BOJ Eases Market Strain, Super Micro Faces Challenges – Reuters

Market Outlook: A Week of Recovery and Uncertainty

A look ahead at U.S. and global markets reveals a notable rebound in world markets after a turbulent week. The recovery was partly fueled by comments from the Bank of Japan, which appeared to soften its stance following recent volatility, prompting traders to assess future directions.

Japan’s main stock index briefly returned to its closing value from the previous Friday, achieving a remarkable recovery of nearly 5,000 points, or 12%, in just three days. By the end of Wednesday’s trading session, the index was approximately 1% higher.

As market volatility indicators began to decline toward long-term averages, Shinichi Uchida, the deputy governor of the Bank of Japan, emphasized the importance of maintaining current monetary easing levels in light of recent market fluctuations. He mentioned that the recent volatility, which followed an interest rate increase and hints at more, might compel the central bank to reconsider its tightening measures.

A significant driver of last week’s turmoil stemmed from the Bank of Japan’s actions, which impacted a large yen-funded currency ‘carry trade,’ subsequently driving the yen’s value higher. Estimates suggest that around two-thirds of short yen positions may have already been unwound, as reported by JPMorgan.

The dollar-yen exchange rate rebounded 4% from a seven-month low, reclaiming a position above 147. The U.S. "fear index," which gauges stock market volatility, has decreased to 23—down nearly a third from Monday’s peak and closer to its historical average of 19.3. With reduced fears of a recession in the U.S., Wall Street’s recovery appears set to continue, with futures for all major indexes rising over 1% ahead of the trading session.

Mixed international economic signals contributed to the stabilization. While Chinese export growth fell short of expectations, import figures exceeded forecasts, helping to ease global growth concerns.

Investors are now refocusing on the fundamentals of the earnings season and the prevailing sentiment around potential Federal Reserve rate cuts. Should apprehensions about high-tech valuations and the reassessment of the artificial intelligence sector have contributed to last week’s upheaval, the disappointing earnings from Super Micro Computer might further unsettle that market.

Super Micro’s gross margins fell below projections due to elevated costs associated with AI chip production, resulting in a 14% drop in its stock price. However, other major chipmakers have mostly avoided significant fallout—Nvidia posted a 1.5% rise in early trading.

Despite some sector volatility, overall second-quarter earnings have proven strong, with a projected annual profit growth tracking at 13.7%, surpassing earlier estimates by over two percentage points. Notably, Uber’s recent results exceeded Wall Street expectations, buoyed by consistent demand for its services, contributing to a 5% increase in its stock.

In the interest rate sphere, the broader stabilization in the stock market has slightly softened the Federal Reserve’s outlook, though significant cuts are still anticipated, with futures reflecting expectations of 41 basis points in reductions next month and over 100 basis points by the year’s end.

Treasury auctions have proceeded without issues—Tuesday’s $58 billion three-year auction went smoothly, and a $42 billion benchmark 10-year auction is set for later today. The current yield on the 10-year Treasury stands at 3.93%, over 20 basis points lower than if held a week ago.

Concerns regarding a potential recession remain prevalent, with the upcoming jobless claims data likely to draw particular attention due to renewed fears about labor market weakness. For many investors, a "soft landing" remains the prevailing expectation, supported by anticipated Fed rate cuts.

Stephen Dover of Franklin Templeton Institute highlights that the average stock market return in the year following the first Fed rate cut is close to 5%, even during recessions, and rises to 16.6% when cuts occur without triggering a recession.

In European news, pharmaceutical giant Novo Nordisk revised its full-year profit outlook downward following weaker-than-expected sales of its weight-loss drug Wegovy, raising competitive concerns against Eli Lilly.

Political developments also play a role, as Democratic presidential nominee Kamala Harris and her newly selected vice presidential running mate, Minnesota Governor Tim Walz, campaigned together for the first time in Philadelphia. Harris leads in national opinion polls against Donald Trump, though betting markets indicate a tighter race than before.

Key upcoming events that may influence U.S. markets include:

• U.S. June consumer credit data
• Remarks from Bank of Finland Governor Olli Rehn, a European Central Bank policymaker
• Corporate earnings announcements from major companies including Disney and Warner Bros Discovery
• A Treasury auction of $42 billion in 10-year notes.

Investors will be closely monitoring these developments for further direction.