North American News
NASDAQ Plunges: Worst Trading Day Since February 21 Sends Shockwaves Through Markets
- NASDAQ tumbles by 2.17%
The NASDAQ index had its worst day since February 21. The tech heavy index fell by -2.17%. The Dow and the S&P also fell sharply.The declines were triggered by the US debt downgrade from Fitch to AA+ from AAA.That was enough to shift the bias back to the downside.
Looking at the final numbers:
- Dow industrial average fell -347.60 points or -0.98% at 35283.09 (worst day since July 6)
- S&P index fell -63.36 points or -1.38% at 4513.36.The decline was the worst since April 25
- NASDAQ index fell -310.48 points or -2.17% at 13973.44 (worst day since February 21, 2023)
Jamie Dimon: The Fed might have to go ‘a little higher’ on rates
- Comment from the JPM leader
- Fitch’s downgrade “doesn’t matter that much”
A review of the earnings after the close
- Shopify, McKesson, Doordash, Qualcomm highlight the releases
Below are a list of some of the major releases after the close. If the EPS and Revenues both beat estimates, it says BEAT. If EPS or Revenues miss, it says MISSED
- Shopify Inc, SHOP, BEAT: Adj EPS 0.14 vs expected 0.05, Revenue $1.69 billion vs expected $1.62 billion
- Robinhood Markets Inc, HOOD, BEAT: EPS 0.03 vs expected -0.01, Revenue $486 million vs expected $472 million
- McKesson Corp, MCK, BEAT: Adj EPS 7.27 vs expected 5.87, Revenue $74.5 billion vs expected $70.28 billion
- DoorDash Inc, DASH, MISSED: EPS -0.44 vs expected -0.41, Revenue $2.13 billion vs expected $2.06 billion
- Equinix Inc, EQIX, MISSED: EPS 2.21 vs expected 2.06, Revenue $2.0 billion vs expected $2.02 billion
- ETSY Inc, ETSY, BEAT: EPS 0.45 vs expected 0.43, Revenue $0.63 billion vs expected $0.62 billion
- MercadoLibre Inc, MELI, BEAT: EPS 5.22 vs expected 4.54, Revenue $3.4 billion vs expected $3.3 billion
- Qualcomm Inc, QCOM, MISSED: Adj EPS 1.87 vs expected 1.81, Revenue $8.44 billion vs expected $8.5 billion
- PayPal Holdings Inc, PYPL, BEAT: Adj EPS 1.16 vs expected 1.16, Revenue $7.3 billion vs expected $7.27 billion
- Albemarle Corp, ALB, MISSED: Adj EPS 7.33 vs expected 4.44, Revenue $2.37 billion vs expected $2.43 billion
- Occidental Petroleum Corp, OXY, MISSED: Adj EPS 0.68 vs expected 0.72
- MGM Resorts International, MGM, BEAT: Adj EPS 0.59 vs expected 0.54, Revenue $3.9 billion vs expected $3.82 billion
US to increase Treasury auction sizes as debt swells
- Quarterly refunding of $103B to raise $19B of cash and refund $84 billion in maturing securities
- Intends to gradually increase coupon sizes in Q3
- 2-year and 5-year note auctions to increase by $3B per month
- 10s to increase by $3B
- 2-year floaters to increase by $2B
- 20-year auctions to rise by $1B
- 30-year auctions to rise by $2B
ADP US July employment +324K vs +189K expected
- The July 2023 employment reading from ADP
- Prior was +497K (revised to +455K)
Details:
- small (less than 50 employees) +237K vs +299K prior
- medium firms (500 – 499) +138K vs +183K prior
- large (greater than 499 employees) -67K vs -8K prior
- Job stayers 6.2% vs 6.4%
- Job changers 10.2% vs 11.2%
Fitch says final decision on a US downgrade was taken on Monday
- Who knew when?
A Fitch director spoke with Reuters and offered some more colour on the downgrade decision:
- Fitch held meetings with the US Treasury ahead of the decision warned about decision, not about downgrade
- Key areas behind decision were deterioration on fiscal and debt side, along with governance
- Governance deterioration gives less confidence in govt’s ability to address fiscal and debt issues
- Debt ceiling debate happens every 2 years or so, may happen again in 2025
US MBA mortgage applications w.e. 28 July -3.0% vs -1.8% prior
- Latest data from the Mortgage Bankers Association for the week ending 28 July 2023
- Prior -1.8%
- Market index 200.7 vs 206.9 prior
- Purchase index 154.1 vs 159.2 prior
- Refinance index 433.6 vs 444.5 prior
- 30-year mortgage rate 6.93% vs 6.87% prior
Fitch downgrades USA long-term credit rating to AA+ from AAA
- Fitch downgrades the USA’s credit rating
- The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years
- Cites repeated debt limit standoffs and last-minute resolutions
- In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years
- We expect the general government deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022
- Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025
- The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the ‘AA’ median and 1% for the ‘AAA’ median)
Full text:
Ratings Downgrade: The rating downgrade of the United States reflects the expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to ‘AA’ and ‘AAA’ rated peers over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions.
Erosion of Governance: In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters, notwithstanding the June bipartisan agreement to suspend the debt limit until January 2025.The repeated debt-limit political standoffs and last-minute resolutions have eroded confidence in fiscal management.In addition, the government lacks a medium-term fiscal framework, unlike most peers, and has a complex budgeting process.These factors, along with several economic shocks as well as tax cuts and new spending initiatives, have contributed to successive debt increases over the last decade.Additionally, there has been only limited progress in tackling medium-term challenges related to rising social security and Medicare costs due to an aging population.
Rising General Government Deficits: We expect the general government (GG) deficit to rise to 6.3% of GDP in 2023, from 3.7% in 2022, reflecting cyclically weaker federal revenues, new spending initiatives and a higher interest burden.Additionally, state and local governments are expected to run an overall deficit of 0.6% of GDP this year after running a small surplus of 0.2% of GDP in 2022.Cuts to non-defense discretionary spending (15% of total federal spending) as agreed in the Fiscal Responsibility Act offer only a modest improvement to the medium-term fiscal outlook, with cumulative savings of USD1.5 trillion (3.9% of GDP) by 2033 according to the Congressional Budget Office.The near-term impact of the Act is estimated at USD70 billion (0.3% of GDP) in 2024 and USD112 billion (0.4% of GDP) in 2025. Fitch does not expect any further substantive fiscal consolidation measures ahead of the November 2024 elections.
Fitch forecasts a GG deficit of 6.6% of GDP in 2024 and a further widening to 6.9% of GDP in 2025.The larger deficits will be driven by weak 2024 GDP growth, a higher interest burden and wider state and local government deficits of 1.2% of GDP in 2024-2025 (in line with the historical 20-year average).The interest-to-revenue ratio is expected to reach 10% by 2025 (compared to 2.8% for the ‘AA’ median and 1% for the ‘AAA’ median) due to the higher debt level as well as sustained higher interest rates compared with pre-pandemic levels.
General Government Debt to Rise: Lower deficits and high nominal GDP growth reduced the debt-to-GDP ratio over the last two years from the pandemic high of 122.3% in 2020; however, at 112.9% this year it is still well above the pre-pandemic 2019 level of 100.1%.The GG debt-to-GDP ratio is projected to rise over the forecast period, reaching 118.4% by 2025. The debt ratio is over two-and-a-half times higher than the ‘AAA’ median of 39.3% of GDP and ‘AA’ median of 44.7% of GDP. Fitch’s longer-term projections forecast additional debt/GDP rises, increasing the vulnerability of the U.S. fiscal position to future economic shocks.
Medium-term Fiscal Challenges Unaddressed: Over the next decade, higher interest rates and the rising debt stock will increase the interest service burden, while an aging population and rising healthcare costs will raise spending on the elderly absent fiscal policy reforms.The CBO projects that interest costs will double by 2033 to 3.6% of GDP.The CBO also estimates a rise in mandatory spending on Medicare and social security by 1.5% of GDP over the same period.The CBO projects that the Social Security fund will be depleted by 2033 and the Hospital Insurance Trust Fund (used to pay for benefits under Medicare Part A) will be depleted by 2035 under current laws, posing additional challenges for the fiscal trajectory unless timely corrective measures are implemented.Additionally, the 2017 tax cuts are set to expire in 2025, but there is likely to be political pressure to make these permanent as has been the case in the past, resulting in higher deficit projections.
Exceptional Strengths Support Ratings: Several structural strengths underpin the United States’ ratings. These include its large, advanced, well-diversified and high-income economy, supported by a dynamic business environment.Critically, the U.S. dollar is the world’s preeminent reserve currency, which gives the government extraordinary financing flexibility.
Economy to Slip into Recession: Tighter credit conditions, weakening business investment, and a slowdown in consumption will push the U.S. economy into a mild recession in 4Q23 and 1Q24, according to Fitch projections.The agency sees U.S. annual real GDP growth slowing to 1.2% this year from 2.1% in 2022 and overall growth of just 0.5% in 2024.Job vacancies remain higher and the labor participation rate is still lower (by 1 pp) than pre-pandemic levels, which could negatively affect medium-term potential growth.
Fed Tightening: The Fed raised interest rates by 25bp in March, May and July 2023.Fitch expects one further hike to 5.5% to 5.75% by September.The resilience of the economy and the labor market are complicating the Fed’s goal of bringing inflation towards its 2% target.While headline inflation fell to 3% in June, core PCE inflation, the Fed’s key price index, remained stubbornly high at 4.1% yoy.This will likely preclude cuts in the Federal Funds Rate until March 2024.Additionally, the Fed is continuing to reduce its holdings of mortgage backed-securities and U.S. Treasuries, which is further tightening financial conditions.Since January, these assets on the Fed balance sheet have fallen by over USD500 billion as of end-July 2023.
ESG – Governance: The U.S. has an ESG Relevance Score (RS) of ‘5’ for Political Stability and Rights and ‘5[+]’ for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption. Theses scores reflect the high weight that the World Bank Governance Indicators (WBGI) have in Fitch’s proprietary Sovereign Rating Model. The U.S. has a high WBGI ranking at 79, reflecting its well-established rights for participation in the political process, strong institutional capacity, effective rule of law and a low level of corruption.
TD are expecting the US nonfarm payroll headline at +260K, well above consensus
TD’s forecasts for the US NFP due on Friday:
- headline payroll number at +260K
- unemployment rate 3.5%
- monthly wage growth 0.3%, and 4.2% y/y
Goldman Sachs says Fitch US downgrade unlikely to force major selling of US Treasuries
Goldman Sachs ‘bottom line’ on the Fitch Ratings downgrade of US long term debt:
- The downgrade mainly reflects governance and medium-term fiscal challenges, but does not reflect new fiscal information.
- The downgrade should have little direct impact on financial markets as it is unlikely there are major holders of Treasury securities who would be forced to sell based on the ratings change.
Commodities
WTI crude oil futures settle at $79.49
- Down $-1.88 or 2.31%
The price of WTI crude oil futures are settling at $79.49 a barrel. That’s down -$1.88 or -2.31%. The low price today came in at $79.05. The high price was at $82.43. At the high, the price tested the low of a swing area on the daily chart between a $82.43 and $83.44
EIA weekly US oil inventories -17049K vs -1367K expected
- US oil inventory data for the week ending July 28
- Prior -600K
- Gasoline +1480K vs -1300K expected
- Distillates -796K vs +112K expected
- Refinery utilization -0.7% vs 0% expected
- Production estimate 12.2 mbpd vs 12.2 mbpd prior
- Impld mogas demand: 8.84 mbpd vs 8.94 mbpd prior
API data released late yesterday:
- Crude -15400K
- Gasoline -1680K
- Distillates -512K
I believe this is the largest weekly draw in the last 40 years.
ICYMI – OPEC’s crude production fell by the most in three years (via a Bloomberg survey)
A Bloomberg article overnight on tighter oil supply.
- Output from the Organization of Petroleum Exporting Countries plunged by 900,000 bpd last month to an average of 27.79 MMbpd, according to a Bloomberg survey.
- the biggest reduction since the group and its allies slashed supplies during the depths of the Covid pandemic in 2020
EU News
European equity close: Bruising day
- Closing changes for the main European bourses
- Stoxx 600 -1.5%
- German DAX -1.4%
- UK FTSE 100 -1.5%
- French CAC -1.4%
- Italy MIB -1.4%
- Spain IBEX -1.9%
Switzerland July manufacturing PMI 38.5 vs 44.0 expected
- Latest data released by Procure – 2 August 2023
- Prior 44.9
Switzerland Q3 consumer confidence -27.1 vs -29.7 prior
- Latest data released by SECO – 2 August 2023
- Prior -29.7; revised to -29.6
UK inflation expectations fall in latest poll
- short and long-term inflation expectations down in YouGov poll
YouGov is out with a UK inflation expectations poll:
- 1-year ahead inflation expectations 4.3% vs 5.0% in June
- 5-10 year ahead inflation expectations 3.2% vs 3.3% in June
Deutsche Bank expect +25bps rate hike from the Bank of England this week – ‘close call’
A snippet on what Deutsche Bank is expecting from the Bank of England:
- expect a +25bps hike taking the Bank Rate to 5.25%
- it is a close call between that and +50bps
- Beyond next week’s decision, see two more +25bps hikes
- rate cuts potentially starting from Q2 of 2024
Other News
BOJ’s Uchida says may step in before 10-year yields hit 1%, depending on speed of the move
- Remarks by BOJ deputy governor, Shinichi Uchida
- Not thinking of raising 1% cap for 10-year yields target for now
- This is already quite a high ceiling
- If economy, prices remain roughly unchanged, don’t expect rates to rise sharply
- BOJ will curb excessive rise in long-term rates
- Does not want to comment on day-to-day FX moves
- But it is very important for exchange rate to move stably, reflecting fundamentals
National Australia Bank expect one more Reserve Bank of Australia rate hike
National Australia Bank on the Reserve Bank of Australia yesterday:
- Yesterday the RBA kept rates on hold at 4.10% as we had expected, but consensus was split going into the meeting with markets pricing just a 24% chance of a hike, while 18/30 economists were tipping a hike.
- Despite that hawkish bias, the extended staff forecasts to end 2025 (from mid-2025) gave a less hawkish feel.Importantly, CPI inflation is forecast to be within 2-3% by late 2025, and relative to the prior May SoMP the end 2024 forecast was unchanged at 3¼%.
- While the Bank maintained a tightening bias, the lack of policy move saw a number of economists (including NAB) shave back their expectations of peak rates from 4.6% to 4.35%. Market pricing shows an 80% chance of one more hike this cycle, with November being the most likely date, following the next quarterly CPI result.
New Zealand unemployment rate 3.6% (vs. expected 3.5%)
New Zealand Q2 2023 employment report
Cryptocurrency News
SEC now ready to consider ETH futures – report
- Blockworks report
The SEC has indicated its readiness to publicly consider the latest ether futures filings, according to two sources cited by Blockworks. The report noted that the readiness to consider doesn’t necessarily mean they will be approved.
The report adds to the mounting evidence that Blackrock and others were tipped off before filing for bitcoin ETFs.
The SEC’s willingness to consider these offerings is a reversal from May, when sources said the US securities regulator had told firms seeking ether futures ETFs to halt their efforts.The SEC did not return a request for comment at the time.
ICYMI – Binance Japan launches crypto services with with 34 tokens/virtual currencies
ICYMI, news from Binance, the world’s largest cryptocurrency exchange.
- It announced the launch of Binance Japan, offering 34 coins, including Bitcoin, Ether, Solana and Dogecoin.
- “By offering regulated exchange services in Japan, we’re hoping to bolster the development of the Japanese digital-asset market.The country’s drive for technological innovation and growing interest in blockchain technology make it a fantastic place to build a robust and sustainable Web3 ecosystem”
Follow our recently launched pages. Join our community and never miss a beat in the dynamic world of trading.
https://www.facebook.com/BilalsTechLtd
https://www.linkedin.com/company/bilals-tech/
