PETER’S BUSINESS & FINANCE BRIEFING – Monday 17 June 2024, 06:00 Hong Kong
• Bank of Japan to scale back bond purchases • US consumer sentiment unexpectedly slumps to 7-month low • Hong Kong shares lead losses in Asia ahead of China May activity data
Monday’s Opening Call
Hang Seng (Hong Kong) Projected Open: 17,797 -145 points -0.8%
Nikkei 225 (Japan) Projected Open: 38,575 -145 points -0.4%
Quick Summary - 4 Things To Know Before Asian Markets Open
The Bank of Japan left its overnight interest rate unchanged at 0.0% to 0.1%, as expected in its latest monetary policy meeting Friday. The vote was unanimous. But policymakers at the Japanese central bank surprised markets by voting to continue their current asset purchases until the July 30 and 31 meeting, despite BoJ Governor Ueda’s earlier indications that a reduction in the bond buying programmes may be due. The central bank will come up with a plan for reducing its ¥6tn (US$38bn) monthly bond purchases over the coming one to two years at their next meeting, a critical milestone in unwinding its ultra-loose monetary policy.
New bank lending in China rebounded far less than expected in May, and some key money gauges hit record lows, suggesting the world's second-largest economy continued to face headwinds even as the central bank seeks to bolster confidence. Chinese banks extended Rmb 950 billion (US$131bn) in new yuan loans in May, rising from Rmb 730 billion in April but well below economists’ estimates of Rmb 1.3 trillion. Meanwhile, total social financing, a broad measure of credit and liquidity in the economy, rose to Rmb 2.070 trillion. Outstanding yuan loan growth came in at 9.3%, a record low and compared with 9.6% in April.
Consumer sentiment in the US unexpectedly declined in June as the near-term outlook for inflation held at its highest level since November 2023. The University of Michigan’s Survey of Consumers showed a preliminary reading of 65.6 on sentiment, down from 69.1 in May and below economists’ expectations for an increase to 72. It was the lowest reading since November. Over three months, it was the biggest drop in sentiment (-13.8 points) going back to the Covid lockdowns. A measure of consumers’ current assessments of their personal finances fell 12 points to 79, the lowest reading since October, and views on economic conditions are the worst since late 2022. On inflation, the one-year outlook held at 3.3% while the five-year view nudged up from 3.0% to 3.1%, also its highest level since November.
French stocks tumbled on Friday as the prospect of a far-right government and leftwing opposition rattled European financial markets, deepening a sell-off that has wiped €150bn off Paris’s main index. The CAC 40 closed 2.7% lower and has now erased its gains for the year. France’s benchmark index has lost more than 6% in the five trading sessions since Emmanuel Macron’s shock decision to call snap parliamentary elections, in its worst weekly performance since March 2022. Bank shares fell sharply in the wake of projections showing that a new leftwing bloc with big spending commitments and Marine Le Pen’s far-right Rassemblement National could between them virtually wipe out Mr. Macron’s centrist alliance. Crédit Agricole, BNP Paribas and Société Générale last week dropped 11%, 12% and 15%, respectively. The risk premium on France’s debt continued to surge on Friday as investor worries grew with polls showing the centrist alliance could be pushed into third place in the upcoming elections. The gap between benchmark French and German yields rose to 77 bps, the highest since 2017. The spread widened by a record 29 bps last week.
Bank Of Japan To Scale Back Bond Purchases
The Bank of Japan left its overnight interest rate unchanged at 0.0% to 0.1%, as expected in its latest monetary policy meeting Friday. The vote was unanimous. But policymakers at the Japanese central bank surprised markets by voting to continue their current asset purchases until the July 30 and 31 meeting, despite BoJ Governor Ueda’s earlier indications that a reduction in the bond buying programmes may be due. The central bank will come up with a plan for reducing its ¥6tn (US$38bn) monthly bond purchases over the coming one to two years at their next meeting, a critical milestone in unwinding its ultra-loose monetary policy. The decision was passed with an 8-1 majority vote, with board member Nakamura Toyoaki dissenting. Mr. Toyoaki was in favour of reducing JGB purchases but is of the view that the BOJ should only decide to reduce them after reassessing developments in economic activity and prices in the July 2024 outlook report, slated for July 31. Ahead of the next meeting, the BOJ said it will collect views from market participants and will decide on a detailed plan for the reduction of its purchase amount for the next one to two years.
In March, the BOJ raised interest rates for the first time in 17 years, ending the world’s last negative rate regime, and scrapped the yield curve control policy in a radical policy move. However, the central bank said at that time it would continue to purchase JGBs, commercial paper and corporate bonds at the same pace.
In his press conference Friday, Mr. Ueda stated that the reduction in bond purchases will be substantial, but not all decisions can be quick. The BoJ will be mindful of the potential market disruptions if policymakers move too hastily. The Bank will not want to inject undue volatility into the JGB market given the potential impact on the balance sheets of Japan’s large insurers and in view of its own huge holdings of domestic bonds.
The yen fell against the dollar after the announcement, with investors disappointed that the BoJ did not specify how much it would reduce its monthly purchases of bonds. The Japanese yen weakened 0.2% to ¥157.37 against the US dollar, sliding closer to the 34-year low of 160 against the dollar hit in late April, which prompted the BOJ to intervene to prop up the currency. The yield on the 10-year JGB fell 3 bps to 0.93%. The benchmark Nikkei 225 rose 0.2%, reversing earlier losses, after the decision.
Carlos Casanova, Senior Economist, Asia, at Union Bancaire Privée, Hong Kong, wrote in a note Friday, “the JPY will likely weaken on a slightly more dovish outcome overall. With the BOJ remaining quite cautious on bond purchases, we think the exchange rate may have to bear the brunt of external pressures stemming from a wide interest rate differential with the United States. Further weakness should therefore ensue. A pivot towards quantitative tightening in July could exert additional upside pressures, pushing 10Y JGB yields higher. We expect that the 10Y will reach 1.00-1.10% in the next [few] months.”
Japan Industrial Output Falls More Than Initially Anticipated
Industrial production in Japan dropped 0.9% month-over-month in April, much worse than flash data of a 0.1% fall and after showing 4.4% growth in March, which was the steepest rise since June 2022. The latest result was the third decrease so far this year.
China Bank Loans Rise Less Than Expected
New bank lending in China rebounded far less than expected in May, and some key money gauges hit record lows, suggesting the world's second-largest economy continued to face headwinds even as the central bank seeks to bolster confidence. Chinese banks extended Rmb 950 billion (US$131bn) in new yuan loans in May, rising from Rmb 730 billion in April but well below economists’ estimates of Rmb 1.3 trillion. Meanwhile, total social financing, a broad measure of credit and liquidity in the economy, rose to Rmb 2.070 trillion. For the first five months of the year, data from the central bank showed a total of Rmb 11.14 trillion in new loans. Broad M2 money supply rose by 7.0% from a year earlier, less than forecasts of 7.5% and below April's figure of 7.2%. Outstanding yuan loan growth came in at 9.3%, a record low and compared with 9.6% in April. Analysts polled by Reuters had expected 9.5% growth.
"China’s credit extension came in lower than expected in May, suggesting that the deleveraging in the households continues," said Zhou Hao, chief economist at Guotai Junan International. But Mr. Zhou said China's central bank may be reluctant to cut interest rates any time soon, as that could lead to further depreciation of the yuan as the US Federal Reserve seems in no hurry to start cutting its rates, which is buoying the dollar. "Balancing all the factors, we think that the PBOC would refrain from policy rate cuts for now but provide more targeted support via relending programmes over the foreseeable future," he said.
China Vehicle Sales Slow
China's vehicle sales increased by 1.5% year-on-year to 2.42 million in May, slowing from a 9.3% rise in the previous month, according to data from the China Association of Automobile Manufacturers (CAAM). It was well below analysts’ forecasts for growth of 8.5%. The CAAM reported that sales of new energy vehicles surged by 33.3%. Meanwhile, a separate report from the China Passenger Car Association (CPCA) revealed that new energy vehicle sales accounted for 46.7% of total car sales in May, a new record monthly high. For the first five months of the year, data from CAAM showed that vehicle sales grew 8.3% to nearly 11.5 million units, with new energy vehicles soaring 32.5%.
Chinese Automakers Overtake US Rivals In Sales For The First Time
Automotive companies in China sold more cars than their US counterparts for the first time last year, boosted by BYD and growth in emerging markets, researcher Jato Dynamics said in a report published Thursday. Chinese brands, led by Shenzhen-based BYD, sold 13.4 million new vehicles last year, while American brands sold about 11.9 million, the data showed. Japanese brands led with 23.59 million sales. China’s sales growth also outpaced the US, up 23% from the previous year compared to the US’s 9%. “Negligence from legacy automakers, which has resulted in consistently high car prices, has inadvertently driven consumers toward more affordable Chinese alternatives,” Jato senior analyst Felipe Munoz said in the report. Chinese carmakers, like its leading car brand BYD, have expanded globally as an electric-vehicle price war at home has pushed down prices and weighed on profit margins. Brands from China have made particular inroads in emerging economies, where Jato said one in five new car sales were made last year amid increased global demand. “Over 17.5 million new cars were sold in the emerging economies in 2023. That is more than the total sales in the US or Europe during the year,” said Mr. Munoz.
Hong Kong Industrial Output Growth Slows In Q1
Manufacturing production in Hong Kong rose 1.8% year-on-year in the first quarter of 2024, slowing from 4.1% growth in the previous period. On a seasonally adjusted quarterly basis, manufacturing activity increased 1%, rebounding from a 0.5% fall in the preceding quarter.
India Wholesale Inflation At 15-Month High
India’s wholesale prices climbed by 2.6% year-on-year in May, accelerating from a 1.3% rise in the previous month and above economists’ estimates of a 2.5% gain. It marked the seventh consecutive period of wholesale inflation and the fastest pace since last February 2023 amid a rebound in manufacturing prices (0.78% vs -0.42% in April), and faster rises in food prices (7.40% vs 5.52%) and primary articles (7.20% vs 5.01% in April). Meanwhile, fuel and power prices slowed slightly (1.35% vs 1.38%). Monthly, wholesale prices rose 0.20%, easing from an upwardly revised 1.1% growth in April.
India Trade Deficit Widens To 7-Month High
India’s merchandise trade deficit rose to US$23.8 billion in May, widening from the shortfall in the corresponding period of the previous year to mark the largest deficit since October 2023. Imports soared by 7.7% to US$61.90 billion in the period, the highest in seven months. In the meantime, exports jumped by 9.1% to US$38.13 billion, supported by strong foreign demand for engineered goods, commercial vehicles, and smartphones.
Sri Lanka GDP Growth Rate Highest In Nearly 3 Years
Sri Lanka's GDP rose 5.3% year-on-year in the first quarter of 2024, accelerating from 4.5% growth in the previous quarter and recording the highest growth rate since Q2 2021. Growth was seen in mining & quarrying (+18.3%), construction (+14.2%), agriculture (+1.1%), wholesale & retail trade (+1.1%), accommodation, food & beverage service activities (+40.4%) and insurance, reinsurance & pension funding (+17.8%).
Russian Inflation Rises To 15-Month High
Inflation in Russia has accelerated to a 15-month high. Inflation was running at 8.3% on an annual basis in May, Russia’s statistics agency Rosstat said on Friday, the highest rate since February 2023. That was up from 7.8% at the end of April and far ahead of the country's official 4.0% inflation target. Inflation was elevated both for services (8.6%) and goods (8.2%). Additionally, core inflation surpassed the headline rate at 8.6%. From the previous month, the Russian CPI rose by 0.7%, the most since February.
Officials have warned that huge public spending to support the military offensive on Ukraine is overheating the economy. Increases in government expenditure have supported Russia's economy in the face of a barrage of Western sanctions but also triggered surging prices and labour shortages in many sectors not connected to the campaign. Fast price rises have put pressure on Russia's Central Bank to further raise interest rates to bring inflation under control. Last week it held its key interest rate at 16% but signalled it could hike borrowing costs in the future if the pace of price rises does not slow down.
Russian GDP Growth Confirmed At 5.4%
Russian GDP expanded by 5.4% annually in the first quarter of 2024, in line with the flash estimate and slightly ahead of economists’ expectations of 5.3%, and following a 4.9% increase in the final quarter of 2023. The acceleration extended the strong momentum for Russian output following last year’s rebound from the 2022 crash, triggered by Western sanctions following Russia’s invasion of Ukraine. Growth was boosted by wholesale and retail trade (11.4%), manufacturing (9%), and construction (4.8%). In the meantime, the GDP deflator was at 13.4%, extending sharp inflationary pressure in the Russian economy and prolonging expectations of a hawkish central bank.
Eurozone Trade Surplus Below Expectations
The eurozone posted a trade surplus of €15 billion in April, below expectations of €20 billion and compared with a €11.1 billion gap in the same month of the previous year. Imports increased by 1.8% to €232.5 billion, while exports surged by 14% to €247.6 billion. In January to April, the surplus was €72.8 billion, compared with a €20.5 billion deficit last year. Imports declined by 10.4% to €785.4 billion, mainly due to a fall in energy products (-9.7%), raw materials (-22.9%) and machinery & vehicles (-2.4%). Exports rose 0.9% to €851.6 billion, with increases in machinery & vehicles (+11.7%), chemicals (+25.1%) and food & drink (+9.2%).
UK Inflation Expectations Fall To Lowest Level In 3 Years
Inflation expectations among UK consumers have fallen to the lowest level in nearly three years, according to official data that will provide welcome news for policymakers ahead of this week’s Bank of England interest rate decision. In May, Britons expected the rate of price growth in the next 12 months to be 2.8%, down from 3% in February, according to a quarterly BoE survey published on Friday. This is the lowest reading since August 2021, and well below the peak of 4.9% in August 2022.
UK inflation is set to fall further, data out this week is expected to show, with core CPI y/y seen tumbling from 3.9% to 3.5%, while headline CPI y/y is seen dropping from 2.3% to 2.0%. UK inflation has been moving steadily lower over the last year and is seen hitting the BoE’s 2% target rate in the coming months. The Bank of England will start cutting interest rates in August, according to all but two of 65 economists polled by Reuters, and most of them expect at least one more reduction this year despite persistently high pay and services inflation. However, the central bank may be able to give a more dovish forecast if the inflation is in line or better.
US Consumer Sentiment Unexpectedly Slumps To 7 Month Low
Consumer sentiment in the US unexpectedly declined in June as the near-term outlook for inflation held at its highest level since November 2023, owing to “modestly rising concerns” over high consumer prices and weakening income. The University of Michigan’s Survey of Consumers showed a preliminary reading of 65.6 on sentiment, down from 69.1 in May and below economists’ expectations for an increase to 72. It was the lowest reading since November. Over three months, it was the biggest drop in sentiment (-13.8 points) going back to the Covid lockdowns. The current conditions index also moved lower, down to 62.5 from 69.6. Expectations dropped from 68.8 to 67.6, below the 72.0 estimate. The university’s measure of buying conditions for durable goods decreased to the lowest level since December 2022. The gloom that has held back President Joe Biden’s approval rating, despite a long and consistent list of positive indicators, just refuses to lift. A measure of consumers’ current assessments of their personal finances fell 12 points to 79, the lowest reading since October, and views on economic conditions are the worst since late 2022. On inflation, the one-year outlook held at 3.3% while the five-year view nudged up from 3.0% to 3.1%, also its highest level since November. UMich said the changes in the benchmark consumer sentiment index and poll of longer-run inflation expectations should not be seen as a major weakening and should be “interpreted as essentially unchanged”.
The decline in sentiment coincides with signs that the labour market, which has driven consumer spending over the last year, is also softening. The unemployment rate rose to 4% last month, the highest in more than two years, while jobless claims unexpectedly jumped higher. “While lower-income families have, as a group, seen notable wage gains in a strong labour market, their budgets remain tight amid continued high prices even as inflation has slowed,” Joanne Hsu, director of the survey, said in a statement.
US Import & Export Prices Both Post Declines In May
More evidence of a pullback in inflation came in May as prices for both imports and exports fell, the Bureau of Labor Statistics reported Friday. Import prices declined 0.4%, compared with economists’ estimates for no change and a reversal from the 0.9% jump in April. Export prices declined 0.6% after rising 0.6% the prior month. A 2% decline in fuel costs helped bring prices down, but food, feed and beverage prices also fell 1.6%.
Economic Week Ahead
In the United States this week, key economic indicators include retail sales, manufacturing and services PMI, industrial production, housing starts, building permits, and existing home sales. Additionally, speeches by several Federal Reserve officials will garner significant attention.
In Asia, China will release a slew of important economic data, including industrial production, retail sales, house prices, the unemployment rate, and fixed assets investment today. The People’s Bank of China medium-term lending facility (MLF) rate announcement will also come today. China’s benchmark interest rate, the loan prime rate (LPR), a pricing reference for bank lending, will be fixed on Thursday. However, a narrowing interest rate margin at commercial banks and a weakening Chinese yuan have limited the room for the People's Bank of China to manoeuvre, and rate cuts may be postponed until later this year, some market watchers said. The Reserve Bank of Australia will announce its latest monetary policy decision on Tuesday. In Japan, the trade balance and inflation rate will be closely monitored. Manufacturing and Services PMI data will be published for Australia, Japan, and India,
Globally, central bank decisions in Brazil, Norway, Switzerland, and the United Kingdom will be of paramount interest. Manufacturing and Services PMI data will be published for the eurozone and the United Kingdom. In the UK, critical data releases include the inflation rate, consumer confidence, and retail sales figures. Germany's ZEW economic sentiment index will also be a key focus.
Mester Says Latest Inflation ‘Welcome News’
Outgoing Cleveland Federal Reserve President Loretta Mester said Friday the latest data showing softer inflation was “welcome news,” and she thinks monetary policy is well positioned to handle risks to the US economy, but she does not think it is time yet to lower interest rates. “We’re in a very good position with monetary policy right now.” She told CNBC, “I would want to see a few more months of good inflation data, inflation coming down, and short-run inflation expectations starting to move down.” She added, “then you need to start thinking about OK, this may be the right panoply of data. If you wait too long to cut rates, if inflation is moving down, by maintaining the current level, you’re actually becoming more restrictive.” Fed officials at their policy meeting last week dialled back expectations for how much they plan to ease this year, pencilling in only one rate reduction, according to their median projection.
G7 Threatens China With Further Sanctions Over Russia War Support
G7 leaders have issued their starkest warning yet to China over its support for Russia, attacking Beijing for “enabling” Russia’s war in Ukraine, and threatening more sanctions if Beijing continues to provide critical support to Russia during the war in Ukraine. The joint statement at the end of their summit in Italy included a far tougher stance towards China than in the past. “China’s ongoing support for Russia’s defence industrial base is enabling Russia to maintain its illegal war in Ukraine and has significant and broad-based security implications,” the G7 leaders said in a joint statement. “We call on China to cease the transfer of dual-use materials, including weapons components and equipment, that are inputs for Russia’s defence sector.” One US official on Friday said China’s backing of Russia posed a “long-term threat to Europe’s security and is of concern to all members of the G7”. The US and EU have already sanctioned Chinese companies that they say have helped Russia import goods banned under western embargoes. “We will continue taking measures against actors in China and third countries that materially support Russia’s war machine, including financial institutions, consistent with our legal systems,” they said.
Earlier, G7 leaders agreed to provide a US$50 billion loan to Ukraine, backed by frozen Russian assets. The agreement was reached on the first day of the G7 meeting in Italy. The proceeds on these assets will be used to pay off an upfront loan to Ukraine. Some US$325bn worth of assets were frozen by the G7, alongside the EU, following Russia's full-scale invasion of Ukraine in 2022. The pot of assets is generating about US$3bn a year in interest. Under the G7 plan, that US$3bn will be used to pay off the annual interest on the US$50bn loan for the Ukrainians, taken out on the international markets. Lenders bear the risk that those proceeds would stop if a peace agreement is reached and the Russian assets are unfrozen in the future. The money is not expected to arrive until the end of the year but is seen as a longer-term solution to support Ukraine's war effort and economy. US President Joe Biden hailed the move, saying, “we’ll be with Ukraine until they prevail in this war,” at a press conference alongside Ukrainian President Volodymyr Zelenskiy in Italy on Thursday.
Macron’s Party At Risk Of Wipeout As Left Forms Unity Pact
President Emmanuel Macron’s centrist alliance could be facing a wipeout in snap parliamentary elections after France’s leftwing parties struck a unity pact. Four otherwise fractious left-wing parties sealed an alliance on Thursday to join forces in the upcoming legislative election, with polls showing it can win the second-biggest bloc behind Marine Le Pen’s National Rally. The alliance, which was endorsed by France's former socialist president François Hollande, will have to overcome significant divisions between its members, notably over military support for Ukraine and far-left leader Jean Luc Melenchon’s refusal to consider Hamas a terrorist organisation. The unexpected development is a big blow to President Emmanuel Macron. If the left parties had run multiple candidates for each seat, Mr. Macron’s centrist alliance would have had better chances of reaching the second round of voting. To qualify for a run-off, a candidate needs to have won the backing of 12.5% of registered voters. With the alliance now in place, Mr. Macron’s chances of emerging from the elections with a firmer grip on government and centrist forces in parliament are now lower. According to two new studies for Le Figaro and BFM TV, only around 40 of Mr. Macron’s MPs would qualify for the second round vote on July 7, in run-off races that would predominantly be fought between candidates fielded by the far right or the leftwing bloc for the 589-strong assembly. The findings suggest that Mr. Macron’s dramatic gamble to dissolve parliament and hold early elections in the hope of stopping the rise of the far-right Rassemblement National party could backfire badly.
Budget Stand-Off Pushes German Coalition To Brink
German ministers are hurtling towards a showdown over how to plug a massive financing gap in next year’s budget, in one of the toughest tests of coalition unity since Olaf Scholz became chancellor. The deadline for adopting a draft budget for next year in the Eurozone’s largest economy is July 3, a task not helped by increasing frictions between the three coalition parties in the wake of the European elections. Finance minister Christian Lindner has demanded big savings across the board to cope with a smaller tax take in Germany’s sluggish economy, which is only expected to grow by 0.3% this year. But he is facing strong resistance from many of the key ministries affected. “The parties’ positions are essentially irreconcilable, and I don’t see yet how we get to an agreement,” said one MP with knowledge of the talks, according to the Financial Times. The conflict is a huge dilemma for Mr. Scholz, who is already reeling from a European election that saw his Social Democratic party slump to just 14%, the worst result in a nationwide vote in its 134-year history.
German business leaders are coming out against the ruling left-liberal government, and the CEO of Deutsche Börse, a multinational corporation that operates the Frankfurt Stock Exchange, one of the biggest stock exchanges in the world, is now labelling the current government’s policy as “a disaster” on a range of issues, including migration and economic policy. Theodor Weimer issued the scathing rebuke against the ruling government at an event organised by the Bavarian Economic Advisory Council. During his speech in Munich, Mr. Weimer said, “I have now had my 18th meeting with our Vice-Chancellor and Minister of Economic Affairs Robert Habeck, and I can tell you, it’s a sheer catastrophe.” He said that his talks with international investors gave him “direct knowledge” of their opinions on Germany. “I don’t want to spoil things tonight, but our reputation in the world has never been as bad as it is now.” He said Germany was “well on the way to becoming a really outdated economy.” The speech was made on April 17 but has only become public now after the Economic Advisory Board posted it on Youtube.
Nigel Farage’s Reform UK Overtakes Conservatives
Nigel Farage’s Reform UK party has overtaken the Tories in a national opinion poll for the first time, climbing 2 percentage points to 19%. The Conservatives remained at 18%, according to a YouGov poll conducted after the prime minister launched his party’s manifesto last week. While the Financial Times’ tracker shows on average that the Conservatives have an eight-point lead over Reform, it is a fresh blow for Rishi Sunak, who was attending the G7 summit in Italy. Mr. Farage, leader of Reform, said in an ITV election event, “just before we came on air, we overtook the Conservatives in national opinion polls. We are now the opposition to Labour.” Mr. Farage said he would be willing to lead a merged Reform-Conservative grouping after the election. He predicted “something new is going to emerge on the centre-right”, telling LBC that the Tories “may well be dead” after the election but that he would “be prepared to lead the centre-right in this country”.
Donald Trump Promises Top US CEOs To Cut Taxes & Regulations
Donald Trump told a gathering of top US CEOs that he would slash taxes and regulations while pushing up tariffs, as he tried to win backing for his populist economic agenda from the country’s business leaders. Mr. Trump made the remarks at a Business Roundtable event in Washington, which was attended by about 100 corporate leaders, including Citigroup’s Jane Fraser, Apple’s Tim Cook, Bank of America’s Brian Moynihan and longtime JPMorgan Chase boss Jamie Dimon. Mr. Trump promised to lower the corporate tax rate from 21% to 20%, further reducing the income levy on the largest US companies that he already slashed while president, according to people familiar with the remarks. Mr. Trump called the 20% figure a nice, round figure, according to two sources who spoke to Bloomberg News. The former president also promised the executives he would slash regulations if he won a second term. One executive present at the meeting told CNBC that Mr. Trump brought up the idea of imposing an “all tariff policy” that would ultimately enable the US to get rid of the income tax. He also talked about using tariffs to leverage negotiating power over bad actors, according to another source. The remarks show Mr. Trump, who championed tariffs as a foreign policy multi-tool during his first term in office, is considering a drastically more protectionist trade agenda if he defeats President Joe Biden in November.
Mr. Trump’s remark about replacing income taxes with tariffs quickly drew critics. “Broadly substituting tariffs for income tax is a sure way to hit low- and middle-income Americans hard and reward top,” New York University School of Law professor David Kamin wrote on X.
Tesla Shareholders Approve Elon Musk’s $56bn Pay Deal
Tesla shareholders voted in favour of chief executive Elon Musk’s US$56bn pay and to reincorporate the electric-vehicle maker in Texas, handing significant victories to him as he seeks to reassert his control over the company. The result, announced at Tesla’s annual meeting in Austin last week, will strengthen the company’s hand as it attempts to overturn a January decision by a Delaware court to void the award, the largest in US history, over concerns about its size and the independence of the board. The pay vote is only advisory and doesn’t guarantee Mr. Musk will get the money. A Delaware judge nullified Mr. Musk’s 2018 compensation plan in January, and Tesla is expected to appeal. The 2018 package made Musk eligible for as much as US$55.8 billion in stock options if Tesla hit certain milestones. The current value of the options was closer to US$48.4 billion at the close of trading Thursday, according to the Bloomberg Billionaires Index.
"The vote changes nothing," said Mathieu Shapiro, a managing partner at law firm Obermayer Rebmann Maxwell & Hippel. "It only offers Tesla opportunities to try to use the vote to obtain a better decision going forward," he added. Tesla did not disclose the margin of the vote.
Japan Market Reverses Losses After BOJ
Asia-Pacific markets were mixed after the Bank of Japan kept its benchmark interest rate unchanged on Friday but indicated it’s considering the reduction of its purchase of Japanese government bonds. The central bank left short-term rates unchanged at between 0% to 0.1% as widely expected but said it could reduce its purchases of Japanese government bonds after the next monetary policy meeting, scheduled for July 30 and 31. The yen weakened and Japanese sovereign bond futures surged after the central bank delayed providing details until its next policy meeting.
Japan’s Nikkei 225 reversed losses to gain 0.2% after the BOJ decision. For the week, the benchmark index was up 0.3%. South Korea’s Kospi was 0.1% higher, taking its gains for the week to 1.3%. Australia’s S&P/ASX 200 fell 0.3%. Over the week it was down 1.7%. In India, the BSE Sensex rose 0.2% to settle at a fresh record high, extending gains for the third session.
Hong Kong Leads Losses In Asia
Hong Kong equities dropped on Friday while other Asian stock markets edged up following softer than expected US employment figures and producer price data. Sentiment also took a hit after the European Commission said on Wednesday it would impose extra duties of up to 38.1% on imported electric vehicles from China amid efforts to support European automakers. The Hang Seng index shed 171 points, or 0.9%, to 17,942. For the week, the index was down 2.3%.
Chow Tai Fook, one of the world’s largest jewellers, led declines in the Hang Seng, falling 8.9% after the company reported disappointing earnings. Rising gold prices led to unrealised losses of HK$2.5bn (US$320mn) as a result of short positions the company used as a hedge against holding large amounts of the precious metal. Among other prominent decliners, Alibaba slipped 2.3% and Hong Kong Exchanges and Clearing dropped 2.4%. BYD fell 1.5% Friday. Cloud Factory Technology Holdings, which offers network data services, sank 17.4% from its initial public offering price to HK$3.8 on its trading debut in the city.
On the mainland, the Shanghai Composite rose 0.1% to 3,033. The index was down 0.6% for the week, the fifth straight week of losses as signs of economic weakness and the lack of fresh stimulus measures in China dampened investor confidence. Data earlier last week showed that consumer prices in China rose less than expected in May, while producer prices remained deflationary. China’s statistics bureau is due to announce industrial production, retail sales and fixed-asset investment data as well as home prices this week. The PBoC will announce official lending rates later this week.
Kweichow Moutai, the world’s most valuable liquor distiller, slid almost 2% at one stage in Shanghai amid reports its products were selling at a lower retail price as market conditions cooled. The share price later recovered to close unchanged.
European Markets Hit By Political Turmoil
European bourses closed entirely in the red Friday, with sentiment hampered by ongoing political angst in the EU. French Finance Minister Le Maire sparked a rout in European assets, after he answered "yes", when asked if the current political crisis could result in a financial crisis. The region-wide Stoxx 600 fell 1.0%, having on Thursday recorded its biggest one-day decline in two months. Its losses for the week were 2.4%. Germany’s Dax lost 1.4% and London’s FTSE 100 was 0.2% lower.
French stocks tumbled on Friday as the prospect of a far-right government and leftwing opposition rattled European financial markets, deepening a sell-off that has wiped €150bn off Paris’s main index. The CAC 40 closed 2.7% lower and has now erased its gains for the year. France’s benchmark index has lost more than 6% in the five trading sessions since Emmanuel Macron’s shock decision to call snap parliamentary elections, in its worst weekly performance since March 2022. Bank shares fell sharply in the wake of projections showing that a new leftwing bloc with big spending commitments and Marine Le Pen’s far-right Rassemblement National could between them virtually wipe out Mr. Macron’s centrist alliance. Crédit Agricole, BNP Paribas and Société Générale last week dropped 11%, 12% and 15%, respectively.
The risk premium on France’s debt continued to surge on Friday as investor worries grew with polls showing the centrist alliance could be pushed into third place in the upcoming elections. The gap between benchmark French and German yields rose to 77 bps, the highest since 2017. The spread widened by a record 29 bps last week. S&P downgraded the French credit rating from AA to AA- citing larger-than-expected deficits and political fragmentation as reasons for the downgrade. Peripheral debt in the eurozone was also caught up in the rush to exit positions. Italian bonds yields reached the widest in four months versus German peers after the premium jumped the most since March 2023.
The UK 10-year Gilt yield dropped 9 bps to 4.05%, marking a one-month low due to expectations of interest rate reductions by central banks. The Bank of England will likely maintain rates this week, with markets predicting a cut in August or September.
US Stocks Mixed
On Wall Street Friday, US stocks were mixed in broad risk averse conditions. The Nasdaq Composite ticked higher to close at a record for the fifth straight session, despite more than 70% of the index closing lower on the session. The tech-heavy index rose by 0.1% to end at 17,689. The S&P 500 inched lower by less than 0.1%, closing at 5,432 and snapping a four-day win streak. The Dow slipped 58 points, or 0.12%, to end at 38,589. Boeing was a drag on the Dow, falling 1.9%, after telling suppliers it is delaying its 737 production target by three months. There was underperformance in the small-cap Russell 2000 as it continued on its sell-off from Thursday, declining another 1.6%.
Eight of the 11 sectors in the S&P 500 slid during the session, with communication services, information technology and consumer staples emerging as the only winners. Within the broad market index, more than 360 stocks ended the day with declines. Hopes for a continued cooling of inflation boosted the S&P 500 and Nasdaq last week. The S&P 500 and Nasdaq Composite ended the week higher by 1.6% and 3.2%, respectively. The Dow was off 0.5% over the five sessions.
Nvidia outperformed Apple and Microsoft on Friday, bringing the market cap of the mega-cap tech stocks even closer together. Shares of Nvidia were up 1.8%, while Apple was down 0.8% and Microsoft was up 0.2%. Nvidia has a market cap of US$3.244 trillion, Apple US$3.258 trillion and Microsoft’s market cap is US$3.289 trillion. Elsewhere, software giant Adobe leapt 14.5% Friday after fiscal second-quarter results surpassed Wall Street estimates. Shares of chipmaker Broadcom surged more than 23% last week, its biggest weekly gain in history, after its second-quarter earnings report came in ahead of Wall Street forecasts on both top and bottom lines. The chipmaker also announced a 10-for-1 stock split.
Money Market Assets At Record
Money-market fund assets rose to a record on expectations that the Fed is in little rush to ease monetary policy. About US$28 billion flowed into US money-market funds in the week through June 12, according to Investment Company Institute data. Total assets rose to US$6.12 trillion from US$6.09 trillion in the prior week, surpassing a prior record high reached in April.
Treasury Yields Lowest Since Early May
The yield on the US 10-year Treasury note declined for a fourth consecutive session to 4.22% on Friday, reaching the lowest level since the end of March, as lower-than-expected CPI and PPI and a rise in initial claims increased bets the Fed can deliver multiple rate cuts this year, despite a hawkish stance from the central bank on Wednesday. Wholesale inflation unexpectedly ticked down 0.2% last month, while economists polled by Dow Jones expected the gauge to increase 0.1%. That follows a consumer price index reading that was flat on a monthly basis in May. Over the week, the 10-year yield is 21 bps lower, while the 2-year yield has fallen 18 bps to 4.71%, the lowest level since April 4, despite the Fed adjusting its dot-plot to reflect one instead of three rate cuts.
Traders are now predicting a 68% chance of a rate cut in September, a significant increase from the 50% likelihood last Monday. The odds of a rate cut in November have also risen to 80% from 67%, and for December they have climbed to 96% from 86%.
Yen Hits 6-Week Low As BOJ Holds Rates
The dollar was firmer on Friday supported by weakness in the euro after French Finance Minister Le Maire sparked broad euro selling after he noted that the political issues could turn into an economic one. The euro dropped below 1.07, bottoming at 1.0669, and near May's low of 1.0649, though it bounced off session lows in line with the close of European equities to end the session 0.4% lower at $1.07, down 1% for the week. The British pound finished the week in the red, with a decline of 0.6% to $1.2682.
The yen slumped as much as 0.6% to ¥157.98 versus the dollar, hitting its lowest level in six weeks, as JGB futures saw the biggest increase since late December. It ended the session 0.2% lower at ¥157.37. Monetary policy was left unchanged, as expected, but investors were caught off-guard again as the BoJ defied expectations for an immediate reduction of bond purchases. For now, the gap between Japanese and US bond yields remains wide, weighing on the currency. While a weaker yen helps Japanese exporters and the local tourist industry, it also makes imports of energy and food more expensive, hitting consumers. More business leaders have also been expressing concerns about the overall impact on the economy of the weak yen.
The offshore yuan weakened to around Rmb 7.27 per dollar, close to its lowest levels in two months as signs of economic weakness and the lack of fresh stimulus measures in China dampened market sentiment. Data earlier this week showed that consumer prices in China rose less than expected in May, while producer prices remained deflationary. The latest figures raised the odds that the People’s Bank of China could ease policy further this year, but the central bank has to balance supporting the economy with defending a rapidly weakening currency.
Gold & Silver At Session Highs
Gold and silver both closed at session highs. Gold was up 1.2% Friday to $2,333 an ounce, for a weekly gain of 1.7%. Silver closed 1.4% higher Friday.
Crude Subdued Amid Firmer Dollar
Crude oil was softer on the session Friday, amid the stronger dollar, broader risk aversion arising from the political crisis in the EU and ongoing tensions between Israel/Lebanon. Brent crude oil for August delivery was 0.2% lower at $82.62 a barrel. Some modest upside was seen after the G7 promised additional sanctions on those engaged in deceptive practices while transporting Russian oil. Oil prices were up 3.8% last week as summer fuel demand is expected to reduce inventories in the coming weeks.
Bitcoin Lower
Bitcoin was down over 1% Friday and 5% over the week, to just above $66,000. ETFs now own 1 million of the 21 million bitcoins that will ever be mined.
Peter Lewis’ Money Talk Podcast
On Monday’s “Peter Lewis’ Money Talk” podcast, I’ll be joined by Alex Wong, director at Alex KY Wong Asset Management, and Nitin Dialdas, Chief Investment Officer at Mandarin Capital. Providing a view from Mainland China will be Yanan Wu, the Chairman and CEO of Surfin Group.
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