The past week has seen an increase in geopolitical tensions, which finally had an impact on crude oil, neutralizing the most recent series of losses. Brent crude dropped to 78 USD, then rebounded to 81.5 USD. However, the increase is temporary, as the price fell below the 80 USD mark the day after events in the Middle East. Wall Street is dominated by declines. The SP500 managed to drop below local lows and the index is at its lowest since June 14th. Dow Jones traced a double top formation. Nasdaq100 technology is also in retreat. We have just seen the quarterly results of media companies making up the “Magnificent Seven”. Most of their prices, however, are still in technical correction.
In Japan, the central bank has raised interest rates for the second time, the Bank of England has lowered them, and the Fed has prepared the ground for a reduction in the cost of money in September. Yields on American bonds fell sharply. 2-year bonds are at their lowest levels since May 2023. After the last FOMC meeting, the market fully priced in three moves by the Federal Reserve this year (September, November, December). Eurodollar momentarily fell below 1.08 before bouncing back sharply after a weak NFP report. Gold is heading towards historical records.
The killing of the Hamas leader in Tehran, more specifically reports of Iran planning to retaliate, has injected some nervousness into the oil market. The market is beginning to fear that the conflict will extend to neighbouring countries. Concerns also arise about the Strait of Hormuz and its potential blockade. It accounts for 15 to 20 percent of the world’s oil supply. The one-day rise in oil prices was impressive, though the end of the week saw sellers reassert their dominance.
Underpinning these fears is also the rise in demand from the US, with the latest data pointing to a sharp drop in oil and petrol stocks. This is down to summer travel. On the other hand, a disappointing ISM report for American industry has fueled concerns about demand in the coming months.
Similarly, the data mentioned earlier have sparked fears about the health of the US economy. The ISM index dropped to its lowest figure since February. One could argue that this sector is currently experiencing a downturn globally. Europe’s PMI indicators are consistently below the crucial 50-point level, and Chinese counterparts are also on the decline.
Once again, the labor market is showing signs of slowdown. This time they are pronounced. The non-farm sector only increased by 114,000, far below the projected figure of 175,000. The previous reading was revised downwards – a bad sign. The unemployment rate unexpectedly jumped to 4.3 percent, compared to an expected steady level of 4.1 percent.
Powell admitted that inflation risks are not the only important factor anymore. The Fed is increasingly focusing on the job market, stating that it is beginning to balance the dual mandate. This means that the Fed is no longer only concentrating on CPI and PCE data but is also closely monitoring employment figures. It could be argued that the Fed is noticing a warning sign flashing in the economy and does not want to slow down further. This is why a September easing of monetary conditions is a viable option for decision-makers.
In theory, Wall Street should benefit from the prospect of interest rate cuts, which is generally good news for stock markets. However, it’s likely that these have already been largely priced in, resulting in a contrary reaction. There are now growing anxieties over a slowdown in the US economy. The market now sees that the Fed is noticing and highlighting this more and more. This nervousness is illustrated by the rise in the VIX index to over 20 points, reaching its highest point since April when risk aversion was driven by geopolitics.
In the week of July 19-23, Alphabet and Tesla disappointing earnings drove down their stock prices. Tesla’s shares experienced a sell-off of over 12%, representing the largest single-day drop since 2020. Microsoft disappointed with Azure’s cloud revenue. Meta Platforms brought in some optimism with better than expected Q2 results, which led to a bounce in stock prices at the opening of Thursday’s trading. Apple also had a positive post-session trading following good earnings – a 5% YoY increase.
Amazon’s shares struggled after the results, possibly due to weaker revenue in the last quarter and disappointing forecasts for the following months. Nvidia, a principal AI player, will release its report at the end of August. Stocks of all these companies are undergoing technical corrections. Elon Musk’s company is the furthest from its historical highs, while Zuckerberg’s is the closest. Investors are starting to see that investment in AI infrastructure is growing and that it will take some time to see returns. The software-related business is slowly slowing down, and the chip manufacturing sector is gaining, as evidenced by the (temporary) “rocketing” of AMD shares.
This analysis was provided by Łukasz Zembik from Oanda TMS Brokers.
Source: https://ceo.com.pl/gospodarka-usa-dostaje-powaznej-zadyszki-geopolityczne-napiecia-podgrzewaja-rynki-34716
