Flash crash in Japan
César Pérez Ruiz, Chief Investment Officer, Pictet Wealth Management.
THE WEEK IN REVIEW
It was a topsy-turvy week for risk assets, but after a tumultuous start, investor sentiment steadied somewhat and bargain buyers emerged to ensure the S&P 500 finished it basically flat. Fears the US economy was heading for recession were assuaged by good data on services activity and weekly unemployment claims. After dipping over 12% on Monday, assurances from the Bank of Japan that it would not raise rates again while markets remained unstable limited the Topix’s weekly loss to 2.1% i (in yen), with a noticeable rebound in the performance of Japanese banks. The BoJ’s comments also took the heat out of yen strengthening, while the defensive Swiss franc gave up some of its gains against both the euro and US dollar. In bonds, a weak 10-year auction and a dialling back of aggressive market pricing of monetary easing pushed US Treasury yields higher. Investment-grade credits in the US had a poor week in unison with Treasuries. But their noninvestment-grade peers finished higher and spreads tightened.
QUOTE OF THE WEEK
“As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” Bank of Japan Deputy Governor Shinichi Uchida said on Wednesday.
KEY DATA
Consumer prices in China rose for the sixth consecutive month in July, when they climbed at an annual 0.5%. By contrast, the producer price index fell by an annual 0.8%, the 22nd consecutive month of contraction. Chinese exports rose by 7.0% in July from a year earlier (down from 8.6% in June), while imports rose 7.2% in July, rebounding from a 2.3% fallin June.
The US ISM Services index rose from 48.8 in June to 51.4 in July, suggesting an expansion in activity. The US trade deficit narrowed to USD73.1 bn in June, reflecting a 1.5% rise in exports versus a 0.6% rise in imports.
German industrial production increased by 1.4% in June month-on- month (m-o-m) but was still down 4.1% from June 2023. Industrial orders rose 3.9% m-o-m in June, a significant rebound from the 1.4% decline in May.
MARKET VIEW
US inflation and retail sales data will be key this week for a readout on the health of the economy after last week’s growth scare. Themarket correction was more technical than systemic and resembles the selloffs seen in 2015 and 2018, when there were also growth scares. We do not expect a recession and see the Fed cutting by 25 bps three times this year, starting in September. On the fiscal side, weak Treasury sales last week mean auctions warrant watching in the coming months if deficits remain at high levels.
In equities, a weaker outlook from a home rental company on slower demand underlines our theme of moving from consumer to producer stocks. Plans by a Japanese tech investor to purchase its own shares reinforce another of our themes, investing in companies that pursue buybacks.
Overall, we expect the current period of market uncertainty and volatility to persist,so there is norushto raise exposure. We remain neutral equities. In second quarter earnings, US companies led the way with 5% sales growth versus 2% in Europe. At the Olympics, the US came out on top too, leading the medals table with 126 in total. But combined, EU countries won 309.
