U.S. equities declined on Friday following disappointing earnings from social media companies as well as weaker economic data with Treasury yields declining as traders pared back bets of rate increases.
The S&P500 declined -0.93% on Friday weighed by communications -4.33% and technology -1.38% while utilities outperformed +1.37%. The Dow Jones was also -0.43% lower along with the Nasdaq Composite -1.87% and Russell 2000 -1.62% with the VIX edging -0.35% lower to 23.03. Shares in Snap Inc slumped -39.52% after posting poor results following a slowdown in ad spending with Twitter was little changed as porting a sales miss which added to concerns about online add spending, weighing on shares in Meta Platforms and Alphabet Inc.
The U.S. composite PMI for July declined to 47.5 from 52.3 previously due to a decline in services to 47 from 52.7 previously, missing estimates of 52.6 while manufacturing PMI was in line with estimates with a modest decline to 52.3. The reading below 50 signals a contraction in business activity, adding to fears of a recession amid aggressive tightening by central banks to tame rampant inflation. In focus for the week ahead is the Conference Board’s measure of consumer confidence of July on Tuesday forecast to weaker modestly, along with durable goods orders on Wednesday expected to show a decline of -0.3% in June from +0.7% in May. The main focus is the Federal Reserve rate decision on Thursday where economists and futures markets are pricing in a +0.75% increase to bring the Fed Funds rate to +2.35%. Futures are now pricing in a peak rate of +3.35% in February 2023 with expectations of rate cuts to follow that would leave interest rates at 2.73% by the end of 2023, a move echoed by U.S. yield curves with further spreads inverting last week including the 2-30-year spread which briefly inverted for the first time since the global financial crisis.
European equities edged higher on Friday with the Euro Stoxx 600 up +0.31% along with the DAX +0.05%, CAC +0.25% and FTSE100 +0.08%. According to the average of 16 analysts in a Bloomberg survey, the Euro Stoxx 600 will end the year down -9.1% at 444, implying 5% upside from current levels. Business activity in the Eurozone also weakened in July according to PMI reports with manufacturing declining to contraction territory at 49.6 from 52.1 previously, a larger decline than forecast with services down to 50.6 from 53 previously against estimates of 52 with business activity in Germany also contracting as inflation squeezes businesses and households as well as the war Ukraine weighing on sentiment. Goldman Sachs strategists also cut their six-month target by 15 per cent in the past month, signaling a 20 percent decline for the index in 2022. They forecast Stoxx 600 earnings growth of 7 percent this year, half what bottom-up consensus expects, and cut their 2023 EPS growth forecast to 0 percent from 5 percent previously.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX looks set for a modestly lower open this morning with ASX200 futures down -12 points or -0.18% to 6,685. The index finished little changed on Friday, down just -0.04% with financials +0.53% and real estate +0.91% offsetting weakness in energy -1.19% and communications -1.32%. Shares in Zip co. surged +54% over the week including a +13.5% gain on Friday after exiting its overseas markets and scrapping products as it tries to get itself back into the black. This comes a week after abandoning its merger with Sezzle last week in another attempt to fast-track profitability. According to AMP senior economist Diana Mousina, there are risk of “more downside to equities until there are clearer signs inflation has peaked and until economic data troughs”, noting on “a six-to-twelve-month view, we are more optimistic on shares as inflation recedes, central banks stop raising interest rates and a deep recession is avoided”. Q2 inflation data is in focus this week on Wednesday, expected to show prices rose +1.9% over the quarter and +6.3% over the year, up from +5.1% in Q1 with a core measure also expected to rise although by a more modest amount. Retail sales data is also released on Thursday and expected to rise +0.6% over the month of June moderating from +0.9% in May.
Oil prices finished lower on Friday with both WTI and Brent crude down -1.71% and -0.64% respectively to US$94.70 and US$103.20 a barrel. Base metals rose for the week, rebounding from recent weakness with aluminium up +5.66% along with copper +3.64%, lead +3.78%, nickel +14.12%, tin +0.39% and zinc +2.66%. Iron ore futures rose +5.13% on Friday and are little changed this morning at US$104. Gold rose +0.51% on Friday to US$1,727.64 an oz, while silver declined -1.37% to US$18.60 along with Bitcoin -2.24% which is modestly higher over the weekend at US$22,723.
Economic data:
- German Ifo Business Climate (MoM Jul) 18:00
- Chicago Fed National Activity Index (MoM Jun) 22:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
