On Wednesday, the United States (US) Federal Reserve (Fed) raised the target range for the federal funds rate by 25 basis points. The move was aligned with market expectations and has brought US borrowing costs to their highest level since January 2001. The decision was made as policymakers remained vigilant about the US’s economic outlook and stated their readiness to adjust monetary policy if risks to inflation and employment goals emerge. The tightening campaign resumed after a pause in June, with the Fed noting a moderate rate of economic expansion, robust job gains, low unemployment, and elevated inflation. In the week ending 22 July, the number of Americans filing for unemployment benefits declined by 7,000 to 221,000, the lowest number in five months and well below market expectations of 235,000. Continuing claims also dropped significantly by 59,000 to 1,690,000 in the previous week, their lowest since January, indicating a swift reemployment of jobseekers, and a continuing tight labour market. The US economy exhibited resilience, with a GDP growth rate of 2.4% in the second quarter, surpassing market expectations of a 1.8% expansion, despite the challenges brought on by high interest rates.
The ECB raised interest rates by 25 basis points on Thursday, making it the region’s ninth consecutive rate hike. Despite a recent slowdown in inflation, the ECB expressed concerns that it remains persistently high. As a result, the rate on main refinancing operations now stands at 4.25%, its highest level since October 2008, while the rate on the deposit facility reached 3.75%, its highest level in over 22 years. The ECB, however, has committed to a “data-dependent approach” for future rate decisions, aiming to keep rates at sufficiently restrictive levels until inflation returns to its 2% target. Since starting its tightening cycle in July 2022, the ECB has implemented an unprecedented 425 basis point increase in rates, marking the fastest tightening pace in its history. Meanwhile The HCOB Eurozone Composite Purchasing Managers’ Index (PMI) declined to 48.9, marking a drop from the previous month’s reading of 49.9. This figure came in below market expectations of 49.7, as indicated by a preliminary estimate. The latest PMI reading revealed a notable contraction in business output, reaching its sharpest decrease since November of the previous year. The downturn was fueled by a sharp decline in new business inflows, the most substantial drop seen in eight months.
EQUITY MARKETS REMAIN ROBUST
On Thursday, US stock markets were down, ending the Dow Jones’ 13 consecutive sessions of gains. Investor sentiment has been buoyed by economic data readings and strong corporate earnings results. Meta Platforms, the parent company of social media giant Facebook, rose by around 8% following strong earnings and profit reports, accompanied by a better-than-expected forecast for the current period. Fellow global tech company, Comcast, also experienced significant gains, jumping over 6.5% after surpassing earnings and revenue expectations. McDonald’s joined the rally, rising approximately 1.4% after the fast-food company’s sales exceeded forecasts. Additionally, financial services company, Mastercard, demonstrated positive performance, up 0.2%, as it delivered robust revenue and earnings growth. Looking ahead, semiconductor company Intel, motor manufacturer Ford and telecommunications company, T-Mobile, are scheduled to report their earnings today after the closing bell, further adding to market anticipation and sentiment.
The FTSE 100 saw gains on Thursday, with investors closely examining quarterly corporate results and interest rate decisions. Marketing and information company, Informa’s shares rose by 4.1%, driven by strong bookings and China’s economic recovery, positioning the company to meet its full-year forecasts. Energy services company, Centrica, was up 7.5% after announcing a significant dividend hike and posting higher first-half profits. However, petroleum giant, Shell, faced a setback, with its shares retreating by around 1% following a 56% drop in second-quarter profit. Similarly, Barclays saw a decline of more than 5% as the bank fell short of expectations for its investment banking unit, leading to concerns about business pressures in the UK.
European shares also continued their upward trajectory on Thursday afternoon, with Frankfurt’s DAX 40 rising by approximately 1.7% to reach a near six-week high of 16,320 points. Investors were digesting the latest policy decisions from both the ECB and the Fed, as well as a bunch of earnings releases. On the corporate front, several companies made notable announcements that captured investors’ attention. Food and beverage giant, Nestle, improved its full-year organic sales outlook, while vehicle manufacturer, Renault, achieved its largest-ever operating margin. Aeronautics company, Airbus, surpassed expectations with higher-than-anticipated underlying operating profit and reaffirmed its financial goals for the year. However, there were mixed results in some sectors.
On Thursday, Japan’s Nikkei 225 Index showed a strong performance, rising by 0.68% to close at 32,891, while the broader TOPIX Index gained 0.53% to reach 2,295. Both indices achieved their highest levels in three weeks, driven by investors’ reactions to the Fed’s policy decision, which was met with positive sentiment among investors, propelling the Japanese markets higher. The technology sector led the charge, with impressive gains from companies such as Tokyo Electron, SoftBank Group, Capcom Ltd – up a staggering 15.1%, Renesas Electronics, and Keyence. Other heavyweights in the index also made significant advances, including Disco Corp, Fast Retailing, Mitsubishi UFJ, Kawasaki Kisen, and Nidec Corp. Overall, the upbeat market sentiment and strong performances from key sectors and companies contributed to the notable rally in the Japanese stock market on Thursday.
COPPER AND OIL CELEBRATE CHINESE STIMULUS
On Thursday, West Texas Intermediate Crude futures surged above $79.00/barrel, reaching a near three-month high achieved earlier in the week. This impressive rally was driven by expectations of tighter global supply and a resurgence in Chinese demand, which provided significant support to the market. The recent increase in oil prices, totalling more than 10% this month, can be attributed to voluntary output cuts implemented by major oil-producing countries like Saudi Arabia and Russia. Additionally, indications from the expanded Organization of the Petroleum Exporting Countries, OPEC+, of their readiness to take further action further bolstered market sentiment. Chinese authorities’ commitment to strengthening policy support to boost their economy also contributed to a positive outlook for the world’s largest crude importer. However, oil prices experienced some pressure on Wednesday following the Fed’s decision to raise interest rates by 25 basis points. This move raised concerns about overall demand in the market.
Gold experienced a decline on Thursday, wiping out its early gains and falling below $1,950/ounce. This retreat came after the precious metal reached a two-month high of $1,980 on 18 July. The drop was fuelled by the release of robust economic data, strengthening the case for the Fed to raise interest rates in September. In response to this encouraging data, the US central bank raised its funds rate by 25 basis points to 5.5%. Additionally, the Fed kept the possibility of future rate hikes open, further influencing the direction of gold prices.
Copper futures climbed towards the $3.90/pound threshold, reaching their highest level since 14 July. The surge was fuelled by expectations of a demand rebound, driven by Chinese government’s commitment to providing further economic support. Beijing’s plans to bolster economic policy adjustments, with an emphasis on expanding domestic demand and supporting private investment, contributed to the positive outlook. Additionally, efforts to develop underdeveloped areas in megacities were unveiled by China’s state planner. Furthermore, concerns about supply shortages also played a role in the price surge. In May, copper output in Chile, the top producer, declined by 14% year-on-year, raising potential concerns about supply constraints. As copper plays a vital role in the world’s transition to sustainable energy sources, these supply issues have added to the upward pressure on prices.
POUND STRENGTHENS POST FED AND ECB RATE INCREASES
The US dollar index surged above 101 on Thursday, rebounding from earlier losses, as key data supported the possibility of the Fed extending its tightening campaign in the upcoming September meeting. Yesterday, Fed Chair, Jerome Powell, emphasised the Central Bank’s data-dependent approach going forward, indicating that any further decisions to raise borrowing costs have not been finalised. The rise in the dollar was driven by robust economic data, signalling the possibility of additional rate hikes by the Fed in the future. Powell’s comments on the Central Bank’s approach added to the market’s anticipation for further tightening measures.
The euro initially gained ground but later traded around $1.10/€ as the US dollar strengthened following a positive GDP growth figure for the US. As expected, the ECB implemented another 25-basis point increase in borrowing costs and emphasised its data-dependent approach for future decisions. ECB President, Christine Lagarde, mentioned that a pause or hike, but not a cut, should be anticipated for upcoming meetings, with data guiding the Central Bank’s actions. Despite signs of weakness in the eurozone economy, inflation remains significantly above the target, prompting policymakers to acknowledge that inflation is expected to remain high for an extended period. Flash PMI (purchasing managers’ index) surveys for July revealed the most substantial contraction since November 2022, with manufacturing experiencing a sharp decline not seen in over three years.
The pound strengthened, reaching above $1.29/£ and nearing a 15-month high of $1.314/£ achieved on 14 July. The move was influenced by the Fed’s rate decision on Wednesday. However, Fed Chair Powell’s dovish tone during the press conference and uncertainty about future rate hikes contributed to the pound’s appreciation. Looking ahead, the Bank of England (BoE) is also anticipated to raise interest rates by 25 basis points next week. However, weaker-than-expected PMI data and a reduction in inflationary pressures in the UK have raised doubts about the need for higher interest rates as initially projected. As a result, the BoE might not have to implement rate increases to the extent initially anticipated. Overall, the pound’s strength was driven by the Fed’s cautious stance on future rate hikes, while upcoming decisions from the BoE are being influenced by recent economic data and inflationary pressures.
The pound started the day trading at 1.2796/$ and 1.1654/€.
Sources: Trading Economics, Refinitiv and News 24.
Written by Citadel Global Director, Bianca Botes
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