European and US stock futures are trying to recover some of their losses from yesterday. Investors are concerned about the slowdown in the US economic numbers and the sell-off in China.
Yesterday, we saw another underwhelming reading of US ISM spark concerns about economic growth and this forced investors to sell off.
Today, the focus will be on the US factory order numbers and of course on the Fed’s monetary policy stance. We are going to get some more hints on the Fed’s monetary policy later today when the Fed member Bowman speaks.
Stock Market Today
According to the Institute for Supply Management (ISM), the purchasing managers’ index fell from 60.6 in June to 59.5 in July. The report is based on a survey of industrial executives and is regarded as a reliable indicator of factory activity and output in the United States. The PMI report’s components revealed a broader economic softening, with new orders and output declining and major trade drivers contracting as well.
Stock traders should understand that, while the latest reading still indicates strength, as a figure above 50.0 indicates growth, the month-on-month decline indicates that peak growth and high inflation are likely behind us. Investors should be aware that a similar situation is unfolding in China, where industrial activity growth has been the slowest since the coronavirus pandemic began.
Despite the PMI report, interest rates are still very likely to rise as unemployment falls and supply chain bottlenecks are addressed. We will also see a narrowing of the labour-demand-supply gap as children return to school and unemployment benefits are reduced.
Moving forward, bulls are very likely to maintain their dominance, as evidenced by the strength of corporate earnings. Until now, 88% of the firms listed on the S&P 500 index have outperformed expectations. Strong earnings are helping to support companies’ optimistic valuations. Investors should be relieved that rising earnings, low interest rates, strong vaccination campaigns, record levels of monetary and fiscal stimulus, and controlled inflation all point to a positive outlook for Wall Street in the second half of 2021.
Chinese Tech Sell Off
Equity markets in China took a further beating as gaming stocks tumbled. The focus is still very much on the regulatory related measures which are on the rise. Today we have seen Tencent stock price crash by another 10%.
Authorities in China are releasing new headlines pretty much every day and this is having a profound influence not only on Chinese stocks but rest of the Asian markets as well.
In addition to this, investors have also a wall of worry to climb when it comes to Chinese companies listing for an IPO in the US and that process has become a lot more cumbersome as it requires improvement in the overall transparency.
The US Securities and Exchange Commission has declared that Chinese companies that sought to sell stocks in the United States would provide more comprehensive disclosures.
As of now, the Nikkei and the Shanghai Composite Index were down 0.82% and 0.62% respectively. The ASX 200 index was down 0.36% and Seoul’s Kospi dipped 0.12%. The Hang Seng index in Hong Kong fell 1.42%.
Bitcoin has failed to continue to move higher as investors know that the new Sheriff on Wall Street, Gary Gensler is thinking of more oversight for the cryptocurrency sector. He is certainly the most experienced person and knows a lot more about cryptos than any of the previous SEC heads.
He has made it clear that he wants to protect investors and that means more regulation. Of course, the entire concept of Bitcoin and most of the other cryptocurrencies is to ward off regulatory burden.
But the fact is that the crypto world has changed substantially. We have institutional players who are making big moves every day. Protecting consumer and investors is the right step as it is only strengthen the confidence among investors and traders, which in return should help the Bitcoin price to flourish.
Gold prices are under pressure once again as the dollar index continues to move higher. We could see some recovery in gold prices today as the Fed member is slated to speak and it is likely that his comments aren’t going to be hawkish especially the fact that we have seen weakness in the US ISM manufacturing data yesterday. Remember, the Fed is still very much data dependent and if the economic data cannot support their case, we are unlikely to see any hawkish comments from the Fed.
Moving forward, investors should keep a close eye on the non-farm payroll figures, which are scheduled to be released on Friday. This would reveal information about the current state of the labour market, which is a major driver of economic growth.
The outlook for oil demand has been a sensitive topic due to fluctuations in oil prices, and Beijing’s slowing industrial activity has added to the uncertainty. China is the world’s largest purchaser of oil, and any change in its consumption has an impact on global oil prices. The decline in its industrial activity indicates that economic growth is slowing, and as a result, its demand for oil may fall, negatively affecting oil prices. This, combined with rising coronavirus cases and an increase in oil supply by OPEC+, has the potential to drive down oil prices even further.
The futures for Brent crude settled at $73.24 per barrel, dropping 2.9%, and the futures for WTI crude settled at $71.51 per barrel, falling 3.3%.