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Good morning. Financial markets are entering the climax of the week. On one hand, we are observing a deepening correction in the technology sector, which is starting to cause structural tensions on Wall Street in the form of margin calls. On the other hand, temperatures are rising again in the Middle East, which was immediately reflected in oil prices. All of this is happening just hours before a crucial decision by the US Federal Reserve (Fed), which must weigh the latest, unexpectedly weak US labor market data.
Geopolitical Environment
- End of a brief pause and a spike in oil prices. Only yesterday, markets were focused on the correction in the black gold market, triggered by a temporary halt in strikes between the US and Iran. Today, this scenario has reversed. Renewed military action and escalating tensions in the Middle East have pushed Brent crude prices up by more than $3 per barrel. An additional factor supporting commodity valuations are estimates from the American Petroleum Institute (API), pointing to a significant drop in US crude inventories last week. (Sources: ICIS; The Guardian; Reuters; IG).
Top Stories Today
- A painful reality check for AI valuations and margin calls. The sell-off in tech stocks, which we covered yesterday, is gathering pace. US indices heavily weighted toward the artificial intelligence sector, including the Nasdaq, are approaching levels viewed as a technical correction. Sharp declines forced leading investment banks, including Goldman Sachs and JPMorgan, to increase collateral calls on certain hedge funds. This points to growing nervousness and a need for risk reduction across the financial system. (Sources: Financial Times).
- SK Hynix results drag down Asian markets. The South Korean semiconductor giant reported strong operating profit growth in Q2, but failed to meet the extremely high consensus among LSEG (London Stock Exchange Group) analysts. This was enough to trigger a massive sell-off in the company's shares, dragging down the broader market in Seoul (Kospi index) and Japan's Nikkei. At the same time, reports are emerging regarding China's progress in developing its own lithography machines, further weighing on sentiment in the chip sector. (Sources: Financial Times).
- Weaker US labor market shifts Fed expectations. The US economy created just 57,000 new jobs in June. This result is drastically lower than the market consensus of around 110,000, despite the unemployment rate falling to 4.2%. Analysts note that following the release of these data, the market-implied probability of an interest rate hike at today's Fed meeting (calculated, among others, based on CME futures) dropped significantly. (Sources: MarketWatch; T. Rowe Price).
- European banks deliver positive surprises. In contrast to the discounted tech sector, major European financial institutions are reporting stellar results. UBS increased net profit by 17% to $2.8 billion, recording a massive $36 billion inflow of net new assets in wealth management, while its investment banking profit doubled. Deutsche Bank also beat expectations, posting a 10% increase in net profit to €1.9 billion on the back of strong performance in rates and credit trading. Meanwhile, Standard Chartered beat pre-tax profit forecasts, raised its full-year outlook, and announced a $1 billion share buyback. (Sources: Financial Times; Reuters; Investing.com).
Market Background
- Visa cuts jobs to invest in AI. The payment processor announced a plan to reduce approximately 2,600 jobs. The goal is to improve operational efficiency and free up capital to develop and integrate artificial intelligence technologies. The market greeted this news with moderate optimism, leading to slight gains in the stock price following the announcement. (Sources: Reuters).
- South Korea tightens ETF rules and opens FX market. The local Financial Services Commission (FSC) brought forward to July 31 the implementation of stricter rules for retail investors trading single-stock leveraged ETFs. The minimum deposit will increase from 10 to 30 million won and must be covered strictly in cash. At the same time, Korea launched a 24-hour onshore trading system for the USD/KRW currency pair to boost its liquidity and global appeal. (Sources: The Korea Herald; Reuters; Economic Times).
- Liquidity injection in China and a glitch in Europe. The People's Bank of China (PBOC) injected approximately 600 billion yuan into the market via overnight reverse repo operations, providing substantial liquidity support that was higher than at the start of the week. Meanwhile in Europe, the European Central Bank (ECB) dealt with a brief outage of its key Target2 payment system, though the service quickly returned to normal operation. (Sources: Economic Times; Reuters).
Key Events to Watch
- 07-29, 20:00 – US: FOMC (Fed) Interest Rate Decision. Today's headline event. Following weaker labor market data, investors will be looking for signals regarding the monetary policy path for the coming months. A press conference with the Fed Chair will be held half an hour after the decision.
- 07-30, 13:00 – UK: Bank of England (BoE) Rate Decision. An event tied to the publication of the Monetary Policy Report, which will set the short-term trends for the British pound (GBP).
- 07-30, 14:30 – US: Advance GDP (Q2) and Core PCE Index. A combination of key data showing the growth pace of the US economy along with the Fed's preferred inflation gauge.
- 07-31 – Japan: Bank of Japan (BoJ) Rate Decision. With a historically weak yen, which we noted in previous briefs, markets are eagerly awaiting the updated quarterly economic report and potential steps toward monetary policy normalization.
- 07-31, 11:00 – Eurozone: Flash CPI Inflation. The July reading will serve as the primary benchmark for the ECB's upcoming decisions.