Wild Swings Engulf Global Equities

U.S. stock markets experienced significant volatility. An early-week rally pushed the markets to new highs, but this momentum faded, primarily due to weaknesses in the tech sector. The major indices had a mixed finish with, S&P 500 and Nasdaq closed lower, while the Dow recorded a notable gain. 

In the past fortnight saw a shift in market leadership toward Small-Cap and value stocks. The Dow Jones Industrial Average, a more narrowly focused index, outperformed, and value stocks outpaced growth stocks by 477 basis points (4.77 percentage points). This divergence marked the largest since March 2023, when growth stocks outperformed by 654 basis points. 

A key factor behind the underperformance of growth stocks was a significant decline in chip company stocks. This followed news that the Biden administration was considering stringent export curbs if companies like Tokyo Electron and the Netherlands’ ASML Holding continued providing China with advanced semiconductor technology. Major chipmakers, including Taiwan Semiconductor Manufacturing, Broadcom, and NVIDIA, saw substantial declines. 

Despite solid returns this year, overall gains in the S&P 500 have been heavily influenced by sharp increases in the largest tech companies. The S&P 500 is market-cap weighted, meaning larger companies have a greater impact on the index's movements. The average year-to-date gain of 37 per cent for mega-cap tech companies like Apple, Microsoft, Amazon, Alphabet, Meta, NVIDIA, and Tesla has been a driving force for 2024, continuing 2023's trend where the "Magnificent 7" significantly contributed to the S&P 500's 26 per cent gain. 

Market analysts noted that polls suggesting a potential Republican sweep in the November elections appeared to benefit value stocks. The prospect of reduced banking regulations seemed to boost the value-oriented financial sector, while expectations of higher tariffs under a possible Trump administration favoured industrial and business services shares.

Economic reports mostly exceeded expectations. Notably, retail sales, excluding the volatile gas and auto segments, jumped 0.8 per cent in June, marking the largest increase since January 2023. However, the Labour Department’s weekly jobless claims report showed a rise in the number of Americans filing for unemployment, reaching 2,43,000—a nine-month high. 

In Europe, the pan-European STOXX Europe 600 Index fell 2.68 per cent, influenced by escalating U.S.-China trade tensions. Among major Continental indexes, Germany’s DAX dropped 3.07 per cent, France’s CAC 40 lost 2.46 per cent, and Italy’s FTSE MIB declined 1.05 per cent. The UK’s FTSE 100 Index fell 1.18 per cent. The European Central Bank (ECB) kept its key interest rates unchanged at 3.75 per cent, as expected. The ECB emphasized that future decisions would be datadriven. 

In Japan, stock markets declined, with the Nikkei 225 Index falling 2.7 per cent and the TOPIX Index down 1.2 per cent. Speculation about potential interest rate hikes by the Bank of Japan (BoJ) at its July end meeting, alongside details on tapering its bond purchases, led to a slight drop in the yield on the 10-year Japanese government bond, from 1.06 per cent to 1.04 per cent. 

Chinese equities rose despite weaker-than-expected second-quarter economic growth in the past fortnight. The Shanghai Composite Index increased by 0.37 per cent, and the CSI 300 climbed 1.92 per cent. However, Hong Kong’s Hang Seng Index fell by 4.79 per cent. China’s GDP grew by 4.7 per cent in the second quarter, below expectations and slower than the 5.3 per cent growth in the first quarter. On a quarterly basis, the economy expanded by 0.7 per cent, less than half of the previous quarter's revised 1.5 per cent growth.