The Weekly Market Monitor

Your Weekly Digest of Market News and Analysis from the Editors

July 30, 2023

Notable market news this past week (30-Jul-23)

Here is the Skeptivest roundup of the latest market headlines for the week

🇯🇵 Did the BOJ heralded the start of a slow shift from ultra-loose monetary policies?

"Still, it seems clear that the BOJ is setting the stage to widen and eventually abandon YCC." - Matt Simpson, Senior Market Analysts, City Index, Brisbane

Context for new readers: The Bank of Japan manages initiated a Yield Curve Control (YCC) in 2016 to stimulate growth and hit a 2% inflation target as Japan faced a massive problem of deflation, with people hoarding cash instead of spending them. The goal was to essentially flood the economy with cheap capital to maintain ultra-low interest rates in order to revive growth. To do so, the BOJ bought significant amounts of Japanese Government Bonds by printing money in order to keep yields low.

BOJ shocks the market: BOJ caused significant turbulence in financial markets as it relaxed its control over bond yields. The BOJ said on Friday that it will tolerate yields on 10 year government bonds of up to 1% from previous 0.5%. Note that the BOJ maintained that these would be "references" rather than "rigid limits". This action resulted in Japan's 10-year yield bond reaching its highest point since 2014, leading to major fluctuations in the yen and sparking a discussion about whether the country is embarking on a path towards policy normalization.

Pressure to alter policy lately: Pressure had been mounting on the central bank to alter the policy (i) amid elevated inflation and improved wage growth in Japan. (ii) There has also lately been greater investor interest in Japan, especially after Buffett's very public investments into couple of Japanese trading houses. (iii) Interestingly, the policy shift also comes at a time when overseas debt has become increasingly unappealing for Japanese investors with the soaring cost of hedging against swings in the value of yen (higher interest rate differentials)

Implications on global fund flows: The policy shift also sent jitters across US and European bond markets as traders are betting that Japanese investors will start to repatriate cash back to Japan with increasing appeal of the domestic bond market. Japanese investors are the biggest foreign holders of US government debt and own sizable amounts of European bonds.

Personal thoughts - Keeping JGB yields ultra low was probably unsustainable to begin with: The BOJ already owns >50% of outstanding Japanese Government Bonds. Obviously, they can't print money forever to keep JGB yields low. It is a sign that the BOJ is caving in. When that happens, JGB yields may shoot through the roof and result in a recession that may see ripple effect across the world.

🇺🇸 What recession? - The US soft-landing

“What the Fed has to worry about is whether or not there will be a later rebound in inflation.” - Diane Swonk, chief economist at KPMG LLP

Stronger economy than expected: Shortly after Fed Chairman Jerome Powell stated that the Fed no longer foresees a recession, Commerce Department data released on Thursday revealed that the national GDP experienced a year-over-year growth rate of 2.4% in the second quarter. This growth surpassed the predictions of most analysts and against all the predictions that the Fed's rate-hike campaign would trigger a downturn.

Inflation measures fall: Signs that things are moving in the direction the Fed wants. Last month, the personal consumption expenditures price index exhibited a growth of just 3% compared to the previous June. Employment cost index also rose at its slowest rate in two years.

Mission not over: Powell said he doesn’t see inflation falling to the Fed’s 2% target until at least 2025.

Fed continue to hike nonetheless: On Wednesday, the Fed resumed its most assertive series of interest rate hikes in the past four decades. Fed hikes interest rate by 25bps to a level not seen in 22 years and hinted at the potential for additional actions in the future.

Possible hike in September: Powell left open the possibility of further hikes, which he emphasized will depend on incoming data.

🌆 eBay, a story of how constant reinvention and pursuit of new growth pillars are of utmost importance

eBay is making investments in the luxury segment, especially as overall usage trends show a decline amidst strong competition

Shares tanked: During the last quarter, eBay experienced a 5% increase in sales, reaching $2.5b. However, the company's profit forecast was disappointing. Apps download and users are trending down as e-commerce competition gears up.

Doubling down on luxury market: eBay’s long been a secondhand-shopping go-to. But it has since lost market share to rivals like Amazon and Walmart. Hence, it is doing into the luxury market in hopes of boosting earnings and differentiating itself from rivals. In a recent move, eBay expanded its designer-certified program to encompass prominent streetwear brands such as Kith, Supreme, and Off-White. It also acquired Certilogo, which creates virtual tags to track brand-name goods.

Questionable timing: In our current macro climate, consumers are probably cutting back on such material splurges. High end luxury watches like Rolex, Patek Philippe and Aduemars Piguet continue to fall in the secondary market.

☕️ Quick fire happenings to note

  • Chinese Tech: China has requested its major technology firms to furnish case studies of their most triumphant startup investments in consumer, telecom, and media enterprises. This indicates that the authorities are prepared to grant these companies more flexibility in supporting such ventures, as they had imposed strict regulations on them, effectively bringing such investments to a standstill two years ago.
  • Chinese youth working as "full-time children": Unemployment for Chinese youth age 16 to 24 hit a record 21.3% last month. Young people in China are moving home to be "full-time children", getting paid to help out their families, amidst bleak job prospects.
  • Musk rebrands Twitter to X: Musk replaced Twitter’s famous bird logo (what the company calls its “most recognizable asset”) with an “X”. Musk intends to create an “everything app” under a new company called X Corp. Experts say Musk has wiped out $4b to $20b of brand value. Just last week, Cathie Wood’s ARK Investment Management wrote down its stake in Twitter by 47%
  • Zuckerberg's year of efficiency yielding dividend and extend gains for tech stocks: Meta recorded its most profitable quarter since 2021, generating $32b in revenue. Nevertheless, its Reality Labs division, which develops Meta's metaverse technology, has logged >$21b loss since start of last year. This comes after Alphabet shares rallied after it reported revenue that beat analysts' expectations. Intel shares also surged after as the chipmaker declared an end to the personal computer slump.
  • India's rice export ban: India has banned the exports of non-basmati white rice in an effort by the government to rein in high food prices. India is the world's leading rice exporter, accounting for >40% of the global rice trade. No doubt, supply will drastically tighten and cause price to shoot up.
  • HK joins Malaysia in developing economic hub in Johor, near Singapore borders: Malaysia's MRT and HK's MTR signed a MOU on Friday to develop 2.4ha of land for mixed-use in Bukit Changar. The RM3b development is at the site of the Bukit Changar terminus station under construction that is part of the JB-SG RTS.