Global financial markets experienced renewed volatility this week, driven by concerns over a potential U.S. recession, which many consider premature. The week began with a sharp drop in global equity markets, sparking headlines about a potential crash. Despite significant fluctuations, the stock market ultimately saw only modest changes. While recent volatility is noteworthy, it’s crucial to remain calm and avoid panic-driven decisions.
Market swings were influenced by technical factors and automated trading. A modest increase in Japanese short-term interest rates led to a partial unwinding of the "carry trade," where investors borrow in Japan at low rates to invest in higher-yielding U.S. assets. A sharp rise in the yen made this trade unprofitable, prompting many investors to exit their positions.
Economic concerns also played a role, particularly after last week’s negative unemployment and manufacturing data. However, this week brought some relief. S&P Global data showed that the services sector remained in expansion territory, despite a slight decline to 55.5. The Institute for Supply Management’s gauge rebounded to 51.4 from 48.8, indicating improved conditions. A better-than-expected jobs report on Thursday also boosted the market, with weekly jobless claims dropping to 233,000 and alleviating some labour market concerns. Experts, including Goldman Sachs economists, argue that recession fears are exaggerated, noting the economy’s stability and the Federal Reserve’s focus on systemic risks over market volatility.
Market volatility was somewhat eased by dovish comments from BoJ Deputy Governor Shinichi Uchida, who indicated that interest rates are unlikely to rise soon amidst market instability. This led to a weakening of the yen, which ended the week in the lower JPY 147 range against the USD.
In Europe, June retail sales volumes unexpectedly fell by 0.3%, reflecting weaker demand and a slower recovery from inflation. German industrial output and orders exceeded expectations, but manufacturing sector conditions worsened in July.
In the UK, July retail sales rose by 0.3%, reversing the previous month’s decline. The Services PMI increased to 52.50, and the Construction PMI beat expectations, rising to 55.30. Halifax reported a 0.8% rise in house prices, with housing sentiment improving due to lower interest rates and government plans for residential development.
Global stocks ended the week with modest declines. In the U.S., the Dow Jones fell by 0.60%, the Nasdaq dipped by 0.18%, and the S&P 500 edged down by 0.04%. In Europe, the Euro Stoxx 50 rose by 0.79%, while the FTSE 100 saw a slight decrease of 0.08%. Asian markets were mixed, with Japan’s Nikkei 225 dropping by 2.46%, the Hang Seng Index gaining 1.18%, and the Shanghai Composite declining by 1.49%. Brent oil prices increased by 3.00%, while gold prices slipped by 0.46%.
Market Moves of the Week
President Cyril Ramaphosa has signed the National Health Insurance (NHI) bill into law, moving forward despite significant opposition. Democratic Alliance leader John Steenhuisen has voiced concerns, highlighting that the NHI remains a divisive issue within the coalition government. The bill will be implemented gradually, with the government working to address concerns and make necessary legal adjustments.
South African private sector activity remained sluggish in July, with the S&P Global South Africa PMI inching up to 49.3 - still below the growth threshold of 50 for the second consecutive month. Supply-side pressures, including severe weather disruptions at key ports, contributed to the weak performance. Nevertheless, businesses remain optimistic about improved conditions in the coming year.
Despite market volatility, the JSE All Share Index ended the week slightly up by 0.25%, bolstered by gains in the Industrial sector (+1.61%), while the Resource (-1.14%) and Financial (-0.21%) sectors lagged. The yield on the South African 10-Year Bond fell by 0.14%, and the rand settled at R18.31/$.
Chart of the Week:
Last week’s disappointing U.S. jobs data sparked significant volatility in global financial markets, leading to a sharp sell-off on Monday. However, new employment figures released this week, showing the largest drop in U.S. unemployment benefits in nearly a year, reassured markets that the U.S. labour market workforce isn’t disintegrating so much as reverting to its pre-pandemic trend. The S&P 500 responded with a 2.3% surge on Thursday, marking its best performance in 18 months and fully recovering from the earlier losses. While other markets have also regained ground, they have yet to return to the levels seen before last week’s unsettling jobs report. Source: Bloomberg.
Credits: Strategic IQ
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