Last week, global equities finished a rather lacklustre week lower, closing down slightly overall. Regionally, the S&P 500 Index closed the week down 0.3%, the STOXX Europe 600 Index was flat, whilst the MSCI Asia Pacific underperformed, down 1.7%.1 Rotation out of cyclicals and into defensives was noticeable globally, with continued poor Chinese macroeconomic data viewed as the key driver.
The US July Consumer Price Index (CPI) report was much anticipated but failed to provide much impetus either way, coming in in line with expectations. In Italy, a surprise banking tax brought volatility to the Italian banking space. Also, EU gas futures were up over 22% last week on news of a threat of strikes at Australian terminals.
The notable takeaway from the latest Bank of America “Flow Show” report was the further US$20.5 billion into money market funds. That makes US$145 billion of flows into cash so far in the third quarter, a faster rate of inflows than in in the second quarter, which indicates to us that long-only investors are still seeking safe spaces. There were also strong inflows into US Treasuries, with US$127 billion year-to-date. If we annualise that pace of inflows, it comes to US$206 billion, a record.2
US equity funds saw their first inflow in three weeks, with US$1.6 billion. European-focused equity funds recorded their 22nd consecutive week of outflows, shedding US$3.5 billion. Meanwhile, emerging market equity funds received US$6.0 billion, marking five straight weeks of inflows.3
Week in review
European equities finished last week roughly flat, despite a choppy week on low volumes.
Sector performance was mixed last week as defensives outperformed cyclicals. Health care was the leading sector last week, as Novo Nordisk’s SELECT trial data came in better than expected. Insurers were also higher on the back of positive earnings and following some recent underperformance. At the other end, basic resources were the notable underperformer following weak Chinese economic data. Autos were also weaker as cyclicals were sold last week.
Banks were also in focus last week on reports that the Italian government planned to propose a one-off 40% tax on excess net interest income in 2022 and 2023, payable in 2024. This led Italian bank stocks lower on Tuesday. More broadly, the FTSE MIB was down 2.1% on the day, whilst the overall European banking sector finished Tuesday down 2.7%.4
After the market closed, there were reports the Italian government was backtracking on the initial announcement, applying a cap of 0.1% of total assets. This would lessen the impact quite markedly, offering the sector some relief. With that, the sector recovered some ground on Wednesday, although still closed lower on the week.
As noted, EU gas futures rallied last week on reports of potential strikes in Australia. However, stockpiles are rising in Europe and are currently above a 10-year high.5
US equities were mixed last week, with markets lacking any clear direction. The Dow Jones Industrial Average closed the week up 0.6%, whilst the S&P 500 Index was down 0.3% and the tech-heavy Nasdaq was down 1.6%.6 US cyclicals underperformed defensives.
Federal Reserve (Fed) speak was mixed as Philadelphia Fed Bank President Patrick Harker noted the potential for rate cuts next year, whilst San Francisco Fed Bank President Mary Daly said the Federal Open Market Committee (FOMC) still had work to do to fight inflation.
On that note, the latest US CPI report came in largely in line with expectations at +0.2% on the month in July. The headline annualised CPI came in a little softer than forecast at 3.2%, but still higher than the 3.0% reading in June. The details showed more than 90% of the increase on the overall CPI was due to housing costs that have otherwise moderated since the start of the year. Used car prices fell for a second month, while airfares posted the biggest back-to-back declines since the start of the pandemic, down 8.1% on the month, and now down for a fourth straight month.
The rotation out of cyclicals was evident in overall sector moves last week, with health care and utilities amongst the outperformers and materials and technology stocks the key laggards. Energy stocks extended their recent rally last week, with help from a gain in oil prices. Banks were also in focus last week as ratings agency Moody’s downgraded 10 small/mid-sized US lenders on mounting funding costs and office exposure. Moody’s also put a host of other banks on watch, alerting investors.
Whilst there are still a few notable companies left to report, quarterly earnings season is starting to wind down, with nearly 90% of the S&P 500’s market capitalisation having reported. Overall, earnings have beaten expectations. More globally orientated S&P 500 companies are experiencing a greater decline in earnings-per-share growth than their more domestically focused peers.
Last week was down overall for equities in Asia. The MSCI Asia Pacific Index closed down 1.66% as the usual themes of a China economic slowdown, real estate weakness and Japan’s continued focus on yield curve control policy all weighed on sentiment.
On Friday, Japan’s market was closed Friday for Mountain Day, so there was a short trading week. There was a rotation out of cyclicals into defensives, with pharmaceuticals, food and utilities outperforming and precision instruments, banks and electric appliances underperforming.
Stocks tied to Japan’s reopening and inbound tourism jumped on Wednesday and Thursday after news that China would approve the resumption of Japan-bound group tours.
All eyes were on earnings last week as it was the peak of quarterly earnings announcement before the long weekend and Obon festival. However, volumes were surprisingly light, despite high volatility on the back of busy earnings.
The Japanese yen weakened against the US dollar, with the dollar trading up through 144 yen on Friday amidst the interest-rate differential between the two countries.
On the economic front, the consumer goods price index rose 3.6% year-over-year in July, marking the seventh straight month of slowing wholesale inflation. Also, wage growth unexpectedly slowed in June. These two indicators seem to support the Bank of Japan’s accommodative stance.
Last week was poor for Chinese markets, with Shanghai’s benchmark equity index closing the week down 3.01%. A few things continue to impact the market.
Inflation data showed that consumer and producer prices fell in tandem, highlighting the weak demand throughout the economy and raising concerns that China may be about to enter a deflationary period, despite recent statements from the Politburo on plans to boost the economy.
Authorities resumed travel groups to a range of countries including Japan, South Korea and the United States.
Regulatory crackdowns continue in China, with the pharmaceutical and health sectors the latest to face increased scrutiny from regulators. In addition to the focus on properties and financials, technology companies will catch some investor attention this week, as earnings from Tencent, Meituan, JD and Trip.com are expected.
The real estate space continues to be a major concern, as Country Garden missed interest payments on a couple US dollar bonds. The company announced on Friday that it’s facing record first-half losses, due mainly to rising costs and higher refinancing costs.
Softer trade and lending data was released last week, again highlighting the slowdown in the economy.
New bank loans rose less than expected in July, which could prompt the government to increase stimulus measures in the near term.
This week, Chinese banks report earnings, with investors likely to be interested in the exposure to the property sector as well as any commitments that have been made to support the economy more broadly.
Hong Kong’s equity market largely mirrored that of mainland China, closing lower last week on concerns that the downturn in China’s property market will persist and the slowdown in economic growth will deepen.
Chinese property developers weakened on the Country Garden concerns noted, whilst the auto sector sold off on softer China Passenger Car Association (CPCA) data and concerns of a price war in the electric vehicle space.
Health care firms plunged on the back of increasing government control and a continued anti-corruption campaign.
Macro week ahead highlights
This week, inflation is in focus with reports from the United Kingdom, Sweden, Japan, and a second reading of eurozone inflation in July. If core inflation remains elevated in the United Kingdom and Europe, the markets are likely to price in central bank rate hikes this fall. The latest UK unemployment release is also likely to attract attention—with an eye on wage inflation. Markets will also have an eye on a key sentiment survey in Germany.
Monday 14 August
- Germany July Wholesale Prices
Tuesday 15 August
- UK labour market statistics
- Germany ZEW survey
- US: Retail Sales Advance/Ex-Auto & Gas/Control Group (July), Export/Import Price Index/Ex- Petroleum (July), Empire Manufacturing (August), Business Inventories (June), NAHB Housing Market Index (August)
Wednesday 16 August
- UK CPI Inflation
- Euro-area Industrial Production (IP)
- US Mortgage Applications, July Housing Starts, IP, August New York Fed Services Business Activity, FOMC Meeting Minutes
Thursday 17 August
- Spain June Trade Balance
- Norges Bank policy meeting
- US Initial Jobless Claims, August Philadelphia Fed Business Outlook, July Leading Index
Friday 18 August
- Japan July CPI
- UK Retail Sales
- Euro-area final CPI inflation
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. BofA Global Investment Strategy, EPFR.
4. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
5. Source: Bloomberg, as of 12 August 2023.
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