Global Stock Market Faces Challenges as Investors Worry
Stock markets around the world are experiencing a rough patch as concerns over a potential trade war and weak global manufacturing data weigh on investor sentiment. The recent selloff in stocks, which was initially driven by fears of escalating trade tensions, now seems to be transforming into a consolidation phase following the sharp gains of the past two weeks.
Despite a strong start by the bears, they have struggled to maintain control, with high-cap tech stocks acting as a saving grace for the bulls. The performance of the S&P will be closely watched as it is being pulled in different directions by the Dow and Nasdaq. It appears that some investors may have extended their holiday breaks, contributing to the mixed trading sentiment.
Recent data on global manufacturing has raised concerns. The June S&P Global-Global Manufacturing Purchasing Managers’ Index (PMI) came in at 48.8, the lowest level of the year and marking the tenth consecutive month below the 50-point threshold indicating contraction. The US ISM Manufacturing PMI for June was also below 50 for the eighth straight month. The ISM report highlighted weak demand, production slowdowns due to lack of work, and reduced employment as companies manage outputs amid pessimism about the second half of the year.
The question now is whether the weakness in manufacturing will spill over to the services sector or if strength in services can eventually lift the manufacturing industry. In Europe and Asia, the service sector has begun to soften. The final reading of the Eurozone services PMI for June was 52, lower than the initial estimate of 52.4 and the May figure of 55.1. This represents the lowest reading since January, and businesses’ growth expectations for the next 12 months have weakened. The UK services PMI also dropped to 53.7, the weakest level since January, with concerns about the impact of higher interest rates and cost of living pressures.
China’s services PMI from Caixin, which focuses on the private sector, fell to 53.9 in June from 57.1 in May, well below expectations. The Caixin report noted that the slower rise in business activity was due to weaker-than-expected demand conditions. However, the travel and leisure sector in China continues to thrive thanks to a revival in tourism and travel after easing pandemic restrictions. Optimism about the 12-month outlook also strengthened in June.
While China is facing criticism from around the world, there are still positive signs in its economy. The China Beige Book’s Q2 review suggests that China’s economic rebound is not finished yet. The report highlights accelerating retail earnings and sales volumes, as well as continued growth in travel and hospitality. On the manufacturing side, revenue has improved for three consecutive months. Export orders remain weak due to global weakness, but there are signs of optimism for the future.
In Japan, services moderated as its PMI fell by 1.9 points to 54, which is also the lowest level since January. Australia’s services PMI slipped just above 50 at 50.3, indicating stagnation.
Looking ahead, it is crucial to consider the impact of a persistent higher cost of capital on economic growth. With a highly leveraged economy, businesses are facing higher interest rates on loan renewals and new debt, which will lead to more bankruptcies, increased interest expenses, and the need for more equity. This higher cost of capital could hinder economic expansion.
As we prepare for the release of Q2 earnings reports, it is important to note that two major drivers of profit margin expansion over the past 15 years – low labor costs and low interest expenses – have now reversed. Labor costs are rising, and interest rates are no longer at rock-bottom levels.
In conclusion, global stock markets are facing challenges as concerns about a trade war and weak global manufacturing data weigh on investor sentiment. The performance of the service sector will be crucial in determining whether the weakness in manufacturing spreads to other sectors. The impact of a persistent higher cost of capital on economic growth should also be closely monitored. Despite the negative sentiment, there are still pockets of strength in China’s economy, particularly in the travel and leisure sector.
