The Stock Market Rout May Not Be Over

Stocks

Summary:

For a while on August 5, things were looking awful. During the Asian trading session...

For a while on August 5, things were looking awful. During the Asian trading session, Japan's benchmark Topix share index had fallen by 12 per cent, marking its worst day since 1987.

Stock prices in South Korea and Taiwan had tanked by 9 per cent and 8 per cent respectively, and European markets were falling.

Before trading began in America, the VIX index, which measures how wildly traders expect share prices to swing, was at a level it had only reached early in the COVID-19 pandemic and after Lehman Brothers collapsed in 2008.

Ominously, though gold is usually a hedge against chaos, its price was falling — suggesting that investors might be selling assets they would rather hold on to in order to stay afloat.

The previous week's rout in global markets seemed to be spiralling into a full-blown crisis.

Mercifully, the panic started to ebb once Wall Street opened for business. The VIX fell back to only its highest during the crash of 2022; by the end of the day, the S&P 500 index of large American firms was down by a painful, but not catastrophic, 3 per cent.

On August 6 European markets were fairly flat and Asian ones staged a blistering recovery, especially in Japan, where the Topix rose by 9 per cent. Half an hour after the opening bell had rung in New York, the S&P 500 was up by 1 per cent.

Traders may be able to pause for breath and a few hours' sleep. Even as they do so, however, one question looms large. Did markets simply succumb to a brief bout of summer madness, or is the worst still to come?

One clue to the answer is that what began as the unwinding of a few popular trades has now spread.

The early stages of the fall, which began in mid-July, were led by Japanese stocks, American big-tech firms and global companies in the chipmaking supply chain. They were triggered by a rapidly strengthening yen in the first case and evaporating euphoria over artificial intelligence (AI) in the next two.

On August 2 an unexpectedly weak American jobs report accelerated the plunge dramatically by suggesting that the world's biggest economy may be closer to recession than most had thought.

That still left room for a fair few winners. Even as America's headline indices sank, shares in companies such as Johnson & Johnson, Procter & Gamble and UnitedHealth enjoyed a bounce on the day of the jobs report. Such firms are in sectors well-placed to weather a downturn (pharma, consumer staples and health care, respectively), and pay healthy dividends, raising their value as the Federal Reserve becomes more likely to cut interest rates.

But by August 5 that was little help. Investors were ditching them alongside virtually every other stock in the S&P 500.

Such indiscriminate selling may well resume. Christian Raute, a trading-strategy boss at Citigroup, a bank, says that the breadth of the selling suggests that professional investors have received a "tap on the shoulder" from above, ordering them to reduce their risk no matter what they need to offload to do so. For large funds, that will take more than just a few days of sales.

In the meantime, other outfits will hesitate to buy even assets they think have become underpriced, fearing a behemoth somewhere still has a big position to dump into the market. The gut-churning drops, in other words, may be far from over.

Investors may be forced out of especially crowded bets for other reasons. Look at the astonishing speed with which the Japanese yen has strengthened in recent weeks, for instance, which is probably because of the unravelling of "carry trades". These involve borrowing yen cheaply and using the proceeds to buy other assets — perhaps a higher-yielding currency, such as the American dollar or Mexican peso, or even stocks.

But should the yen suddenly strengthen relative to the other asset, the trade quickly plunges into the red and may need to be terminated. Doing so involves selling the other asset and buying yen to pay back the debt, exacerbating the move and quite possibly forcing others into the same position, creating a vicious circle. If this generates a big loss, the investor may also need to exit other positions to meet it.

Some of the violent recent swings in the yen, Japanese and American stocks, and indeed the Mexican peso may thus be down to yen-based carry trades. Moreover, any popular trade that some investors have funded through borrowing can fall victim to the same sort of doom loop. Bets on firms linked to AI euphoria are a prime candidate.

The VIX index's hair-raising spike on August 5, caused by hordes of investors clamouring to buy insurance on the same stocks at once, suggests quite how crowded such positions are even after the recent unwinding. It also shows quite how much this crowding can move markets. And so there is plenty of potential for future sales, whether forced or voluntary, to cause further ructions.

The most dangerous escalation would come if the turbulence left a sizeable investment vehicle unable to raise the cash to meet margin calls or close loss-making positions. That is what happened to Archegos, a family office, in 2021, prompting fire-sales of its assets and losses for its banks stretching into the billions. At a bigger outfit, such a collapse could spread contagion across the market and imperil other firms.

As yet, "there is not sufficient pain to suggest a big player is in danger," says Citi's Mr Raute. "But if we see five more days of this, that may change."

Another cause for panic could come from bad news on the economy, or on the viability of the AI boom.

There are plenty of potential flashpoints before the summer is out. Around a quarter of firms in the S&P 500 are still due to report their second-quarter earnings. These include Home Depot and Walmart, barometers of American consumer sentiment, and Nvidia, on which the fortunes of AI investors everywhere depend. Inflation data released on August 14 will hint at whether the Fed can indeed cut rates by 0.5 percentage points in September, which many are convinced it must in order to stave off a recession. Given the carnage that followed the most recent jobs report, the next, on September 6th, is another obvious catalyst.

Even now America's stockmarket remains more expensive relative to firms' underlying earnings than at almost any point in history. Greed has given way to fear, and the bulls have taken a battering. But if valuations are to return to normality, there is still a long way to go.

Source: The Economist

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Thomas

Economic

Bond

The Malaysian ringgit's rally is luring global funds to buy more local bonds, giving a further boost to emerging market's top-performing currency this quarter.

Foreign investors poured RM5.5 billion into Malaysian bonds in July, the largest monthly inflow in a year, according to data from Bank Negara Malaysia. The recent surge in the currency has pushed total returns on ringgit notes to 5.9% this year, among the highest in emerging markets.

"Expectations of ringgit strength attracted foreign bond flows, probably on an FX-unhedged basis to position for FX gains, creating a positive feedback loop," said Winson Phoon, head of fixed-income research at Maybank Securities Pte in Singapore. "The stars have aligned for the ringgit and local bonds."

Investors are increasingly taking a bullish position on the ringgit in a sign of confidence in the country's improving economic outlook. The Malaysian currency is up 5.5% against the dollar this quarter. Increased expectations for US interest rate cuts may further attract foreign flows to the domestic bond market. Hot Ringgit Trade Gets Another Boost from Foreign Bond Flows_1

Hot Ringgit Trade Gets Another Boost from Foreign Bond Flows_1

The rush to Malaysian debt securities is partly helped by light foreign positioning ahead of an expected Federal Reserve pivot. Global funds' purchase of bonds over the past 12 months remains at 0.6 standard deviation below the five-year average.

Maybank sees the 10-year Malaysian government yield falling to 3.5% by mid-2025 amid expectations the central bank will maintain the overnight policy rate at 3% through next year. This is supported by waning inflation risks and solid domestic growth prospects. The 10-year benchmark note traded at about 3.75% on Wednesday.

Investors will be on watch for the timing and extent of an eventual cut in subsidies for the nation's most widely used gasoline for further impact on consumer prices.

"We favour tactically positioning for dollar-ringgit to push below our fair value target of 4.30," buoyed by an export recovery, unwinding of dollar longs and room for further foreign bonds and stocks inflows, CIMB Bhd strategists including Michelle Chia wrote in a note on Monday.

Source: Bloomberg

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Samantha Luan

Economic

Bond

Investors in Asia will be hoping that the recovery in global sentiment and risk assets on Tuesday extends into Wednesday, although the rebound in U.S. bond yields and the dollar may cool some of that optimism.

Nothing epitomized 'Turnaround Tuesday' more than the whoosh in Japanese stocks - a day after tumbling 12% in their second biggest fall on record, stocks rallied 10% for their third biggest rise on record.

In some ways, however, day-to-day swings of that magnitude based on not a lot of fresh or major market-moving news are red flags. They're typical of more protracted and volatile downturns, and many investors are retaining a cautious stance. 'Turnaround Tuesday' Soothes Nerves ... For Now_1

'Turnaround Tuesday' Soothes Nerves ... For Now_1

That said, any respite is welcome. Implied yen volatility remains elevated but eased off on Tuesday, and Wall Street and MSCI's emerging, Asian and world stock indices all gained more than 1%.

Fears of impending U.S. recession will have been allayed further too, as the Atlanta Fed's GDPNow growth tracker estimate for third quarter GDP growth was raised to 2.9% from 2.6%.

Little wonder that U.S. bond yields and the dollar rose. That's a twin dynamic that is rarely positive for emerging markets, but if it is part of a broader market recovery and cooling off in volatility then investors may be more forgiving.

Emerging market participants will also note that the steep fall in U.S. yields in recent weeks has more than offset the decline in stock prices. So much so that emerging market financial conditions are now the loosest since January, according to Goldman Sachs. 'Turnaround Tuesday' Soothes Nerves ... For Now_2

'Turnaround Tuesday' Soothes Nerves ... For Now_2

Wednesday's calendar in Asia includes Chinese trade figures for July, the latest FX reserves holdings from China, Japan and Hong Kong, and earnings reports from Singapore's top bank DBS and Japan's SoftBank Group.

China's trade data will be under even particular scrutiny given the ratcheting up of U.S. trade and tariff tensions. Export growth is seen quickening, a potential silver lining to the world's second-largest economy still struggling under a property sector bust, weak consumer demand and the threat of deflation.

Monthly changes in countries' FX reserves holdings rarely have an immediate impact on financial markets, but anyone with an interest in the dollar's reserve status will cast an eye towards the latest updates from Beijing, Tokyo and Hong Kong.

That's nearly $5 trillion of reserves, 40% of the global total. China holds the world's largest stash, with $3.22 trillion, and Japan is the largest overseas holder of U.S. Treasuries, with $1.13 trillion.

Several leading policymakers in the Asia and Pacific region are scheduled to speak on Wednesday, including Reserve Bank of Australia assistant governor Sarah Hunter, Bank of Japan deputy governor Uchida Shinichi and Bank of Thailand governor Sethaput Suthiwartnarueput.

Here are key developments that could provide more direction to Asian markets on Wednesday:

- China trade (July)

- China, Japan, Hong Kong FX reserves (July)

- Softbank earnings (Q1)

Source: Reuters

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Samantha Luan

Economic

The cost of emitting carbon dioxide into the atmosphere is set to decouple from gas prices in the European Union, marking an historic shift in the dynamic between the two markets, according to the EMEA head of natural resources research at Goldman Sachs Group Inc.

The EU is facing "a complete break from the historical relationship where lower gas always meant lower carbon," Goldman's Michele Della Vigna said in an interview. The development reflects the changing dynamics affecting the carbon market, including shrinking emissions caps, with industry replacing power producers as the biggest buyers of permits to pollute and "a complete change in the gas market," he said.

Until now, gas prices have tended to move in tandem with the price for carbon allowances. But that relationship is unlikely to last, Della Vigna said.

Russia's invasion of Ukraine triggered a new wave of energy investment in Europe, as the bloc raced to address supply holes. Not only did that race lead to a surge in the production of renewables, but with gas getting a stamp of approval in the EU's green taxonomy, its supply is now set to pick up meaningfully. Goldman predicts that infrastructure investments will drive up global liquid natural gas supplies by 50% in the next five years, leading to a halving of gas prices over the period.

That has major implications for inflation, and will ultimately have a big impact on carbon prices, Della Vigna said.

Assuming a 50% decline in the price of gas, "then actually even with a higher carbon price, we would see no inflation in energy in Europe, no hit" to consumers or industry, Della Vigna said. "If anything, the higher carbon price will be a helpful way to make sure power prices don't fall so much that the development of renewable power becomes challenged from an economics perspective."

Concerns over inflation may make the EU less inclined to allow the carbon price "to go much higher than where it is at the moment in a high energy price environment," Della Vigna said. "That's why cheaper gas actually should mean higher carbon prices. Not just because of affordability, but also because cheaper gas means European heavy industry can come back and as they come back more emissions come back, which leads to a tighter carbon market from 2026."

"Industry has gone back into properly developing a new infrastructure for liquefied natural gas," he said. And that "is now about to all come on stream."

The development has the potential to drive the price of carbon allowances on the European Union's Emissions Trading System to as much as €130 a tonne by 2028, Della Vigna said. This year, prices have averaged at around €66 (RM323) a tonne, according to BloombergNEF.

The EU's carbon market is set to tighten significantly in the coming decades as the bloc works toward its goal of net-zero emissions by the middle of the century. Analysts at BloombergNEF forecast EU carbon increasing to nearly €150 by 2030.

At the same time, financial market participants have been buying allowances in anticipation of higher prices, Della Vigna said. As an asset, carbon allowances traded on the ETS can offer value if investors think prices will rise, "which is certainly our view," he said.

"Clearly in a surplus the market tends to be weaker, and that's what we've seen in the last couple of years," he said. But from 2026, that surplus is likely to "turn into a deficit," he said.

Carbon allowance prices are currently depressed after the EU brought forward some supply to help generate revenue for member states and move away from Russian energy supplies, said Huan Chang, an analyst with BloombergNEF. And for many industries, it's still cheaper to exceed emissions caps than it is to invest in decarbonising technologies. But with higher prices for carbon allowances, that looks set to change.

Emissions covered by the EU ETS fell by 16% last year, representing the biggest annual decline on record.

The EU, which has set a 2030 target to cut emissions by at least 55%, is gradually reducing the supply of ETS allowances as part of a defined strategy to force key sectors to decarbonise. Since the 2005 start of the EU ETS, emissions generated by companies it covers have fallen by 41%, according to EU data. That's led to a 28% decline in total emissions across the EU. Over time, the list of industries covered by the ETS has been expanded with shipping a recent addition.

Source: Bloomberg

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Warren Takunda

Stocks

London stocks had pared gains by midday on Tuesday as the relief rally lost steam following a heavy selloff a day earlier which saw global markets plunge.

The FTSE 100 was up just 0.1% at 8,018.15, having briefly dipped into the red.

Stocks tumbled on Monday after the non-farm payrolls report for July released on Friday came in much weaker than expected, fuelling concerns the Fed may have made a mistake by not cutting rates last week.

Russ Mould, investment director at AJ Bell, said: "Fears about a sharp recession in the US, engendered by weak jobs data, remain and the unwinding of the yen carry trade may continue to play out, although whether the market moves are being exacerbated because many traders are on the beach is an open question.

"The next key test will come with the market open in the US this afternoon, with futures prices suggesting a recovery rally will take hold on Wall Street too.

"Investors will have to wait until next week for significant economic releases from the US, with data on consumer sentiment, retail sales and inflation all due. These could help point towards whether the Federal Reserve will cut rates in September and how far they might go."

Investors were also digesting the latest reading on the UK construction sector, which showed activity grew in July at the fastest pace in 26 months.

The headline S&P Global construction purchasing managers’ index rose to 55.3 from 52.2 in June. This marked the fastest rate of expansion since May 2022.

A reading above 50.0 indicates growth, while a reading below signals contraction.

The survey found that all three categories of construction saw activity increase in July as work on housing projects returned to growth.

Commercial activity increased solidly, but the fastest expansion was seen in civil engineering, where the rate of growth accelerated to the sharpest in almost two-and-a-half years.

Andrew Harker, economics director at S&P Global Market Intelligence, said: "The election-related slowdown in growth seen in June proved to be temporary, with the pace of expansion roaring ahead in July. Firms saw the strongest increases in new orders and activity since 2022 as paused projects were released amid reports of improved customer confidence.

"The strength of demand moved the sector closer to capacity, bringing a recent period of improving supplier performance to an end. There were also signs of inflationary pressures picking up, something that will need to be watched closely if demand strength continues in the months ahead."

In equity markets, InterContinental Hotels rallied after saying its bottom line shrank by 10% in the first half due to the planned reduction of its so-called System Fund surplus, but underlying profits improved by 12% due to solid margin improvements and an acceleration in RevPAR growth in the second quarter.

Operating profit from reportable segments improved to $535m, up from $479m the year before.

Rolls-Royce got a boost as JPMorgan Cazenove lifted its price target on the stock to 535p from 475p "after another set of strong results".

Keller surged as it said its full-year performance was set to be "materially ahead" of current market expectations after a strong first half.

Flexible workspace provider IWG racked up strong gains as it reported record first-half revenue.

On the downside, Domino’s Pizza was in the red as it warned full-year profit would be towards the lower end of the current range of market expectations after a slower start to the first half.

Rightmove lost ground as it said its contract with OpenRent will end on 1 September, but reiterated its revenue and margin guidance for the full year.

Source: ShareCast

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Warren Takunda

Economic

GBP/CAD receded from July’s multi-year highs around 1.7850 last week but appeared to find support around 1.7625 on Thursday, Friday and on Monday, which is the 23.8% Fibonacci retracement of the April uptrend and a level that should continue to underpin the pair over the coming days.

The pullback in GBP/CAD has been modest despite widespread losses for Sterling pairs connected with last Thursday’s interest rate cut from the Bank of England. This is because the Canadian dollar has also weakened broadly over recent days in apparent sympathy with a softening of the US dollar.

“GBPCAD gains are slowing, around the highest point seen for the GBP since 2021. While longer term technical pointers remain bullish, the GBP’s run higher is looking overextended in the short run,” said Shaun Osbourne, chief FX strategist at Scotiabank, in a review of the Canadian dollar charts last Wednesday.

Pound to Canadian Dollar Week Ahead Forecast: Supported Near 1.7660_1

Above: Pound to Canadian dollar rate shown at daily intervals with selected moving averages and Fibonacci retracements of the April uptrend indicating possible areas of technical support for the pair.

While Sterling has fallen with the onset of the Bank of England easing cycle, GBP/CAD has been supported by losses for the Canadian and US dollars as the market has moved to price in as many as four interest rate cuts from the Federal Reserve for this year following a spate of soft economic numbers from the US.

Last Wednesday’s statement from Fed Chairman Jerome Powell suggesting a September rate cut is possible has been an important source of support for GBP/CAD, alongside the softer ISM Manufacturing PMI for July out last Thursday, and weaker than expected July jobs report announced in the US last Friday.

However, the easing cycle underway at the Bank of Canada is also supportive of the outlook for GBP/CAD, which reached its highest level since February 2021 in July, and could provide an extra lift to the pair as soon as this Friday if Canada’s jobs data for July comes in soft for a second month running.

“The BoC has clearly telegraphed that with unemployment rising and inflation at target they have no qualms easing further/more than the Fed,” Barclays strategists wrote in a Sunday note to clients. “Accordingly, we expect further pressure on CAD. This week the highlight will be jobs data on Friday.”

Pound to Canadian Dollar Week Ahead Forecast: Supported Near 1.7660_2

Above: Change in market-implied expectations for BoC cash rate over time. Source: Goldman Sachs Marquee.

Friday’s July jobs data from Canada is the highlight of an otherwise quiet week for economic calendars on both sides of the GBP/CAD equation, though the trajectory of the US dollar will also be an important influence.

Canada’s dollar often follows the US dollar in trade-weighted terms so would likely weaken, lifting GBP/CAD from Monday’s levels, if the US dollar weakens afresh as it did over the second half of July.

One big risk for GBP/CAD, however, is that Federal Reserve officials push back against the expectation of a deeper easing cycle while out on the speaking circuit this week, lifting both the US and Canadian dollars.

Another risk is of geopolitical tensions between Iran and Israel, and worries about the global economy, driving a continued sell-off in risky assets and positively correlated currencies like sterling over the coming days.

GBP/CAD could test the 23.8% Fibonacci retracement of the April uptrend at 1.7625 in those circumstances, where it should remain supported, pending another attempt on the 1.78 handle over subsequent weeks.

Pound to Canadian Dollar Week Ahead Forecast: Supported Near 1.7660_3

Above: Pound to Canadian dollar rate shown at weekly intervals with selected moving averages.

Source: Poundsterlinglive

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Glendon

Economic

This week, the USD to INR exchange rate continues to be a focal point for investors, traders, and those involved in international transactions between the United States and India. As of August 6, 2024, the exchange rate stands at approximately 83.68 INR for 1 USD, reflecting a relatively stable trend over the past week.

The USD/INR pair has been trading in a tight range near record highs, influenced by various economic factors and government controls. This week's forecast suggests continued stability with a slight bullish tendency, as the pair is expected to fluctuate between 83.36 and 85.66, with an average rate of 84.08 for the month.

Several key factors are influencing the USD to INR exchange rate this week:

Government Controls

The Indian government has taken a more active role in managing the USD/INR exchange rate. This intervention aims to maintain economic stability and manage inflation, while also supporting export-driven growth. As a result, the currency pair is not trading as a free-floating forex pair, which limits speculative activities.

Economic Indicators

Both the United States and India have recently released important economic data, including GDP growth rates, inflation figures, and employment statistics. These indicators play a crucial role in shaping investor confidence and currency valuations. The Indian economy's performance, particularly in terms of export growth and inflation management, is being closely watched by market participants.

Central Bank Policies

The monetary policies of the US Federal Reserve and the Reserve Bank of India (RBI) continue to be significant factors. The US Fed's recent dovish stance regarding interest rates has not significantly impacted the USD/INR pair, unlike its effect on other major currencies. The RBI's interventions and policy decisions are playing a more direct role in managing the exchange rate.

Global Trade Dynamics

Trade relations between the US and India, as well as broader global trade patterns, are influencing the demand for both currencies. The Indian government's focus on creating dynamic export conditions for Indian manufacturers is a key factor in their approach to currency management.

For traders and investors looking to capitalize on USD/INR movements this week, it's important to note that the currency pair is not behaving in a manner typical of freely traded forex pairs. The tight control exercised by the Indian government means that price fluctuations, while healthy for speculators using trading platforms, are occurring within a managed range.

Trading strategies for this week should take into account the following:

Tight Range Trading

Given the controlled nature of the USD/INR pair, traders should be prepared for tight range trading. Setting narrow stop-loss and take-profit orders may be necessary to capture small price movements.

Technical Analysis

While fundamental factors are heavily influenced by government intervention, technical analysis can still provide insights into short-term price movements. Resistance levels around 83.74 and support near 83.67 have been observed in recent trading.

Economic Calendar

Keeping a close eye on economic releases from both the US and India this week can help anticipate potential price movements. However, the impact of these releases may be muted compared to other currency pairs due to government controls.

Long-Term Trends

Despite short-term fluctuations, the overall trend for USD/INR has been bullish. This week's trading is likely to continue this trend, with the pair potentially testing new highs.

For those involved in currency exchange or international transactions, it's advisable to monitor rates closely and consider the following options:

Banks and authorized dealers offer currency exchange services, though rates may be less competitive.

Online forex platforms often provide more favorable rates and convenient services.

For large transactions, negotiating rates with financial institutions may be beneficial.

Looking ahead, market analysts are closely watching several factors that could influence the USD/INR exchange rate in the coming weeks and months:

US Economic Performance

The strength of the US economy and potential delays in the Federal Reserve's rate-cut cycle could support a stronger dollar in the near term.

Indian Fiscal Policies

Any announcements regarding government spending, tax reforms, or economic stimulus measures in India could affect the INR's valuation.

Foreign Investment Flows

The inflow or outflow of foreign investments in Indian markets can cause short-term fluctuations in the exchange rate.

Global Economic Conditions

Broader global economic trends, including trade tensions and geopolitical events, may impact both currencies.

In conclusion, the USD to INR forecast for this week suggests a continuation of the recent trend of tight range trading near record highs. While the overall trajectory remains bullish, government controls are likely to limit extreme fluctuations. Traders and investors should approach the USD/INR pair with caution, considering the unique factors influencing its movement and the limited scope for speculative trading. As always, staying informed about economic indicators, policy decisions, and global events will be crucial for understanding and anticipating movements in the USD/INR exchange rate.

To stay updated on all economic events of today, please check out our Economic calendar

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