Finance

Stocks fall again on focus on US jobs data: markets align

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1 week ago

August 8, 2024

Stocks fall again on focus on US jobs data: markets align

(Bloomberg) — European stocks fell and U.S. futures fluctuated, prolonging the volatility that has gripped global markets for days as the debate over central banks’ policy decisions continues to stoke investor fears.

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Europe’s Stoxx 600 index reversed much of Wednesday’s advance, driven by technology and mining stocks. Contracts on the S&P 500 and Nasdaq 100 swung between small gains and losses after an overnight decline on Wall Street. The MSCI Asia-Pacific Index retreated, while Japan’s Topix Index fell back into the red after an earlier recovery. The dollar weakened against major currencies and government bond yields fell.

Markets have been turbulent since tepid economic data last week fueled concerns that Federal Reserve policy risks a deeper slowdown. Thursday’s US unemployment figures are in sharper focus than ever after last week’s lackluster payroll figures. Investors are also bracing that the U.S. and Japanese central banks may move rates in opposite directions in the coming months, putting further pressure on the yen-funded carry trade.

This is a “consolidation period before any new trend, given how volatile the market has been,” said Kerry Goh, chief investment officer at Kamet Capital Partners Pte. “Investors will likely stay on the sidelines until new data emerges. The next few days will be crucial: either a quiet return or we will see a new period of volatility emerge.’

Corporate profits are also still busy. Siemens AG shares fell after the manufacturer said the group’s sales growth and returns in its main industrial unit are at the lower end of forecasts. Shares of Zurich Insurance Group AG fell after the company reported a rise in losses at its property and casualty business, partly due to “higher catastrophe losses and weather events.”

Allianz SE climbed after second-quarter profit rose on stronger profits from its life insurance and asset management businesses. Deliveroo Plc recovered after reporting stronger customer orders and said profit for the year will be at the high end of forecast. Entain Plc soared after the British gambling company got a boost in profits from this summer’s European football championship.

Policy differences

The difference in the monetary policies of the US and Japanese central banks is expected to undermine the yen’s role as a cheap source of funding for financial assets.

A Thursday summary of views from last week’s Bank of Japan meeting showed that authorities did not see the surprise rate hike in recent months as a policy tightening. Vice Governor Shinichi Uchida said yesterday that the BOJ will not raise interest rates if financial markets are unstable, a reassurance that has helped stocks and sent the yen lower.

According to strategists at JPMorgan Chase & Co, three-quarters of the carry trade has been unwound as the recent slump has wiped out any positive full-year returns.

The carry strategy – which involves borrowing at low interest rates to finance purchases of higher-yielding assets elsewhere – has been faltering for months. Carry trades took a big hit last week as volatility increased in global markets on fears of rapid Fed rate cuts and after the Bank of Japan’s bigger-than-expected rate hike.

According to Quincy Krosby of LPL Financial, unwinding the carry trade has even more room. “A softer dollar, driven by market perception that the Fed will soon initiate an easing cycle, should help support a stronger yen – negative for trading.”

Meanwhile, the debate about the direction of the American economy continues. JPMorgan Chase & Co. now sees a 35% chance that the US economy will enter a recession by the end of this year, compared to 25% at the start of last month. The bank’s new calculation for recession risk follows a similar move by Goldman Sachs Group Inc., which now sees a 25% chance of a recession in the coming year.

However, other investors argue that the data still points to a soft landing.

“I’m not that concerned about the American economy. Yes, unemployment is worrying, but not dramatic. It’s just a delay,” said Francois Rimeu, a strategist at La Francaise Asset Management in Paris. “I believe this was just a volatility episode like we have experienced in the past during the summer.”

The dollar was weaker on Thursday, reversing the previous session’s moves. Weak demand for a 10-year Treasury auction and $31.8 billion in corporate debt issuance were headwinds.

The Treasury auction result is “consistent with our view that we are in for a sustained correction to higher yields in the near term,” said Zachary Griffiths, head of U.S. investment grade and macro strategy at CreditSights. “The price revision after what was actually just a moderately weak payroll report seems way overdone.”

In the commodities sector, oil held steady after its biggest advance in a week, while the market was tense over a possible retaliatory attack by Iran on Israel in revenge for the killings of Hamas and Hezbollah leaders.

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