China Stocks Eye Gains; S&P 500 Steady On Powell: Markets Wrap

European stock futures increased, while Asian stocks experienced volatility on Wednesday. This followed the US equities reaching new highs and traders analyzing comments made by Federal Reserve Chairman Jerome Powell regarding the US economy.

During Asian trading, contracts for the Euro Stoxx 50 rose by approximately 0.2%, indicating a potential rebound for the region’s equities after three consecutive days of losses. Japanese stocks saw gains, while Chinese and Australian stocks declined, resulting in little change for the overall regional shares.

China’s consumer prices showed a slight increase in June, remaining close to zero for the fifth consecutive month. This indicates that deflationary pressures are still hindering economic recovery, with factory-gate prices continuing to experience deflation.

US equity futures also remained steady, following the S&P 500’s sixth consecutive session of gains on Tuesday. This winning streak is the longest since January, as traders maintain their belief that the Fed will cut interest rates this year. Additionally, the Nasdaq 100 reached a new record high.
Powell refrained from specifying a specific timeline for rate cuts during his discussions with lawmakers on Tuesday. However, he highlighted the increasing signs of a weakening job market, as evidenced by the government’s data showing a third consecutive month of rising unemployment. As a result, shorter-term Treasuries performed better as investors bet on their potential benefits from policy easing.

During his remarks, Powell mentioned that regulators are nearing an agreement to revise their plans to require major banks to hold significantly more capital. This would be seen as a significant victory for Wall Street lenders. The proposed changes are related to Basel III, an international agreement implemented in response to the 2008 financial crisis, aimed at preventing bank failures and future financial crises.

According to Michael Feroli at JPMorgan Chase & Co, Powell’s comments indicated a continued shift towards preparing the market for a rate cut later in the year. Feroli also noted that Powell mostly adhered to the expected script when discussing the state of the economy.

Meanwhile, swap traders maintained their projection of two rate cuts in 2024.
In other news, the Reserve Bank of New Zealand maintained interest rates at their current level, which caused the New Zealand dollar to decline. Overall, currency movements were relatively subdued, with the US dollar showing little change in strength and the Japanese yen weakening against the US dollar. The index measuring emerging markets currencies remained largely unchanged on Tuesday.

Bond traders are preparing for China to take action against historically low yields. The central bank now has a large amount of yuan securities that it can sell, totaling in the hundreds of billions.

In the corporate world, Baidu Inc. experienced a significant increase in its stock price in Hong Kong, as its robotaxi service, Apollo Go, gained popularity in China. Taiwan Semiconductor Manufacturing Co. saw its second-quarter sales boosted by the growing demand for artificial intelligence. On the other hand, Yokohama Rubber Co. shares declined following reports that the company is in talks to acquire Goodyear Tire & Rubber Co.’s off-the-road tire business.
According to sources, Japan’s largest banks have urged the Bank of Japan to significantly reduce its monthly bond purchases during discussions with market participants.

Meanwhile, on Wall Street, there has been a notable shift towards the technology sector, which could amplify the risks if the current artificial intelligence-driven rally falters. Valuations in the sector are already high, and earnings growth is expected to slow down going forward.

This development adds to the uncertainty for investors who are relying on the continued success of Big Tech. Lisa Shalett, from Morgan Stanley’s wealth management unit, highlights concerns about “stretched momentum, weak breadth, and complacency” in the market.
According to Citigroup Inc. strategists led by Drew Pettit, the rally in artificial-intelligence stocks is still going strong. However, a historical review indicates that it may be a good time to cash in on the major players in this sector. The strategists noted that sentiment towards AI-exposed equities is currently at its highest since 2019, and the majority of these companies are expected to exceed analyst expectations in terms of free cash flow.