Markets in a minute 6th August 2024

Equity markets headed lower last week on the back of weak US manufacturing and employment data with the S&P 500, NASDAQ & Stoxx 600 all ending the week in negative territory. The real action came yesterday. Monday's trading saw the S&P 500 finish down 3%, the NASDAQ down 3.4% and the Stoxx 600 down 2.1%.

The combination of weak US economic data, the unwinding of the carry trade and weaker sentiment in the AI sphere (perhaps exacerbated by Warren Buffet's selling of 50% of Berkshire Hathaways' Apple holdings) all came together, rounding out a 3-day sell-off in equity markets.

Wile Q2 corporate earnings from Meta (Facebook) were strong, tech stocks more broadly were weighed down by lacklustre earnings announcements. Intel's Q2 results and guidance after the market close on Thursday were much weaker than expected. The company also announced it would reduce its global workforce by 15% (15K workers), with the majority of the cuts in 2024. Intel's share price fell by over 25% on Friday.

US ISM manufacturing - a survey of manufacturing companies to gauge current and expected business conditions - fell by more than expected in July. Of particular concern was the sharp fall in the employment subcomponent to the lowest level since the the pandemic. On Friday, the US labour report for July cemented these worries as it was much weaker than expected.

By contrast, Eurozone Q2 GDP showed that activity continues to recover, rising by 0.3% q/q, above market expectations and matching the Q1 outturn. This was driven by strength in Spain (0.8% q/q) and France (0.3%), and was also helped by Ireland (1.2%). Activity in Germany declined by 0.1%, down from a 0.2% rise in Q1 amid falling investment.

Early last week, the Fed left policy unchanged at its meeting last week, as expected. However, Chair Jay Powell seemed to put more emphasis on the potential for slowing activity and stated that a rate cut "could be on the table as soon as the next meeting in September".

At the back end of last week, things shifted somewhat. Weak US manufacturing data was followed on Friday, by a poor US labour report for July led investors to fear that the US economy may be weakening. Bond yields fell across the board with the short end falling dramatically, leading to the yield curve 'un-inverting' itself for the first time since 2022 (bond prices rise as bond yields fall) .

Last week, the US Treasury 10-year yield fell by around 21bps last week to 3.99% and the equivalent Bund falling by some 24bps to 2.16%. Both yield levels are the lowest since February.

Mondays' market reaction led analysts to expect two rate cuts from the Fed in September and 3 full reductions by the ECB before the year is out. However, despite this sentiment, yields on Monday didn't seem to shift dramatically to reflect these views and Fed officials moved yesterday to reassure investors that the US economy is not in a recession.

Meanwhile, Eurozone headline inflation accelerated marginally in July to 2.6% y/y, from 2.5% in June, while core inflation was unchanged at 2.9%. This suggested that inflation remains somewhat sticky.

This week, focus will be on how markets react to Mondays' volatility. Asian markets rebounded on Tuesday trading with the Topix up over 9% at time of publication.

Otherwise, the data calendar is very light, with the main data point today's Eurozone retail sales as a gauge of demand conditions in the region. Q2 earnings are likely to remain a focus, with Caterpillar, Airbnb and Siemens reporting. Overall, the market is likely to continue digesting the movements and data of the past few days to assess the economic and policy outlook.