Fed cuts rates for the first time since 2008
The FOMC predictably lowered the Fed funds rate by 0.25 bps, taking the target range to 2.0-2.25%. It was the first interest rate cut in the last ten years. Moreover, the US Federal Reserve announced plans to end its quantitative tightening (balance-sheet reduction) program two months earlier than previously expected. “Information received since the Federal Open Market Committee met in June indicates that the labor market remains strong and that economic activity has been rising at a moderate rate,” the FOMC said in its statement. However, policymakers noted that growth of business fixed investment has been soft, while overall inflation is running below the 2% target. Fed Chair Jerome Powell told a news conference that the Fed was not about to start a long series of rate cuts, while the decision was just a “mid-cycle adjustment to policy” intended to improve US economic conditions. At the same time, he added that it may or may not be a one and done move. Notably, a market majority expected at least one other rate cut until year end. The 0.25 pps move failed to impress US President Donald Trump, who said that markets were looking for indications of a “lengthy and aggressive rate-cutting cycle”.
Eurozone GDP growth slows in 2Q
The 19-country Eurozone economy expanded 0.2% q-o-q and 1.1% y-o-y in the second quarter, preliminary Eurostat data show. The pace of economic growth decelerated in the first quarter from 0.4% and 1.2%, respectively. Meanwhile, experts believe that weak economic growth in Europe could be another reason for new stimulus on the part of the ECB. Last week the European regulator left its monetary policy unchanged but hinted that further easing is possible. Eurostat also said that Eurozone unemployment dropped from 7.6% in May to 7.5% in June, or the lowest rate since July 2008. Meanwhile, the euro-area’s inflation rate slowed to 1.1% y-o-y in July from 1.3% y-o-y in June, while the CPI Core dropped from 1.1% to 0.9%. It should be noted that the European Commission lowered its GDP forecast for the Eurozone from 1.5% expected earlier to 1.4% in 2020. The estimate for 2019 was left unchanged at 1.2%.
German retail sales jump sharply in June
German retail sales jumped 3.5% m-o-m in June, Germany’s federal statistical agency (Destatis) reported. This is the highest monthly pace since November 2001, while analysts on average forecast just a 0.5% m-o-m increase. At the same time, retail sales declined 1.6% y-o-y vs. an expected 2.7% y-o-y increase. Data exclude automobile and gasoline sales. To remind, in early June the Bundesbank reduced its two-year forecast for German GDP growth, pointing to deteriorating conditions in the industrial sector. In line with the German central bank’s estimate, GDP growth will slow down from 1.5% in 2018 to 0.6% in 2019 but growth will pick up to 1.2% in 2020.
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US: FOMC disappoints investors
Key US equity benchmarks took a pounding on Wednesday, July 31. Even though the FOMC expectedly cut the federal funds rate for the first time in a decade, market participants’ expectations about further monetary easing petered out. Moreover, many investors are disappointed that the key rate was reduced only by 0.25%.
At a post-meeting press conference, Fed Chair Jerome Powell noted that the federal funds rate was reduced as part of policy adjustments taking into account the negative impact of the trade conflict and slower growth of industrial output. However, he added that this action is not necessarily the start of a full easing cycle. This disappointed investors immediately.
As regards macro data, the ADP National Employment Report showed hiring of 156,000 in July, or slightly above the median consensus (155,000).
Recapping the indices, the Dow Jones Industrial Average decreased 1.23% to 26,864.27, the S&P 500 fell by 1.09% to 2,980.38 and the tech-focused Nasdaq Composite retreated 1.19% to 8,175.42.
In commodities, September NYMEX WTI rose 53 cents to USD 58.58/bbl, whereas August COMEX gold dropped by USD 3.60 to USD 1,426.10/oz. The 10-year US government bond yield ticked down 0.04% to 2.02%.
Among the top outperformers, Apple shares jumped 2% as quarterly earnings came in better than expected and the tech giant raised financial guidance for the rest of this fiscal year.
Insurer Humana spiked 4.3% after reporting adjusted EPS of USD 6.05 per share in the second quarter, or above the median consensus of USD 5.31 per share.
On the minus side, the world’s second-biggest microchip producer Advanced Micro Devices (AMD) tanked 10.1% after issuing weak revenue guidance for the current quarter.
In the blue-chip segment, most liquid names landed in the red, with the underperformers led by Microsoft (-2.9%), Verizon Communications (-2.4%) and UnitedHealth (-2.3%), while advancers, in addition to Apple, were only J.P. Morgan (+0.4%), Goldman Sachs (+1.2%) and Dow (+0.08%).
A long bearish candlestick has shaped up on the S&P 500 daily chart, while the Slow Stochastic Oscillator is set to exit overbought territory. As a result, the index could extend its descent in the short term.
Europe: benchmarks correct higher
Key European stock indices landed mostly in positive territory on Wednesday, July 31, despite patchy macro data and uncertainty surrounding the US-China trade talks. Notably, benchmarks corrected to the upside after Tuesday’s decline, while investors opted for a wait-and-see stance ahead of the announcement of the FOMC’s interest rate decision.
Yesterday’s meeting between US and Chinese negotiators ended early, with the outcome still unknown as neither party came out with any comments for the media.
As regards macro data, Germany’s unemployment rate stood at 5.0% in July, unchanged from the previous month and in line with the consensus forecast, while the country’s retail sales were down 1.6% y-o-y and up 3.5% m-o-m vs. expectations +2.7% y-o-y and +0.5% m-o-m.
In the Eurozone, the unemployment rate came in at 7.5% in June, while the July CPI (preliminary) clocked in at 1.1% y-o-y, with both indicators matching the median consensus. Furthermore, the Eurozone Q2 GDP (preliminary) predictably slowed to 0.2% q-o-q and 1.1% y-o-y. Recapping the benchmarks, the UK’s FTSE 100 slipped 0.78%, while the French CAC 40 firmed 0.14%, and the German DAX advanced 0.34%. The regional barometer STXE 600 closed 0.17% higher at 385.77.
On the upside, Credit Suisse and BNP Paribas gained 2.4% and 1.6%, respectively, on the back of upbeat quarterly earnings. Among the laggards, Lloyds Banking Group gave up 3.18% after reporting a decrease in H1 pre-tax profit, citing having had to take additional provisions to cover a batch of new PPI claims.
France’s Airbus Group added 0.3% after posting a 141% upsurge in H1 net income.
French perfume and cosmetics maker L’Oreal shed 2.2% as its half-year profit missed expectations.
Key European stock indices have been mostly on the rise during the first half of Thursday, August 1, on the back of gains in financial services names sparked by upbeat earnings from Barclays и Standard Chartered.
Moreover, benchmarks are drawing support from incoming macro data. Specifically, the July manufacturing PMIs for the UK and Germany outpaced expectations, while the same indicator for the Eurozone stood at 46.5, up from 46.5 in June, vs. 46.4 expected.
By 9:12 GMT, the UK’s FTSE 100 edged down 0.08%, the German DAX firmed 0.33%, and the French CAC 40 rose 0.55%. The regional barometer STXE 600 was up 0.10% at 386.16.
The daily chart shows that the German DAX continues to trade close to the lower line of Bollinger bands, while the Slow Stochastic Oscillator has entered oversold territory. As a result, the benchmark will likely correct to the upside in the short term.
Asia: equities retreat after Fed funds rate cut
Asian stock indices turned in mostly negative dynamics on Thursday, August 1 in the aftermath of the US Federal Reserve’s interest rate decision. Notably, the regulator predictably cut the Fed funds rate by 25 bps, taking the target range to 2.0-2.25%. Moreover, the US Federal Reserve announced plans to end its quantitative tightening (balance-sheet reduction) program two months earlier than previously expected. Fed Chair Jerome Powell pointed out that the US economy and labor market remain robust, while monetary easing is intended to mitigate downside risks to growth.
On the macro data front, Japan’s net foreign investment came out, with the weekly inflow at JPY 37.5 bn compared to a JPY 109.9 bn outflow a week earlier. In South Korea, the July CPI decreased 0.30% vs. a flat reading projected. In y-o-y terms, the indicator rose 0.60% vs. the 0.85% consensus forecast.
In China, the Caixin manufacturing PMI clocked in at 49.9 in July, up from 49.4 in the previous month, while analysts, on average, expected 49.6. In Australia, Q2 import and export prices increased 0.9% and 3.8%, respectively.
The Japanese Nikkei 225 ticked up 0.09%, the Chinese Shanghai Composite fell 0.81%, Hong Kong’s Hang Seng retreated 0.76%, the South Korean KOSPI eased 0.32%, and the Australian S&P/ASX 200 closed 0.35% lower.
The S&P/ASX 200 standout advancers included Donver EDI and Nufarm, which surged 3.39% and 3.27%, respectively. On the other side of the ledger, Janus Henderson Group and Northern Star Resources sank 12.13% and 7.22%.
The Nikkei 225 gainers were led by Nomura and TDK, which soared 8.96% and 7.79%, respectively. Among the decliners, Toyo Seikan Group and Nippon Express tumbled 10.79% and 8.12%.
Japanese exporters enjoyed demand as the yen weakened. In particular, Toyota Motor, Honda Motor and Canon gained over 0.85%.
Nomura Holdings spiked 8.96% after reporting an increase in Q1 profit.
Takeda Pharmaceutical jumped 5.8% after reporting an 88.8% upsurge in quarterly revenue.
In the Australian banking sector, Westpac, National Bank of Australia, and Australia & New Zealand Banking ended in the green, while Commonwealth Bank closed marginally lower.
Australian mining giant Rio Tinto gave up 0.99% amid retreating iron ore prices.
From a technical standpoint, the Hang Seng has closed a bullish gap, reaching its lower line in the vicinity of 27,584.
Oil has extended losses on Thursday amid across-the-board deterioration in global financial market conditions. Investors were disappointed by the results of the FOMC’s July monetary policy meeting. Even though the regulator cut the federal funds rate for the first time since 2008, Fed Chair Jerome Powell did not rule out aggressive measures to ease monetary policy. Instead, he called the rate cut as “a mid-cycle adjustment to policy” which is designed to improve economic conditions in the country.
Some support came from Wednesday’s EIA petroleum status report, according to which crude inventories showed an 8.5 mn bbl drawdown, while analysts on average forecast just a 2.8 mn bbl contraction. Stockpiles declined for the seventh week in a row. Meanwhile, gasoline and distillates decreased by 1.79 mn bbl and 894,000 bbl, respectively. US oil output climbed by 900,000 bpd to 12.2 mn bpd. Crude extraction recovered virtually in full after a decline following Hurricane Barry in the Gulf of Mexico.
Non-ferrous metals have been on a downward trajectory on the LME, while gold reversed to the downside amid less dovish-than-expected FOMC statements, dropping below USD 1,420/oz.
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