Trail 149 — Seat Belt Sign On
Markets Update by Aashish Singh
Business Update by Sylvia Lo
Financial markets are fascinating. They are constantly evolving, they follow no predetermined path and much like humans, their behaviour at times is completely irrational. Every day their movements are thoroughly analysed, yet their next steps are a complete mystery. They follow a random walk and therein lies their beauty. Each week I briefly recap a few stories that captured my interest.
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The three main themes driving market sentiment this week: central banks, war and MAG7 earnings. Starting from the East, the Bank of Japan unexpectedly hiked by 0.15% as Governor Kazuo Ueda pressed ahead with his push to lift his benchmark away from zero. There is an element of supporting the yen attributed to this move, but the implications to unwind of the yen carry trade that cheaply funded assets worldwide have re-vibrated through markets since. Meanwhile the Bank of England went the other way and delivered its first rate cut since the pandemic. Lastly the Fed kept rates flat, but signalled a September cut.
The market expects more cuts (3 in total) in the US this year as recession fears mount. The jobs report added to these fears with the U.S. unemployment rate jumping to near a three-year high of 4.3% in July amid a significant slowdown in hiring. So, a hike, a cut, and a pause but more importantly none of these quelled the risk on sentiment. To add to the market’s angst was the escalation of the conflict in the Middle East, with Israel eliminating a top Hamas leader on Iranian soil and Iran subsequently vowing retaliation. For the last year, in these moments the market has sought comfort in the AI growth story, but earnings reports from the likes of Microsoft and Amazon, clearly showed the dividends from the huge capital investments are a while away, if at all.
In this backdrop, the S&P500 slipped 2.5% this week with the drop in the Mag7 the steepest. The VIX traded above its long-term average of 20 for the first time this year, spiking briefly to touch the 30 handle. This volatility extended across the different asset classes. The Dollar slipped on lower forward yield expectations, most notably against the yen which is now testing the 145 handle (from 160 levels a few weeks ago). Oil traded lower after initially spiking on the flare up in the Middle east as US recession concerns drove price action. Gold hit a new high versus the dollar amidst increased safe haven demand and a weaker dollar. It’s been an expected week in terms of elevated volatility. This will now persist from here on as bulls have very little to hold onto and the upcoming US election adding volatility to the mix. Strap on for further turbulence ahead.
Most Reliable Trade Flops
For years, Wall Street had it all figured out. If the stock rally is in danger, pile into the Big Tech safety trade. Scared the economy is slowing down? The Federal Reserve has your back.
Now money managers can no longer bet on these market saviours as the most tumultuous week of the year across assets trashes their once-reliable trading playbooks. With Friday’s poor labour data underscoring the risk of an economic downturn, the bond market flashed an unambiguous warning that Jerome Powell’s restrictive monetary stance now risks a policy error. It comes just as the great AI boom of 2024 shudders after disappointing high-profile earnings and fresh fears that the investment splurge has yet to pay off for much of Corporate America.
Three Rate Cuts
US government bonds, on the heels of their best month this year, rallied on economic data seen as cementing the case for three Federal Reserve interest-rate cuts this year. The 10-year Treasury yield fell below 4% for the first time since February on
Thursday after a manufacturing gauge and jobless claims data added to evidence that the US labour market is cooling. The yield on two-year notes slid by as much as 11.5 basis points to 4.14%.
Rate Hike Whipsaws Japan
This past week’s rate hike in Japan hammered the benchmark index the most in eight years. Despite the turmoil, some
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investors still have faith in the long-term outlook for the country’s stocks. The Bank of Japan’s decision on Wednesday to raise rates to 0.25% sent a wave of volatility through the market, with the Topix jumping 1.5% on the day, only to plunge on both Thursday and Friday.
In The World of Business
This week, McDonald’s experienced its first quarterly decline in same-store sales since 2020, largely due to a global boycott sparked by the Gaza conflict and declining international sales, particularly in France, as the company navigates geopolitical and market challenges.
Meta CEO Mark Zuckerberg is focused on expanding WhatsApp’s presence in the U.S. as part of a broader strategy to boost the company’s revenue from its “family of apps” amidst ongoing legal challenges.
Citigroup has emerged as a standout performer among American money centre banks, outpacing peers, and the S&P 500, driven by strong trading, investment banking revenues, and a robust capital position under CEO Jane Fraser.
Boycott McDonalds
McDonald’s recently reported its first quarterly decline in same-store sales since early 2020, driven in part by a global boycott sparked by the ongoing conflict in Gaza. The company experienced a 1% revenue drop across all its businesses, with international markets like France showing particularly significant losses. CEO Chris Kempczinski highlighted that the challenges in France were exacerbated by competition, pricing strategies, and brand perception issues, particularly among the country’s Muslim population. The boycott gained traction after McDonald’s Israeli franchisee offered free meals to soldiers, which led to the movement for a global boycott of the chain.
The impact of the boycott and other geopolitical factors has been substantial, especially in emerging markets where McDonald’s saw a 1.3% decline in sales, compared to a smaller 0.7% dip in the U.S. Despite the challenges, McDonald’s has pledged to support its franchisees in the Middle East during the conflict, offering financial relief measures. The company has also recently acquired all 225 restaurants from local Israeli operator Alonyal Limited. This move is notable as McDonald’s typically operates through third-party franchisees, which has proven to be a highly profitable model. The broader implications of this situation include a nearly 11% drop in McDonald’s stock since January, significantly under performing the S&P 500’s 15% gain.
WhatsApp To Become American Mainstream
Despite being the world’s most popular messaging app with billions of users, WhatsApp has struggled to gain a foothold in the United States. Meta CEO Mark Zuckerberg is keen to change this, as he highlighted during a recent conference call with financial analysts. With WhatsApp recently surpassing 100 million monthly active users in the U.S., Zuckerberg sees a significant business opportunity if the app can capture a larger share of the American market. Given that the U.S. and Canada account for 38% of Meta’s total revenue, a stronger presence in these regions could provide a substantial boost to the company’s bottom line.
Meta’s “family of apps,” which includes Facebook, Instagram, Messenger, and Threads, generated $38.7 billion in revenue last quarter, a 22% increase, contributing to a net profit of $13.5 billion. Zuckerberg emphasised the potential of WhatsApp to enhance group-chat functions and cross-platform communication, hoping that positive user experiences will encourage more Americans to adopt the app.
Citi Comeback
In a surprising twist of fate, America’s money centre banks are not only outperforming their non banking peers but are also outpacing the S&P 500, according to a recent Morgan Stanley report. The standout among these financial giants is Citigroup, which, after years of lacklustre performance, has beaten Morgan Stanley’s price target by an impressive 20%. Citi’s resurgence is part of a broader trend where large banks like Bank of America, Goldman Sachs, and JP Morgan Chase are enjoying robust trading and investment banking revenues, bolstered by a revival in capital markets.
Under the leadership of CEO Jane Fraser, Citigroup has emerged as a top performer among its peers, leveraging a diverse business model to drive growth. The bank’s recent earnings report highlighted a notable 6% increase in markets revenue, primarily from fixed-income and equity markets. A key contributor was a $400 million gain from a Visa corporate transaction, pushing equity market revenue up by 37% year-over-year.
Citi’s impressive performance comes in the context of a broader capital strength across the sector. The Federal Reserve’s annual stress test recently confirmed Citi as the best-performing money centre bank, highlighting a significant capital buffer that could fuel further growth. According to the Morgan Stanley report, the excess capital held by these banks is at record levels, with $157 billion in excess regulatory capital ready to be deployed. This financial cushion is expected to boost future earnings and share buybacks, positioning Citi and its peers for continued success in the latter half of the year.
Until next week
