European and US futures are trading lower today with investors wondering whether the growth in economic recovery has peaked and anticipating what future policies mean for stock markets. Fed Chair Jerome Powell reassured investors yesterday that the spike in inflation is transitory and the US economy is still not ready for the inevitable tapering of bond purchases.
China’s Economic Slowdown
Stock traders have been looking for early signs of economic growth withering in coming months and maybe the slowdown of the Chinese economy could be the cautionary tale for what lies ahead for the US as well.
China reported a 7.9% growth of its GDP during its second quarter on a year on year basis, contrary to the economist’s projected 8.1% growth. On the other hand, retail sales and industrial production jumped by 12.1% and 8.3% respectively on a year on year basis.
Investors should understand that the Chinese government has been proactive in countering the potential slowdown and controlling the spike in inflation by announcing support for firms adversely affected by a surge in product prices and dropping the reserve requirement ratio (RRR) by 0.5%. The reduction in the RRR would pump 1 trillion yuan or $154 billion into the Chinese economy and hence propel demand and economic activity.
The Nikkei 225 index in Japan fell 0.93% in morning trade, and the Shanghai Composite Index declined 0.4%. As of 10:48 p.m. EST, the ASX 200 index dropped 0.1%, while Seoul’s Kospi jumped 0.23%. Hong Kong’s Hang Seng index rose 0.94%.
US Stock Market
Following in the footsteps of the Chinese government, Chair Jerome Powell also reiterated the Fed’s stance yesterday that despite the surge in consumer prices, inflation is likely to prove short term and that the economy is still far away from the level that would push the Fed to taper down on the pandemic Hence, investors should be relieved that the feared hawks are viewing the situation from a distance, and should be optimistic about the future of stock markets as the earnings season continues.
Investors should be on the lookout for potential hints to a shift in economic recovery in today’s report covering the status of unemployment claims.
The Dow Jones Industrial Average jumped 0.13%, and the S&P 500 index hopped 0.12%. The Nasdaq, the tech-savvy index, declined 0.22%, and the Russell 2000, the small-cap index, fell 1.63%.
Bank of America and Citibank
Following the release of $2.4 billion in reserves, set aside in case of a crisis caused by the coronavirus pandemic, profits in the second quarter surged to $6.2 billion compared to $1.2 billion a year earlier. On the other hand, Bank of America released $2.2 billion in reserves and declared a rise in profit from $3.5 billion last year to $9.2 billion in the second quarter of 2021. Contrary to JPMorgan and Goldman Sachs, the two banks failed to grab a higher share in the investment banking division.
Higher fees collected from trading provided some support to the declining lending portfolios of banks last year. However, the revenue from this source slumped as trading declined because of the increase in uncertainty caused by the pandemic. Trading revenue of Bank of America fell 19% while that of Citi dropped by one third.
Morgan Stanley (MS) is set to release its second-quarter profits on July 15, 2021 in which the US investment bank is projected to report earnings of $1.64 per share, a 19.6% drop year on year, and revenues of $13.82 billion, a 3% increase year on year.
Bitcoin has been trading within the range of $32,000 and $34,000 since the start of the month and investors have started to question whether the asset is still a hedge against inflation.
The logic is that as the supply of bitcoin is fixed, unlike US dollars, the digital asset cannot be devalued by a central government by increasing its supply. However, consumer prices have increased the most in June since 2008 and still the value of bitcoin has not risen.
Having said that, crypto enthusiasts should not be too worried by the stalemate as institutional investors continue to pour billions of dollars into the technology and should consider this a correction phase following the peak of nearly $63,000 earlier this year.
Gold and the US Dollar
The price of gold jumped following the Fed chair’s briefing yesterday. Remember that the precious metal is highly sensitive to a change in interest rates as a hike would mean a rise in opportunity cost for holding the non-interest bearing asset. Jerome Powell extinguished fears of revising the interest rates in the short term. The dollar index, on the other hand, usually moves inversely to interest rate forecasts and hence dropped by 0.4%.