Shaw and Partners

It was a tumultuous week for equities although indices managed to recoup the majority of losses. US markets plunged on Monday, building on the decline seen at the end of the prior week following the jobs report which sparked concerns about the US economy and whether the Federal Reserve may have been too slow to begin cutting interest rates. Tech names were some of the hardest hit from the rout. The VIX volatility index briefly jumped to its highest level since March 2020, and the S&P 500 was dangerously close to correction territory. Equities managed to bounce on Tuesday and then fluctuated between losses and gains through the week.

Some support was found in the latest economic data, with ISM’s services Purchasing Managers’ Index (PMI) moving back into expansionary territory for July while weekly jobless claims fell more-than-expected for the week ended 03 August. Overall, the S&P 500 ended marginally below the flatline, the Nasdaq Composite fell 0.2% and the Dow Jones Industrial Average lost 0.6%. Meanwhile, Treasury yields ticked up over the week with the 10-year yield gaining for three sessions and ended the week at 3.943%.

Japanese markets also fell victim to the heightened volatility. Another key factor in the market sell-off was the aftermath of the previous week’s interest rate hike from the Bank of Japan, coupled with a stronger yen prompting traders to unwind their yen carry-trade. As a result, Monday saw the Nikkei 225 plunge over 12% in its biggest one-day percentage drop since the October 1987 market crash, with the yen at a seven-month high against the US dollar. The equity index staged a comeback the following session, jumping 10%. Further support came from comments from deputy governor Shinichi Uchida which signalled that the Bank of Japan wouldn’t raise rates imminently, a dovish contrast to comments made the prior week from Governor Ueda. Ultimately the Nikkei ended the week 2.5% lower while the yield on the 10-year Japanese government bond ended down at 0.86%.

European equities were unable to avoid the sell-off at the beginning of the week. However, after Monday’s slump the benchmark index was able to record four consecutive sessions of gains with recession fears calming and investors looking to buy the dip. For the week the pan-European STOXX 600 ended 0.3% higher. Regional performance was more mixed with France and Germany seeing slight gains, UK and Swiss indices were little changed while Italy was lower.

In China, the Shanghai Composite lost 1.5% for the week on mixed economic data for July. The consumer price index rose more-than-expected however, factory gate prices remained persistently deflationary. Meanwhile imports rebounded from June’s decline, but exports came in lower-than-expected pointing to sluggish demand. In Hong Kong, the Hang Seng managed to notch a 0.9% rise. There was also particular strength seen in Latin American indices for the week. Brazil’s Bovespa was up 3.8%, despite inflation accelerating in July and state-owned oil major Petrobras slumping after its quarterly results.

Weekly macro highlights

US ISM services PMI expands in July

The US ISM services Purchasing Managers’ Index (PMI) rose from 48.8 in June to 51.4 in July, jumping above the 50 level that separates expansion and contraction. The data was above market expectations for an increase to 51.0 and reflected an expansion in the business activity index, which rose from 49.6 to 54.5, and the new orders index, which rose from 47.3 to 52.4. The employment index rose from 46.1 to 51.1 in July, indicating growth for just the second time in 2024, with five months of contraction following the previous expansion in January. Survey respondents noted increasing costs, a detail which was corroborated by the prices index rising from 56.3 in June to 57.0 in July, indicating a faster rate of price growth. The July price index reading was the twenty-fifth in a row near or below 70, following ten consecutive months of readings near or above 80 from September 2021 to June 2022.

Chinese inflation increases in July

Chinese consumer price index (CPI) inflation rose 0.5% month-on-month (MoM) in July, above market expectations for a 0.3% increase and rebounding from the 0.2% decline registered in June. July’s MoM inflation contributed to a year-on-year (YoY) reading of 0.5%, rising from the 0.2% YoY print in June. The increase predominantly reflected food prices ending a twelve-month deflation streak, rising from -2.1% YoY to 0.0% YoY in July and thus no longer acting as a drag on overall inflation. The main drivers behind the rise in food inflation were increases of 20.4% and 3.3% YoY respectively for pork and vegetable prices, having registered 18.1% and -7.7% YoY inflation respectively in June. Contrasting the higher food inflation, non-food inflation eased from 0.8% YoY to 0.7% YoY in July. Transportation facilities remained in deflation for the twenty-fifth consecutive month, registering a 5.6% YoY price decrease as price competition in the auto sector continues to drive down vehicle prices.

UK Halifax house price index rises in July

The UK Halifax house price index rose 0.8% month-on-month (MoM) in July, above market expectations for a 0.3% increase. July’s data represented a rebound from the 0.1% and 0.2% MoM declines registered in May and June respectively. The average property in the UK now costs GBP 291,268, a more than GBP 2,200 increase on the GBP 289,042 average in June. In year-on-year (YoY) terms, the index was up 2.3% in July, its highest rate since the 2.5% YoY increase recorded in January 2024. Halifax highlighted that mortgage rates have recently declined and the Bank Rate cut by the Bank of England in August will provide encouragement for those looking to remortgage, purchase a first home, or move along the housing ladder. Nonetheless, affordability constraints and lack of housing inventory provide headwinds to prospective homeowners. Accounting for these factors, Halifax anticipates UK house prices will continue a modest upward trend throughout the remainder of 2024.