 22-year-highs will slow down the world's largest economy in the months ahead.

Many indicators about the country's inflation outlook continue to offer mixed messages. On Friday, the Labor Department said US employers added 187,000 jobs in July, indicating that hiring has slowed from last summer. But wages continued to rise at a brisk pace.

The dueling narratives from such data have left investors like van Dooijeweert veering toward bonds that offer a healthy return without the risk of equities that could dive should the central bank nudge the economy into a recession.

"If the Fed's not cutting [interest rates], bonds need to sell off," he said, noting that yields would rise in such a scenario. "As we say in my house: party on."

Those rates helped pull more investors away from stocks in most sectors of the S&P 500. Stocks in utilities, usually prized for their stability and dividend payouts, were the indices' worst performers with a 4.7% drop this week.

Energy companies were one of the markets' few bright spots, pulled higher by oil prices that have reached their highest levels since April. Benchmark US crude prices have risen for six straight weeks, closing this week at $82.82 a barrel.

On Friday, Amazon shares were a big winner, jumping 8.3% after the tech giant trounced expectations for quarterly profit.

Apple stock, meanwhile, fell 4.8% after the iPhone maker said revenue declined for a third straight quarter, marking the company's longest sales slump since 2016.

Friday's declines came despite corporate earnings largely beating Wall Street's expectations. Of 422 companies in the S&P 500 that have reported quarterly results, Refinitiv said 79% topped projections, up from the 66% average since 1994.

But some investors note that earnings expectations were fairly low. "It's hard to understand why the market prices [companies] at a premium in that scenario," said Jason Pride, chief of investment strategy and research at Glenmede.

Pride suspects that some investors have pointed to the stock market's performance this year as evidence that the Fed's rate increases won't eventually bite.

"The market's behavior is actually shifting people's beliefs about the economic impact of higher rates," Pride said. "I think that's feeding into itself to some degree."