Global stocks witnessed a decline on Monday, as inadequate business activity data and an inconclusive Spanish election outcome affected European sentiment, ahead of a week abundant with central bank meetings.
The contraction of business activity in Germany in July suggests an increased risk of a recession in the latter half of the year, as indicated by the German Flash Composite Purchasing Managers’ Index (PMI).
Date: July 24, 2023
Place: New Delhi, India
The eurozone’s Flash Composite PMI from HCOB, which serves as an effective measure of overall economic health, experienced an eight-month low in July, sliding to 48.9 from 49.9 in June.
The uncertain outcome of Spain’s sudden election on Sunday, coupled with these economic indicators, cast gloom over European markets at the start of the week.
The euro weakened by 0.4% against the dollar, bond yields across the continent saw a slight decline, while European stock markets experienced a dip, with Spain’s benchmark index experiencing a clear underperformance with a drop of over 1%.
The global markets displayed cautionary tendencies this week with upcoming meetings of the Federal Reserve, European Central Bank, and the Bank of Japan.
“The FOMC and the ECB’s forthcoming meetings are expected to lead to a 25 basis points rise in rates from both institutions, complemented by hawkish forward guidance,” Bruno Schneller, Managing Director at INVICO Asset Management, stated. He also suggested that future hikes in September would largely depend on the direction of growth and incoming inflation data, while pointing out that a significant slowdown in U.S. economic GDP growth was anticipated, leading to a halt in rate increases.
The Bank of Japan, which has a meeting scheduled for Friday, is expected to maintain its current super-loose policy. However, some Western banks have speculated adjustments to their yield curve control stance.
Reuters reported last week that BOJ policymakers are inclined to scrutinize additional data to ensure consistent wage and inflation rate increases before adjusting policy, although the decision could be close.
Asian stock markets displayed mixed performance, with Japan’s Nikkei making a 1.2% gain, while MSCI’s comprehensive index of Asia-Pacific shares outside Japan dropped by 0.5%.
China’s Politburo meeting this week could potentially announce more stimulus, although investors’ reactions to Beijing’s efforts to boost a stuttering post-pandemic recovery have been tepid.
Chinese blue-chip stocks declined by 0.4%, with property developer Country Garden experiencing a slide due to debt concerns.
Political Deadlock in Spain
Spain witnessed a political impasse on Monday as right-wing parties were unable to secure a decisive victory in Sunday’s national election. The responsibility of decision-making now falls upon small regional parties in Basque and Catalonia.
This resulted in Spain’s benchmark IBEX index experiencing a drop of over 1%.
Major Spanish banks including Santander, BBVA, Sabadell, and Caixabank observed stock declines ranging between 1.5% and 3.3%, placing them amongst the largest losers across the European stock market.
“While the election outcome may not forecast a dim long-term future for Spain, the present uncertainty is what markets dislike,” commented City Index strategist Fiona Cincotta.
Earnings Announcements Awaited
Investors brace themselves for a flurry of earnings announcements from global corporations alongside central bank meetings and economic data.
A litany of major companies such as Alphabet, Meta, Intel, Microsoft, GE, AT&T, Boeing, Exxon Mobil, McDonald’s, Coca-Cola, Ford, and GM are scheduled to report this week.
“The current market performance is due to the most narrow leadership seen in the past 30 years,” added Schneller from INVICO Asset Management, asserting that the S&P 500’s YTD returns of approximately 16.5% can be accredited to just 31 stocks.
Yields on 10-year Treasuries remained steady at about 3.82%, still below the recent surge high of 4.094%.
The U.S. dollar softened by 0.25% to 141.48 yen, following a 1.3% leap on Friday after the report on the BOJ.
Following the weak PMI data, the euro slid around 0.4% to $1.1082 while government bond yields across the eurozone fell.
Oil prices made a recovery from previous losses with Brent trading roughly flat on the day at $81 and U.S. crude similarly unchanged at around $77. [O/R]
(Contributions by Nell Mackenzie and Dhara Ranasinghe in London; Additional contributions by Wayne Cole in SYDNEY and Amanda Cooper in London.)
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Source- Reuters, Yahoo News, The Print
