China’s manufacturing contracting, BOJ raises rates
BOJ raises interest rate to 0.25%, U.S. labor market softens, oil prices jump 2.9%, China’s lowered outlook, Microsoft stock drops
Japan’s policy rate
On the last day of July, the Bank of Japan (BOJ) surprised markets by raising its official policy rate to 0.25%, marking the first rate hike since the rate was set near zero. This unexpected move sent the yen surging and pulled the dollar/yen exchange rate back to 150, a level not seen since March. The BOJ also detailed plans to slow its massive bond-buying program, aiming to phase out a decade of substantial stimulus as inflation normalizes. This announcement pushed Japanese government bond yields to their highest levels in 15 years. Despite the initial market hesitation, Japanese stocks (Nikkei 225) ended higher, buoyed by the possibility of further tightening as hinted by BOJ Governor Kazuo Ueda.
United States interest rate
In the U.S., economic data revealed a softening labor market, with job openings declining and private sector payrolls expected to show cooler growth. This data, coupled with easing inflation, is reinforcing expectations that the Federal Reserve may cut interest rates as soon as September. The yield on the 10-year U.S. Treasury bond dropped to 4.10%, its lowest level in four months, reflecting these expectations. Despite the cooling labor market, the S&P 500 rose 1.2%, and the Nasdaq composite jumped 1.8% as Big Tech stocks rebounded, led by Nvidia, which surged 7.8%. Advanced Micro Devices also gained 7.5% after reporting better-than-expected profits, driven by its AI business.
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Oil Markets
Oil prices experienced a significant jump, with West Texas Intermediate (WTI) crude rising 2.9% to $76.93 per barrel, and Brent crude climbing 2.7% to $80.21 per barrel. This surge followed the assassination of Hamas leader Ismail Haniyeh in Iran, which raised concerns about escalating violence in the Middle East and its potential impact on oil supply. Despite these short-term gains, oil prices remain subdued on a year-over-year basis, with prices down approximately 5%.
China
China’s economic outlook remains challenging, with July manufacturing activity contracting for the third consecutive month, signaling weakening demand. However, Chinese stocks saw a significant rebound, with the Shanghai Composite and the Hong Kong Hang Seng indexes both rising over 2%. The rally was driven by investor optimism following a Politburo meeting that emphasized the need to boost consumption and hinted at potential stimulus measures.
Technology and Corporate Earnings
Microsoft’s earnings report underwhelmed investors, causing its stock to drop 1.4%. This contributed to broader concerns about the high valuations of Big Tech companies, especially within the “Magnificent Seven,” a group of U.S. megacap stocks that have driven much of this year’s market gains. Despite this, smaller companies and other sectors posted strong earnings, with DuPont rising 3.9% after a positive earnings report driven by recovery in its electronics business. The Biden administration also announced plans to expand restrictions on exports of semiconductor manufacturing equipment to China, which could further impact the tech sector.
Global Markets rate fluctuations
In Europe, HSBC shares jumped 3% after announcing a $3 billion share buyback and an upgraded income outlook, reflecting the bank’s strong performance amid global interest rate fluctuations. Meanwhile, Samsung Electronics reported a more than 15-fold increase in its second-quarter operating profit, driven by strong AI-related demand, and projected robust demand for chips in the second half of the year.
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