Will August retain July’s heat?

August 1 (Reuters) – And then it was August. Asian stocks have closed the books on a July that ran fairly hot, and not just with respect to temperatures.

For the month, China’s CSI 300 and Hang Seng advanced 4.5% and 6.1%, respectively, notching their largest monthly percentage gains since January.

MSCI’s index of Asia Pacific shares outside of Japan also logged its best upside performance in six months, rising 5.3%.

Japan’s Nikkei 225 was the outlier, ending the month essentially unchanged.

On Monday, market participants looked past China’s weak factory and services data, focusing instead on Beijing’s new measures to stimulate consumption and jumpstart what has so far been a lackadaisical post-COVID demand recovery.

Japan’s Nikkei 225 reached a four-week high while the benchmark Japanese government bond yield touched its highest level in nine years, as the Bank of Japan’s first tentative step away from its ultra-easy monetary policy continues to reverberate.

On Tuesday, Australia’s central bank is expected to follow in the footsteps of its global peers by hiking its policy rate by 25 basis points.

In the United States, all three major stock indexes followed Asia’s example by posting modest gains, which could embolden Asian stocks to extend the rally as the calendar rolls over to August.

Before Wall Street’s opening bell on Tuesday, heavy equipment maker Caterpillar Inc’s (CAT) results will be scanned for clues on the global demand outlook.

US data expected on Tuesday includes the Institute for Supply Management’s (ISM) manufacturing PMI print for July, and the Labor Department’s Job Openings report for June.

Both reports should provide further clarity on the effects of the Federal Reserve’s restrictive monetary policy on the world’s largest economy.

Here are key developments that could provide more direction to markets on Tuesday:

– Reserve Bank of Australia’s policy rate decision

– S&P Global releases India manufacturing PMI for July

– South Korea July CPI data

(Reporting by Stephen Culp, editing by Deepa Babington)

Dollar down for second month, but well off its worst

July 31 (Reuters) – The dollar index is finishing July down 1.1%, after a similar loss in June, but it is well off its intra-month lows as the Fed, ECB, and BoJ are either at, or near, key policy inflection points.

Friday’s dollar index recovery high hit important resistance by the June lows it crashed below earlier this month. Whether those hurdles will be cleared may well depend on US ISM, JOLTs and employment reports out later this week.

On Monday, the dollar was modestly lower against the euro and sterling, which had rebounded from July lows on Friday following below-forecast US core PCE and ECI that favored the Fed being done with rate hikes.

But Chair Jerome Powell made clear last week that policy remained data-dependent and rate cuts were unlikely this year.

Monday provided just second-tier US data, while Chicago Fed President Austan Goolsbee affirmed the Fed’s data dependence, but with a note of optimism about the potential for a “golden landing”; AKA soft landing where inflation recedes without causing a recession.

The dollar and most other currencies rose versus the yen for a second day as yen longs taken ahead of Friday’s BoJ meeting, on the risk the BoJ would loosen or remove its cap on 10-year JGB yields, covered losses.

That as the BoJ’s policy shift greatly underwhelmed and the BoJ on Monday bought 10-year JGBs at 60bps, much closer to its prior 50bp cap than the new hard cap at 100bps. That renewed QE also fed into risk-on flows that favored the yen as a funding currency.

USD/JPY rose 0.7%, EUR/JPY 0.65%, GBP/JPY 0.63%, and high beta AUD/JPY 1.8%. The Aussie was again aided by hopes ongoing Chinese promises to do more to support its struggling economy will eventually result in tangible policy changes and that the RBA on Tuesday will remain hawkish. USD/CNH fell 0.09%, showing no strong buy-in yet on China’s renewed growth prospects.

Bund, gilts, and Treasury yields were initially drawn higher by JGB yields extending their post-BoJ meeting advance, but they then drifted lower as month-end and key US data drew near.

(Editing by Terence Gabriel; Randolph Donney is a Reuters market analyst. The views expressed are his own.)

Gold set for best month in four as rate-hike cycle nears end

July 31 (Reuters) – Gold prices rose on Monday, putting them on track for their best month in four, helped by a weaker dollar and expectations that major global central banks are nearing a peak with interest rate hikes.

Spot gold gained 0.4% to USD 1,967.77 per ounce by 02:39 p.m. EDT (1839 GMT). Bullion is up 2.5% so far this month.

US gold futures settled 0.5% higher at USD 2,009.20.

The dollar index, meanwhile, was heading for its second straight monthly decline, making gold more attractive for other currency holders.

Recent data showing signs of cooling inflation in the United States has raised expectations that the Federal Reserve was closer to ending its fastest rate hiking cycle since the 1980s.

According to the CME’s FedWatch Tool, the probability that the Fed will leave rates unchanged this year is at 60%.

“I don’t think the Fed’s going to make a move in September, but later in the year, if we continue to get strong economic data, the Fed probably will make one more rate hike,” said Jim Wyckoff, senior market analyst at Kitco.

“Right now, the gold and silver markets are waiting for the next catalyst… if demand from China starts to recover, we see more upside in gold and silver.”

Two European Central Bank policymakers on Friday also raised the prospect of an end to its steepest and longest string of rate rises.

Higher interest rates increase the opportunity cost of holding non-yielding bullion.

“Markets feel vindicated with their assessment that Fed rates are at or near their terminal rate, with key inflation reports from the US all pointing towards a faster pace of disinflation,” said Matt Simpson, senior analyst at City Index.

Elsewhere, silver rose about 1.8% to USD 24.77 per ounce. Platinum gained 1.8% to USD 952.55 and palladium climbed 3.1% to USD 1,284.05. All three were set for monthly gains.

(Reporting by Brijesh Patel and Harshit Verma in Bengaluru; Editing by Alexander Smith and Krishna Chandra Eluri)

Bumper earnings will broaden a narrow tech-led stocks rally, analysts say

July 31 (Reuters) – A handful of technology firms and last year’s laggards have so far driven the heady rise in US and global stock markets this year, but bumper earnings surprises could now lift more sectors and stocks and broaden the rally, analysts say.

Analysts point to receding recession concerns and the prospect of a less aggressive policy stance from the US Federal Reserve as factors fuelling hopes for a broader market rally.

According to a Reuters analysis, just 10% of the biggest gainers in the MSCI World index constituents have accounted for around 72% of the rally this year.

That compares with a much broader rally in past years, when the top 10% winners only made up 14% of the overall market upside from March 2020 to early 2022.

The tailwind for a broader rally could be earnings.

The second quarter earnings season has started positively for cyclical sectors, with over a quarter of the global companies announcing their results so far, Refinitiv Eikon data showed.

About 67% of consumer discretionary sector firms exceeded consensus net income expectations, primarily due to robust consumer spending. Meanwhile, 64% of industrial firms surpassed analyst projections for net profits.

US banks have also posted solid second-quarter profits, thanks to a rise in interest margins. Moreover, analysts expect robust deal-making activity in the second half, which could boost investment banking revenues.

“The upcoming earnings season has the potential to broaden the rally for sure. Earnings surprises – to the upside – from a wider breadth of stocks is likely to make investors consider names outside the cohort (of tech stocks),” said Puneet Singh, director of quantitative research at Societe Generale, based in Singapore.

ATTRACTIVE VALUATIONS

US tech stocks have driven the bulk of the narrow rally so far, alongside some industrial sector firms such as Builders FirstSource (BLDR), Carnival Corp (CCL), and Airbnb (ABNB) benefiting from pent-up demand post-COVID-19.

“Equity markets have been cheering the disinflationary trend with a bull market accelerating in Q2 on initially very narrow market breadth triggered by AI optimism,” Massud Ghaussy, a senior analyst at Nasdaq IR Intelligence, said.

“A fear-of-missing-out (FOMO) trade took hold towards the latter half of Q2 with hedge funds unwinding shorts pushing the markets even higher.”

In Asia, Japanese stocks have surged, helped by their cyclical recovery and cheaper valuations, while in Europe, robust travel demand has boosted firms such as aero engineer Rolls-Royce (RR) and the region’s biggest hotel group Accor (ACCP).

However, there are plenty of laggards, especially in cyclical sectors such as financials and consumer discretionary, which are available at attractive valuations, analysts say.

“If the risk appetite remains healthy, inflation remains in check, economic growth remains moderate, and the Fed doesn’t come out with strong statements with a large hike, then we do have the foundation for a broader rally,” Singh said.

Over the past month, the communication services, mining, and financial sectors have all posted about 5% gains, outpacing the tech sector’s modest 2% rise. However, the tech sector has surged 34.5% this year, leading all other sectors.

“We still think tech leadership can continue as the AI theme drives significant earnings upside, but we do think other areas of the cyclical market look cheap,” said Alastair Pinder, head of emerging markets and global equity strategist at HSBC Research, who is overweight on tech, energy, consumer discretionary and financials stocks.

Defensive sectors and international stocks are better places to invest, said Derek Izuel, chief investment officer at Shelton Capital Management, based in California.

“While inflation fears have subsided, all economic indicators are pointing to a slowing economy, yet high-quality stocks are not overpriced,” he said.

“Also, the big effect of the inflation reversal is a more dovish stance at the Fed, and thus fewer rate hikes. This will lead to a weaker dollar, and thus improved international equity returns.”

(Reporting by Patturaja Murugaboopathy; Additional reporting by Noel Randewich; Editing by Vidya Ranganathan and Alison Williams)

China, HK shares post best month in six on support to private sector

HONG KONG, July 31 (Reuters) – Hong Kong and China stocks extended gains on Monday to close their best month since January, as a slew of supportive measures rolled out by the Chinese government boosted sentiment, particularly in the private sector.

** Hang Seng Index rose 0.82% and Hang Seng China Enterprises Index jumped 1.33%.

** China’s CSI 300 Index gained 0.55%, while the Shanghai Composite Index climbed 0.46%.

** Both benchmarks logged their best performance in six months, with Hang Seng surging 6% and China’s CSI 300 jumping 4.5%, repetitively.

** Hang Seng Tech Index went up 1.9% and soared 16% this month, marking the strongest month since the reopening rally in November.

** The official manufacturing purchasing managers’ index (PMI) inched up to 49.3 in July from 49.0 in June, staying below the 50-point mark that separates expansion from contraction.

** Acknowledging the weak economy, China has stepped up stimulus measures to boost confidence, though details so far have been sparse.

** China’s State Council on Monday issued measures to restore and expand consumption in the automobile, real estate and services sector, aiming to give full play to the “fundamental role” of consumption in economic development.

** Biggest cities, including Beijing and Shenzhen, said over the weekend they would implement measures to better meet the needs of homebuyers.

** Meanwhile, an opinion piece in the state-backed People’s Daily vowed to create a ‘bigger, better, and stronger’ private sector.

** The key to watch in the coming weeks are the property sector policies, analysts said.

** We believe the Chinese government will continue to gradually introduce more supportive policies for the ailing property sector as required, said Philip Meier, multi-asset portfolio manager at Gramercy.

** “The chances for a sustained recovery are the highest if the upcoming measures can create a virtuous cycle for the sector.”

** While Beijing’s recent moves should be encouraged, markets need to curb their enthusiasm regarding the scale and impact of these easing measures, Nomura chief China economist Ting Lu warned.

** Hong Kong-listed mainland property stocks erased gains in the morning and closed down 1.8%.

(Reporting by Summer Zhen; Editing by Janane Venkatraman and Varun H K)

Oil on track for biggest monthly gains in over a year

LONDON, July 31 (Reuters) – Oil prices were set to post their biggest monthly gains in more than a year on Monday, on expectations that Saudi Arabia will extend voluntary output cuts into September and tighten global supply.

Brent crude futures slipped 7 cents to USD 84.92 a barrel by 0819 GMT, while US West Texas Intermediate crude edged up 10 cents to USD 80.68 a barrel.

The September Brent contract will expire on Monday. The more active October contract crept 6 cents higher to USD 84.47 a barrel.

Brent and WTI settled on Friday at their highest levels since April, gaining for a fifth straight week, as tightening oil supplies globally and expectations of an end to US interest rate hikes supported prices.

Both are on track to close July with their biggest monthly gains since January 2022.

“While it seems that crude may have priced in all the good news on U.S. inflation and economic resiliency for the time being, it may continue inching higher still,” said Vandana Hari, founder of oil market analysis provider Vanda Insights.

Meanwhile, Saudi Arabia is expected to extend a voluntary oil output cut of 1 million barrels per day (bpd) for another month to include September.

Riyadh’s existing cuts have already constrained supplies, with oil inventories beginning to fall in some regions as demand outpaces supply.

“Oil prices are up 18% since mid-June as record high demand and Saudi supply cuts have brought back deficits, and as the market has abandoned its growth pessimism,” Goldman Sachs analysts said in a July 30 note.

“We still expect the extra 1 million bpd Saudi cut to last through September, and to be halved from October.”

Goldman Sachs estimated that global oil demand rose to a record 102.8 million bpd in July and it revised up 2023 demand by about 550,000 bpd on stronger economic growth estimates in India and the U.S., offsetting a downgrade for China’s consumption.

(Reporting by Natalie Grover in London; Additional reporting by Florence Tan in Singapore and Mohi Narayan in New Delhi; Editing by Tom Hogue, Raju Gopalakrishnan, Himani Sarkar and Christina Fincher)

Asian markets face tough act to follow

NEW YORK, July 31 (Reuters) – Goodbye, July.

Asian stocks could be in for a bumpy start to the week if they expect to outdo robust gains enjoyed the week prior, under the power of potential stimulus in China, Japan’s biggest-ever minimum wage hike, and the flickering optimism that the global economy might avoid recession.

Chinese stocks face the challenge of topping last week’s 4.5% gain in the CSI 300, the index’s biggest weekly jump since November.

The week also saw the Hang Seng and the Nikkei 225 gaining 4.4% and 1.4%, respectively, while MSCI’s index of Asia Pacific shares outside of Japan advanced 2.5%.

Markets were rocked at the tail-end of the week when the Bank of Japan took its first step away from its decades-long monetary stimulus policy, allowing interest rates more freedom to move in harmony with inflation and economic growth.

The move coincided with a decision to implement Japan’s biggest minimum wage hike in history in an effort to jolt the world’s third-largest economy out of the doldrums.

Market participants are also scrutinizing the other side of the Sea of Japan for signs of life in the Chinese economy.

On July 24, Beijing pledged to adjust its policies to jump-start the nation’s lackluster post-COVID recovery, a move which helped solidify the yuan’s near two-week high against the dollar, sending the CSI 300 leaping nearly 3% and the HSI surging 4.1%.

In the coming week in the United States, second-quarter earnings season gallops along, and a spate of high-profile results in the coming days are expected to shed additional light on the global demand picture, particularly as it relates to China.

Megacaps Apple Inc (AAPL) and Amazon.com (AMZN), along with chipmaker Western Digital Corp (WDC), construction and mining equipment manufacturer Caterpillar Inc (CAT), globally ubiquitous coffee chain Starbucks Corp (SBUX), and wireless tech firm Qualcomm Inc (QCOM) are all on deck.

Earnings from Marriott International (MAR), MGM Resorts International (MGM) and Host Hotels & Resorts (HST) will help illuminate the state of global travel and tourism demand.

Potentially market-moving US indicators next week include manufacturing and services PMI. Beyond that, job openings, private payrolls, jobless claims, and planned layoffs will set the stage for the closely watched July employment report on Friday.

Here are key developments that could provide more direction to markets on Monday:

– China’s Caixin manufacturing PMI expected

– Japan to unveil consumer confidence, housing starts, and unemployment data for June

– Australia due to release July manufacturing PMI, June building approvals

– South Korea on deck with July import/export growth report

(Reporting by Stephen Culp; editing by Diane Craft)

Hopes of ‘Goldilocks’ economy, rate peak buoy US stocks

NEW YORK, July 28 (Reuters) – A resilient US economy and expectations of a nearing peak in the Federal Reserve’s monetary policy tightening cycle are emboldening stock investors, even as worries persist over rising valuations and the potential for inflation to rebound.

The S&P 500 is up nearly 19% this year after gaining around 1% in the past week. It has risen nearly 10 percentage points since June 1, over which time the US government avoided a debt ceiling default and consumer prices cooled, while growth stayed resilient.

One key factor driving stocks higher has been the view that the economy is moving towards a so-called Goldilocks scenario of ebbing consumer prices and strong growth which many believe is a healthy backdrop for stocks.

That view gained further traction in the past week, when Chair Jerome Powell said the central bank’s staff no longer forecasts a US recession and that inflation had a shot of returning to its 2% target without high levels of job losses.

Policymakers raised rates by another 25 basis points to their highest level since 2007 at the central bank’s July 26 meeting and left the door open to another increase in September.

“The market has fully accepted the narrative that it wanted, which is Goldilocks. Until we see some set of data that scares them it’s hard to see how that changes,” said Bob Kalman, senior portfolio manager at Miramar Capital.

At the same time, investors believe the Fed is unlikely to deliver much more of the monetary policy tightening that shook markets last year. Futures markets on Friday priced a nearly 73% chance that rates don’t rise above current levels through the end of the year, according to CME’s FedWatch tool, up from 24% a month ago.

A test of the economy comes next week, when the US reports employment numbers for July. While comparatively strong employment data has been a driver of this year’s stock rally, signs that the economy is growing at too rapid a pace could spark worries that the Fed will need to raise rates more than expected.

“For markets to continue to trade higher, the soft landing must be a soft landing, not a reacceleration, because if housing and consumer spending accelerate from here, the Fed will have to raise rates a lot more,” wrote Torsten Slok, chief economist at Apollo Global Management.

Kalman, of Miramar Capital, believes there’s a growing chance the Fed may need to raise rates beyond their current 5.50% threshold and hold them there for longer than expected, an outcome he worries could dampen the economy and hurt risk assets.

“It’s a 50-50 chance that we’ll get Goldilocks or we’ll get a stronger downturn,” he said.

Many are also assessing the durability of a rally in tech stocks, which has been fueled in part by excitement over developments in artificial intelligence. The tech-heavy Nasdaq 100 is up nearly 44% year-to-date, while the S&P 500 information technology sector has gained nearly 46%.

Optimistic forecasts from Meta Platforms (META) and results from Alphabet (GOOGL) earlier this week bolstered the case for those who believe megacaps’ lofty valuations are justified. Some smaller companies have delivered as well, with shares of streaming device maker Roku Inc (ROKU) soaring on Friday after it gave an upbeat quarterly revenue forecast.

Still, some investors have been looking outside of tech stocks for further gains, wary of rising valuations. The S&P 500 tech sector now trades at 28.2 times forward earnings, from 19.6 at the start of the year.

Burns McKinney, senior portfolio manager at NJF Investment Group, owns shares of Apple and Microsoft but has been adding to dividend-paying positions in healthcare, financials, and energy in anticipation that megacap names start to falter.

For megacap stocks, “the risk-reward is not as good as it was a quarter ago,” he said.

Others believe the rally in equities is due for a pause. Randy Frederick, managing director of trading and derivatives for the Schwab Center for Financial Research, said he wouldn’t be surprised to see the S&P 500 fall 5% or more in the next month or two as investors take profits on recent gains.

Yet he also believes stocks are in the “early stages” of their recovery after falling into a bear market last year.

“There’s always a concern with too much optimism, but longer term a sort of consolidation here speaks to a positive market going out,” he said.

(Reporting by David Randall; Editing by Ira Iosebashvili and Deepa Babington)

Bank of Japan’s opaque policy shift means stronger, wilder yen

LONDON/SINGAPORE, July 28 (Reuters) – The Japanese yen is on a bumpy path towards strengthening after Friday’s central bank policy change, threatening to upend the carry trade, one of this year’s most popular strategies, as the currency inevitably becomes more expensive.

The BOJ kept its short-term interest rate target below zero, but shook markets by adjusting a policy that had effectively capped the 10-year government bond yield at 0.5%.

The wild swings in the yen, which saw its most volatile trading day for months, reflect the initial confusion among traders and investors about what this might mean.

But two things are already clear: trading in the yen will be choppy, and have a knock-on impact on markets beyond Japan.

A rocketing yen has major implications for risk assets that have been at least in part supported by the trillions of dollars in global liquidity the BOJ has effectively exported.

In what is known as a carry trade, investors have borrowed cheaply in yen to fund bets in higher-yielding currencies like the dollar or the Mexican peso, making money on the difference.

“All these markets are linked together in terms of global liquidity flows. People borrow in yen to buy dollars, dollars sit around looking for something to do, people say we might buy Treasuries or Apple,” Simon Edelsten, global equities fund manager at Artemis, said.

“All this liquidity creation out of cheap Japanese money feeds into risk assets – at the margin, but enough to move prices.”

In a sign of what might be to come, on Friday the yen JPY=EBS strengthened by as much as 1.2% on the day against the dollar, then weakened 1%, before settling not far from flat around 139 per dollar.

The currency has been under heavy pressure in the past 12 months, as other central banks raised rates while the BOJ kept borrowing costs on a tight leash. But the broad direction of travel for the yen is now thought to be towards strength.

The BOJ’s shift “underscores a strengthening bias in the yen. I wouldn’t be surprised to see it go to a low to mid 130s area because we are looking at yields compressing,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management.

RISKIER GOLD SEAM

Japan’s low yields relative to those elsewhere – a gap which widened significantly in 2022 – has caused both domestic and foreign investors to dump Japanese assets in favour of higher-yielding alternatives overseas.

The yen has been an obvious base for carry trades – in the last 12 months it has lost 25% in value against the Mexican peso and 10% against the pound, for example – but that trend might be about to change.

Mitra said carry trades would “probably come under pressure if the yen appreciates from here by 2-4%. If your carry expectation was 5-6% return versus yen then clearly that starts to erode”.

The yen isn’t finished as a funding currency just yet, as Japanese yields remain much lower than those elsewhere.

“The carry trade is going to become less profitable. You’re mining the riskier a bit of the of the seam of gold,” said Kit Juckes head of FX strategy at Societe Generale, who expects any yen appreciation to be gradual.

“But for now you kind of feel it’s still worth it.”

MUDDLING THROUGH

A further difficulty when predicting what the BOJ’s shift in stance will mean for markets is whether investors understand the new policy.

“They’re essentially digging themselves a deeper hole in terms of making it very, very difficult for the market to take away simple things. They’re trying to control too many variables,” said James Malcolm, head of FX strategy at UBS investment bank.

“You know, still having a 50-basis point ceiling but saying that you’re not going to police it and you’re going to have a hard ceiling above there that you will police,” he said. “It’s a very difficult concept to get across to anybody who’s not willing to spend an awful lot of time and effort following it.”

(Reporting by Alun John and Naomi Rovnick in London, and Ankur Banerjee and Tom Westbrook in Singapore; Editing by Amanda Cooper and Catherine Evans)

US money market funds draw huge inflows in the week to July 26

July 28 (Reuters) – US investors turned to money market funds ahead of the Federal Reserve’s policy decision, uncertain about the future path of the central bank’s monetary policy amid solid economic data.

Investors placed a net USD 24.62 billion in US money market funds in the seven days to July 26, their first weekly net purchase since July 5, data from Refinitiv Lipper showed.

The Fed on Wednesday delivered its eleventh rate hike since March 2022, raising its benchmark policy rate by 25 basis points to a 5.25%-5.50% range. The accompanying statement left the door open for another potential increase.

Meanwhile, US equity funds gained a net USD 2.14 billion in inflows during the week, after recording a weekly outflow of USD 3.06 billion a week ago.

Investors purchased US large-, mid-, and small-cap funds of USD 2.48 billion, USD 612 million, and USD 675 million, respectively, while withdrawing about USD 995 million from multi-cap funds.

By sector, tech funds saw their first weekly outflow in five weeks, amounting to a net USD 1.96 billion. Meanwhile, metals and mining, and financial sector funds received about USD 600 million each in inflows.

Investors purchased US bond funds for the fourth successive week, recording USD 2.56 billion in net buying.

US short/intermediate government and treasury, and short/intermediate investment-grade funds received USD 2.04 billion and USD 595 million, respectively. Inflation-protected funds drew USD 737 million, their first weekly inflow in 15 weeks.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathyin Bengaluru; Editing by Shilpi Majumdar)

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