David Fuller and Eoin Treacy's Comment of the Day
Category - General

    Euro Zone Returns to Growth as Core Inflation Stays Strong

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    Second-quarter gross domestic product advanced by 0.3% from the previous three months after shrinking and stagnating in the two earlier periods, according to Eurostat data published Monday. A Bloomberg survey of economists saw an increase of 0.2%.

    A separate release showed consumer prices rose 5.3% from a year ago in July, as expected. But in a sign of lingering dangers, the closely watched underlying inflation measure that excludes volatile costs like food and energy overshot estimates by a touch to stay at 5.5%, surpassing the headline gauge for the first time since 2021.

    German bonds stayed lower after the data, leaving the yield on two-year debt — among the most sensitive to changes in monetary policy — two basis points higher at 3.07%. Money markets maintained odds of about 70% on a further quarter-point rate increase by year-end.

    While the euro zone’s GDP number looks encouraging, it was buoyed by a bumper three months from Ireland, which expanded by 3.3%. The country comprised less than 4% of the bloc’s overall output last year, and contributed about 0.1 percentage point to second-quarter growth.

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    A 'Dangerous' Consensus Has Traders Staking It All on Goldilocks

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    Fast-money quants known as commodity trading advisers have been amassing a big short bet since May. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates that they are sitting on a $150 billion short bond position that they may unwind in a rally.

    The flip side of the extreme shift is that negative surprises can have an outsize influence. In March, banking turmoil caused equities to sink and Treasuries to rally, forcing commodity trading advisers to unwind $200 billion of bonds in the span of a few days, according to JPMorgan Chase & Co. A growth scare could reprise this episode.

    Nevertheless, it will be hard to stop the market momentum. Strategists have revised upwards their S&P 500 targets and economists have softened their dire predictions. Some of the biggest downside risks threatening the economy — inflation rising to a four-decade high, a looming recession — have since faded.

    “It would require a massive rally in bonds that would probably only occur with some sort of growth scare from a data shock,” said Charlie McElligott, cross-asset strategist at Nomura Securities International. “We have seen economic growth data hold, labor staying firm, and even US housing recovering.” 

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    Burning Ship's Operator Says Almost 500 EVs Are on Board

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    The car carrier on fire near the Netherlands coast has almost 500 electric cars on board, according to its operator, more than was previously reported.

    The cause of the blaze on the Fremantle Highway is still unknown, according to the Dutch coast guard, which previously said the initial cargo list they received suggested just 25 EVs were on the ship.

    Whether EVs had anything to do with precipitating the fire, the number on board is relevant to what’s likely to be a days-long effort to extinguish it. Lithium-ion battery fires burn hotter and last longer than gasoline. They can also be difficult to put out, sometimes reigniting hours or days later.

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    Most European Banks Fare Better in Key Test for Payouts

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    Despite €496 billion ($547 billion) of combined losses in the test, European banks “remain sufficiently capitalized to continue to support the economy also in times of severe stress,” the EBA said.

    Most of Europe’s major banks saw a smaller erosion of their common equity tier 1 ratio than in the last exam. Deutsche Bank AG saw its hit narrow to 5.28 percentage points, from 6.2 percentage points, while the impact at BNP Paribas SA narrowed to 3.92 percentage points from 4.4 percentage points. ING Groep NV of the Netherlands faced a bigger erosion.

    The European units of major US banks were included for the first time and faced bigger-than-average hits. 

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    Oil Rallies to $80 as US Economic Growth Improves Demand Outlook

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    Oil rose to the highest since April as signs of economic strength in the US improved the outlook for demand, outweighing concerns about a price correction based on technical factors.

    West Texas Intermediate settled above $80 a barrel as US economic growth exceeded expectations and speculation mounted that the Federal Reserve is nearing the end of its monetary tightening cycle. But crude is trading in overbought territory on its relative strength index for a third day, raising the threat of a pullback. 

    “Crude extending the bullish rally, led by ‘risk back on’ sentiment in the equity markets, is keeping the buyers present in the crude space,” said Dennis Kissler, senior vice president for trading at BOK Financial Securities. Yet “the market has gone up too far, too fast with speculative buying, and that is creating the overbought condition, so we should see some erratic corrections soon.”

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    Analysis-Investors dumping China load up on other emerging markets

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    Some of the money is being diverted into markets directly benefiting from China's economic pain, such as Mexico, India, Vietnam and other locations that are replacing it across global manufacturing supply chains. Other investors are simply moving to markets with better growth prospects, such as Brazil.

    "China’s export dominance is ebbing, creating opportunities for other emerging market countries to fill the gap, including Mexico, India, and Southeast Asian nations," said Malcolm Dorson, a New York-based senior portfolio manager at ETF manager Global X.

    The scale of change needed in global supply chains could drive such capital flows for the next decade, he said.

    Refinitiv data shows China-focused mutual funds suffered a net outflow of $674 million in the second quarter of this year, while, in contrast, nearly $1 billion went into EM ex-China mutual funds.

    The iShares MSCI Emerging Markets ex-China ETF, the world's largest emerging market ex-China ETF whose biggest holdings are firms in Taiwan, South Korea and India, attracted a record $1 billion net inflow in the first half of 2023, the data showed.

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    Japanese Population Falls in All 47 Prefectures for First Time

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    “The situation is dire and proves government policies to halt the declining birthrate have fallen short,” said Hideo Kumano, an economist at Dai-Ichi Life Research Institute. “The data shows there’s a limit on what can be achieved by easing the burden of raising kids with subsidies. What’s important is to secure employment opportunities in the regions, too.”

    Last year, the number of children born nationwide fell under 800,000 for the first time since records began in 1899. The population of Japanese nationals has been falling continuously for 14 years, and for the first time this included the southern prefecture of Okinawa, historically known for a high birthrate. 

    Kishida’s promised to spend about ¥3.5 trillion ($24.8 billion) on measures to increase the birthrate, without fully explaining how this will be funded. Among the policies is an expansion of cash handouts to families with children, regardless of parental income. Experts have warned the policy package fails to tackle the root causes of the declining birthrate, such as a lack of stable job prospects.  

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