Market Review

The US dollar index fluctuated greatly this week. It rose to a three-week high at the beginning of the week, and then fell and once fell below 104 before rebounding as Powell opened the door to a rate cut in September. After the non-farm report showed that the unemployment rate rose to 4.3%, the US dollar index fell below the 104 mark. This week will close down for the second consecutive week.

Stimulated by the tense geopolitical situation in the Middle East and the intensified risk aversion in the market, spot gold has risen sharply this week. On Friday, the US non-farm data unexpectedly broke out, and the gold price rose to $2,477 per ounce.

In terms of non-US currencies, the US dollar fell sharply against the Japanese yen as the Bank of Japan raised interest rates again and cut its bond purchases, closing down for the fourth consecutive week and hitting its lowest level since early March.

International oil prices fell for the fourth consecutive week. Crude oil opened higher on Monday due to the attack on the Golan Heights in Israel last weekend, but crude oil turned down after news that the United States took the lead in suppressing Israel's retaliatory actions. However, the assassination of the leader of Hamas led Iran to order retaliation against Israel, and crude oil rebounded sharply. However, as the global supply of crude oil was not affected, investors refocused on demand, and crude oil fell again, falling 4% on Friday.

Events of the week

1. The Federal Reserve remains on hold and “explicitly” indicates a 50 basis point rate cut in September?

This week, the Fed kept the target range for the federal funds rate unchanged at 5.25%-5.50% for the eighth consecutive time, saying the committee would pay attention to both inflation and employment risks. Powell expects to start cutting interest rates as early as September, but basically ruled out the possibility of a 50 basis point cut.

Interest rate outlook: reiterate that there will be no rate cuts until there is greater confidence in inflation; we are gradually approaching the time to cut interest rates, but have not yet reached that point; if inflation falls as expected and the labor market stabilizes, interest rates will be cut as early as September. In-depth discussions on rate cuts were held at this meeting. A 50 basis point rate cut is not currently under consideration. Different scenarios can be imagined, from zero rate cuts to multiple rate cuts. Rates will remain unchanged or take early action depending on economic conditions.

Inflation: The description of inflation level was changed from "still high" to "somewhat high". The description of the progress of reducing inflation was changed to "further progress has been made", and the word "small" was deleted. There is no need to focus entirely on inflation. We are confident that the 2% target will be achieved. The scope of inflation decline has expanded, and long-term inflation expectations seem to be firmly anchored. The upside risks of inflation have weakened.

Employment market: Added the expression "unemployment rate has increased", and changed the description of employment growth to "slowed down". Changed "paying high attention to inflation risks" to "paying high attention to the risks faced by both sides of the dual mandate".

Election impact: If the interest rate is cut in September, it should be non-political. Any decisions made before, during and after the election will be based on the balance of data and risks, and there will be no attempt to formulate policies based on the election results that have not yet been released.

Economic situation: Data shows no signs of economic weakness or overheating, or some signs of weakness, but the overall situation is not bad. The Fed has the ability to deal with economic weakness. The unemployment rate remains low, the labor market has become more balanced, and the downside risks facing the current job market are real.

Friday's nonfarm payrolls report showed that U.S. job growth slowed more than expected in July, with just 114,000 jobs added and the unemployment rate rising to 4.3%. Money markets increased their bets on the Fed to cut interest rates by 50 basis points in September, while increasing expectations that the Fed will cut interest rates by more than 100 basis points before the end of 2024. This is the most dovish trader expectation in this cycle.

2. The powder keg in the Middle East is on the verge of exploding. When will Iran retaliate?

U.S. intelligence shows that Iran will attack Israel in retaliation in the coming days. U.S. officials expect Iran's retaliation to be similar to the attack on Israel on April 13, but may be larger in scale and may also involve Lebanon's Hezbollah. It is reported that the Pentagon and U.S. Central Command are conducting similar preparations as in April, involving U.S. military equipment in the Gulf, the Eastern Mediterranean and the Red Sea.

The situation in the Middle East has escalated dramatically this week. Last weekend, Israel accused Lebanon's Hezbollah of attacking the Golan Heights, which was the deadliest attack on Israeli civilians since October 7 last year. Israel called it a provocation that "crossed all red lines." Israel then carried out a "targeted strike" in the Beirut area of ​​Lebanon, annihilating the Hezbollah commander who was allegedly responsible for the Golan Heights attack.

Lebanon's foreign minister responded that Israel's air strikes had crossed a red line and that he would complain to the UN Security Council. The leader of Hezbollah said that their fight with Israel had entered a "new phase" and the conflict would turn into a full-scale war.

On Tuesday, Hamas leader Haniyeh was killed in an attack in the Iranian capital of Tehran. The Iranian Foreign Ministry responded that Haniyeh's blood "will never be shed in vain." Israel also said that it killed Hamas's second-in-command, Mohammed Deif, in mid-July. According to US media reports, Iran's Supreme Leader Khamenei ordered a retaliatory strike against Israel.

It is unclear how aggressively Iran will respond or whether it will avoid escalation. Iranian officials say Iranian military commanders are considering launching a combination of drone and missile strikes against Israeli military targets near Tel Aviv and Haifa, but will be careful to avoid hitting civilian targets and consider launching coordinated attacks from Iran and other allied fronts, including Yemen, Syria and Iraq, for maximum effect.

The European Union and the United States have rushed to send diplomats to the Middle East to try to prevent the conflict from escalating. U.S. Secretary of State Blinken clarified that the United States was not involved in Haniyeh's killing.

3. The Bank of Japan raises interest rates again, and the stock market suffers a capitulation sell-off

On Wednesday, the Bank of Japan announced its latest interest rate decision, unexpectedly announcing a 15 basis point rate hike to 0.15%-0.25%. The policy statement stated that the purchase of Japanese government bonds will be reduced in a predictable manner, by 400 billion yen per quarter, and the monthly bond purchase scale will be 3 trillion yen by the first quarter of 2026. Currently, the monthly purchase is about 6 trillion yen.

The Bank of Japan voted unanimously to scale back its bond purchases, making its interest rate decision by a 7-2 margin.

After the Bank of Japan announced an interest rate hike and a reduction in its bond-buying program, the yen surged to a new high against the dollar since March, breaking through the 150 mark. Japan's new top foreign exchange official, Jun Mimura, said that the depreciation of the yen is more harmful than beneficial to the economy and the authorities will take action when necessary. In previous interventions, data released by the Japanese Ministry of Finance showed that the authorities spent $36.6 billion to support the yen exchange rate in the past month.

The Bank of Japan's shift has shaken markets badly, changing the investment environment and sending traders into risk aversion. As the prospect of further BoJ rate hikes supports the yen, Japanese stocks have started to fall out of favor, with exporters taking a hit.

Japanese stocks plunged for the second day on Friday, with the Nikkei 225 index closing down 5.81%, hitting a new low since February 7. The Topix index closed down 6.1%, the biggest drop since 2016. The plunge in Japanese stocks led to a general decline in Asian stocks, and market sentiment was hit by a triple blow from the sell-off in Japanese stocks, the rout of global technology stocks, and signs of weakness in the US economy.

4. The Bank of England cuts rates, but warns against cutting too fast or too much

On Thursday, the Bank of England cut interest rates by 25 basis points to 5%, in line with market expectations and the first rate cut since March 2020. The Monetary Policy Committee voted 5-4 to approve the interest rate decision, with the decisive vote in favor of the rate cut coming from Governor Bailey.

Bailey said the easing of inflationary pressures was enough for the central bank to cut interest rates, and the Monetary Policy Committee would proceed with caution. "We need to ensure that inflation remains low and be careful not to cut interest rates too quickly or too much," he said in a statement.

At a subsequent press conference, when asked whether the Bank of England's interest rate policy was a "one-off adjustment", Bailey responded that he would not comment on the future trend of interest rates. He said that the decision to cut interest rates was carefully weighed and emphasized that service price inflation and domestic inflation pressures remained high.

5. Nvidia’s stock price soared and plummeted, are fluctuations of hundreds of billions of dollars becoming the norm?

Semiconductor giant Nvidia's stock price has been on a roller coaster ride this week, with volatility comparable to that of Bitcoin. Its stock price plummeted 7% on Tuesday, wiping out more than $193 billion in market value. On Wednesday, its stock price soared nearly 13%, with a single-day market value surge of $329 billion, breaking a single-day record that has been set repeatedly in the past few months. On Thursday, it fell nearly 7% again.

Nvidia's volatility surpassed Bitcoin, with 30-day option implied volatility soaring from 48% to 71%, while Bitcoin's indicator of 30-day implied volatility fell from 68% to 49%.

According to The Information, Nvidia is facing an antitrust investigation by the U.S. Department of Justice due to complaints from competitors, and investigators are investigating whether Nvidia pressured cloud service providers to purchase a variety of its products.

Another chip giant, Intel, had a terrifying week this week. Its second-quarter results and third-quarter guidance were both significantly lower than expected. It will also lay off 15,000 employees, suspend dividends for the first time since 1992, and the company's stock price plummeted.

6. The U.S. Treasury Department lowered its quarterly borrowing estimates

The U.S. Treasury Department cut its estimate for federal borrowing this quarter, now expecting net borrowing of $740 billion from July to September, down from a forecast of $847 billion issued on April 29, and projected the government's cash buffer to decline by the end of the year, coinciding with the possibility of a new round of debt ceiling battles.

In addition, the U.S. Treasury Department plans to "moderately increase" the issuance of short-term Treasury bills next week and maintain the scale unchanged until the end of August. It is also expected to issue a short-term cash management note to meet cash management needs around the end of August.

Amid expectations of a rate cut by the Federal Reserve, the 10-year Treasury yield fell below 4% this week, hitting its lowest level since February 2. The 2-year Treasury yield fell to its lowest level in 14 months.

7. The Political Bureau of the CPC Central Committee: Prepare and launch a batch of incremental policy measures as soon as possible

The Political Bureau of the CPC Central Committee held a meeting on July 30. The meeting pointed out that macroeconomic policies should continue to be more effective. We should strengthen counter-cyclical adjustments, implement proactive fiscal policies and prudent monetary policies, accelerate the full implementation of the determined policy measures, and reserve and launch a batch of incremental policy measures as soon as possible. We should speed up the issuance and use of special bonds, make good use of ultra-long-term special government bonds, support the construction of national security capabilities in major strategies and key areas, and promote large-scale equipment renewal and the replacement of old for new for large durable consumer goods with old for new.

8. National Development and Reform Commission: Put consumption promotion in a more prominent position

Yuan Da, deputy secretary-general of the National Development and Reform Commission, said at a press conference held by the State Council Information Office that the next step is to actively expand domestic demand. Put consumption promotion in a more prominent position, promote the consumption of bulk commodities such as automobiles and home appliances, and promote the quality and expansion of service consumption such as education, elderly care, childcare, and housekeeping. Accelerate the issuance and use of local government special bonds, implement a new mechanism for cooperation between the government and social capital, and further stimulate the vitality of private investment. Coordinate new urbanization and comprehensive rural revitalization, and promote the implementation of major regional strategies.

9. Saudi Arabia's "tycoon" signed a cooperation agreement worth $50 billion

According to the announcement of the Saudi sovereign wealth fund (Saudi Public Investment Fund PIF), PIF has signed six agreements with major Chinese financial institutions with a total value of up to US$50 billion. The institutions that signed the memorandum of understanding include China Construction Bank, Agricultural Bank of China, China Export and Credit Insurance Corporation, Bank of China, Export-Import Bank of China and Industrial and Commercial Bank of China. The memorandum of understanding covers areas of cooperation such as encouraging two-way capital flows through debt and equity, and is part of PIF's strategy to promote global institutional partnerships.

10. World Gold Council: High gold prices suppressed gold jewelry consumption, leading to a decline in gold demand in the second quarter

The World Gold Council said on Tuesday that global gold demand in the second quarter, excluding over-the-counter transactions, fell 6% year-on-year to 929 metric tons, as high gold prices led to a sharp drop in gold jewelry consumption by 19%. The agency said that in the second quarter, due to price sensitivity, demand for gold jewelry was affected, and it may take some time for consumers to fully adapt to the price increase.

The agency said that gold consumption in the gold jewelry industry in April-June this year was the weakest in the same period since 2020, when the COVID-19 pandemic had a severe impact on demand. However, total gold demand, including over-the-counter transactions, still grew 4% to 1,258 tons, the strongest in the same period in the agency's data series since 2000.

Article forwarded from: Jinshi Data