Smoke from a construction crane fire in the Manhattan skyline seen from Weehawken, New Jersey, US, on Wednesday, July 26, 2023. (Photo: Michael Nagle/Bloomberg via Getty Images) The MSCI Asia Pacific index headed for the lowest close in almost a month as stocks fell in Hong Kong and China. Sentiment took a hit after Moody’s Investors Service lowered credit ratings for 10 small and midsize US banks and said it may downgrade major lenders.
Contracts for US stocks slipped after the S&P 500 on Monday halted a four-day drop and the Dow Jones Industrial Average saw its biggest advance in more than seven weeks. Traders are awaiting China’s trade figures as signs of deflationary pressures continue to hit Chinese businesses amid weakening growth.
“China trade data due today is expected to show further export contraction and the currency may be a factor as dollar strengthening is dragging on regional markets across north Asia,” said Marvin Chen, a Bloomberg Intelligence analyst.
US shares rebounded on Monday from their worst week since March, but optimism in Wall Street was offset by the latest comments from a Federal Reserve official that pointed to more rate hikes to tame inflation.
Treasuries steadied in Asia after yields on the 10-year on Monday resumed an increase that drove them last week to the highest since November. Fed governor Michelle Bowman also said on Monday that additional hikes “will likely be needed” and that sent yields on the two-year to climb before paring some of its advance.
Testing demand
Bulging sales of Treasuries are about to deliver a major test of investor demand and determine whether a selloff has room to run as the market braces for the biggest round of refunding auctions since last year. The bond market has to absorb a combined $103 billion of 3-, 10- and 30-year auctions before the week is out — up $7-billion from the May slate.
The yen led declines against the dollar among Group-of-10 currencies. Data earlier showed that growth in Japanese workers’ wages unexpectedly slowed in June, partially clouding prospects for the Bank of Japan’s sustainable inflation goal.
The offshore yuan fell after the People’s Bank of China set the daily reference rate at a level that was stronger than the average estimate in a Bloomberg survey.
Meanwhile, the release of the consumer price index from the US due later this week will provide investors with clues on the Federal Reserve’s policy outlook. Fed Bank of New York President John Williams cited the necessity to keep policy restrictive “for some time” — while noting rate cuts may be warranted next year if inflation slows.
Ripple effects
Morgan Stanley’s Michael Wilson said that Fitch Ratings’ downgrade of US government debt last week and the ensuing selloff in the bond market suggests that “investors should be ready for potential disappointment” on economic and earnings growth.
A clear majority of investors expects a US recession before 2024 is out, leading them to view the current bull market in stocks as ephemeral and to favour long-term US Treasuries. That’s the takeaway from the latest Markets Live Pulse survey, which showed that roughly two-thirds of the 410 respondents anticipate a downturn in the world’s biggest economy by the end of next year.
Survey respondents appear to be looking past the economy’s current resilience and anticipating further damaging ripple effects from the Fed’s cumulative tightening.
“There is no way the Fed can do the level of tightening that it’s done so aggressively and not have some damage,” Kristina Hooper, chief global strategist at Invesco, said on Bloomberg Television. “That’s why I believe it’s going to be a bumpy landing.”
Focus returned to company earnings on Monday. Berkshire Hathaway Inc. hit a record as its results beat estimates. Amazon.com Inc. rose after a news report said it will meet with the Federal Trade Commission to avoid an antitrust lawsuit. Tesla Inc. slid as its chief financial officer stepped down in a surprise shakeup at Elon Musk’s company. Apple Inc. notched its longest losing streak this year.
Elsewhere, oil steadied ahead of US figures on the outlook and stockpiles as the global market tightened amid OPEC+ supply cuts. Gold was lower. DM