China is experiencing deflation. Moody’s downgraded the credit ratings of US banks

August 9, 2023

At yesterday’s stock market close, the Dow Jones Index (US30) decreased by 0.42%, while the S&P 500 Index (US500) lost 0.42%. The NASDAQ Technology Index (US100) closed negative by 0.79% on Tuesday.

Moody’s downgraded the credit ratings of several small and mid-sized US banks and said it may downgrade some of the nation’s largest lenders. The agency warned that the sector’s credit strength is likely to be tested by funding risks and declining profitability.

The US dollar may maintain its upward trend, helped by favorable seasonal trends. According to analysts of JP Morgan, the dollar will not suffer from the downgrade of the rating agency’s rating of US debt obligations. According to analysts of the investment bank, the dollar’s prospects are also supported by a favorable macroeconomic situation, including higher interest rates in the US and continued positive US economic indicators. Not only does the US dollar benefit from its reserve currency status, but previous downgrades in the past have not resulted in currency weakness or reduced foreign sponsorship without major domestic events.

Equity markets in Europe were mostly down yesterday. Germany’s DAX (DE40) decreased by 1.10%, France’s CAC 40 (FR40) fell by 0.69%, Spain’s IBEX 35 (ES35) fell by 0.68%, and the UK’s FTSE 100 (UK100) closed down by 0.36%.

German inflation in July 2023 was up by 6.2% on an annualized basis. In June 2023, inflation was up by 6.4% y/y. The report indicates that high food prices continue to have an upward impact on inflation. In addition, the increase in energy prices was again slightly more significant than in the previous two months. Especially noticeable was the dynamics of electricity prices. In July 2023, consumers had to pay 17.6% more for electricity than in July 2022. In June 2023, the growth was 10.5%. Such a significant increase is mainly due to the abolition of the electricity tariff surcharge on July 1.

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Disappointing PMI data for the manufacturing sector in Germany and the EU continues the trend of deteriorating fundamentals in Europe. After the single market narrowly avoided a technical recession in the first quarter, the outlook for the euro area remains uncertain. The recent rise in core inflation leads to a scenario that the ECB wants to avoid at all costs: high sustained inflation and stagnant growth. If inflation rises, the Governing Council would have to raise rates or keep them elevated, risking a recession in Europe.

China’s export and import data continues to deteriorate, hitting oil markets. On Tuesday, prices for US West Texas Intermediate crude and UK Brent crude initially fell by 2% after China’s July trade data showed exports contracted at the fastest pace in 3.5 years. However, oil prices returned to positive territory by the close of trading amid renewed excitement over Saudi Arabia’s production cuts.

Asian markets traded yesterday without any unified dynamics. Japan’s Nikkei 225 (JP225) gained 0.38% yesterday, China’s FTSE China A50 (CHA50) fell by 0.16%, Hong Kong’s Hang Seng (HK50) lost 1.81% on the day, and Australia’s S&P/ASX 200 (AU200) gained 0.03%. Most Asian stocks declined on Wednesday as weak Chinese inflation data added to concerns about the region’s largest economy.

China’s inflation rate moved into deflationary territory to minus 0.3% year-on-year. Factory inflation rose slightly to minus 4.4% from minus 5.4% in annualized terms. The decline in consumer inflation is associated with a slowdown in China’s manufacturing sector. Weak economic trends are likely to lead to more stimulus from Beijing as the government seeks to support the economic recovery.

S&P 500 (F)(US500) 4,499.38 −19.06 (−0.42%)

Dow Jones (US30) 35,314.49 −158.64 (−0.45%)

DAX (DE40) 15,774.93 −175.83 (−1.10%)

FTSE 100 (UK100) 7,527.42 −27.07 (−0.36%)

USD Index 102.56 +0.51 (+0.50%)

Important events for today:

– China Consumer Price Index (m/m) at 04:30 (GMT+3);
– China Producer Price Index (m/m) at 04:30 (GMT+3);
– New Zealand Inflation Expectations (q/q) at 06:00 (GMT+3);
– Canada Building Permits (m/m) at 15:30 (GMT+3);
– US Crude Oil Reserves (w/w) at 17:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

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China is experiencing deflation. Moody’s downgraded the credit ratings of US banks