European stock prices were initially subdued after a negative close on Friday, as the London-headquartered HSBC bank, which makes most of its profit in China and Hong Kong but at the same time is the EU biggest lender, announced today that its pre-tax profits dropped more than 80% to £0.842 billion in the second quarter, down from £4.7 billion a year ago. The bank giant accelerated 35,000 job cuts and was forced to put aside another £2.9 billion to cover bad debts, warning its bad loans could exceed a previous total estimate, which could reach £10 billion by the end of 2020. They said the outlook would depend on the path of the pandemic and rising geopolitical tensions that could influence their key markets including Hong Kong and the U.K., as the bank has come under fire over its support for China’s controversial security laws in Hong Kong.
HSBC shares were 5.8% down by midday on Monday compared to last week's closing price. The Stoxx 600 Banks (SX7P) composite index lost 0.7%, as other banks made disappointing releases. France's Societe Generale declined 2.3% as it reported a €1.26 billion loss in the second quarter after booking a write-down on the value of its trading business. Last week, the Spanish Santander bank slumped to €11.1 billion loss after write-downs, and it took a €6bn cut related to Santander's U.K. branch amid a heavy economic outlook, marking the first loss in the Spanish lender’s 163-year history. It happened after the bank wrote off €6.1 billion of goodwill left over from the purchases that created Santander U.K. in the 2000s. The French BNP Paribas bank reported in a more or less positive wave on Friday. The American AIG insurance corporation, which has operations in more than 80 countries, is going to make a release today, as well as the famous Berkshire Hathaway investment fund created by Warren Buffett.
Barron's.com, which is one of the flagships in the financial media world, issued by Dow Jones & Company, just wrote: "Investors have warmed to Berkshire Hathaway in the past month, with the stock gaining 10% — ahead of the 5% rise in the S&P 500 index — and several factors appear to driving the advance... Berkshire has been buying up lots of Bank of America, it can go up to a nearly 25% stake... Investors like Berkshire are usually limited to a 10% stake in a bank. But Berkshire asked and received permission from the Federal Reserve Bank of Richmond in April to go over that threshold. It has deployed capital in new investments in the energy pipeline sector... and made a disclosure that implied a sizable stock buyback of about $5 billion in the second quarter". Thus, the report submitted by the Oracle of Omaha's "baby" may add some charm to the market's life after the financial sector's releases.
After the afternoon, the major global stock indexes in both Europe and the U.S. got some of their bearings back. Among positive factors is another improvement in the Chinese Caixin manufacturing Purchasing Managers Index (PMI) data for July which is up to a strong 52.8 points level, and the similar good manufacturing releases from the EU, including especially 53.5 points for the Spanish PMI and 52.4 points for the French PMI. Before the end of the day, a similar kind of release for the industrial PMI by the U.S. Institute of Supply Management (ISM) is highly expected. Most experts from Bloomberg and Reuters polls believe that these figures may also rather indicate a good pace of economic recovery after the corona bottom.
The possible paradox, however, may be that any positive macro reports from the United States may support stock assets, at least in the mid-term. But the same positive news may result in further weakening of the U.S. Dollar if economic data on any continent would be inspiring, then there is no more reason to buy more U.S. Dollars or to buy more U.S. Treasury bonds as safe haven instruments. The more fears there are in the world, the higher the demand for U.S. bonds and for the U.S. Dollar. But if fears start to disappear, there will likely be less need for safe haven Dollars too. The market's final reaction to the U.S. employment report at the end of the week may be similar: of course, if the job statistics is much better than expected.
The fresh economic assessments from the Reserve Bank of Australia (RBA) on Tuesday morning and from the Bank of England (BoE) on Thursday may also either cheer or disappoint the Aussie, the British Pound and other currency competitors of the Greenback, as well as to influence the global stock markets. Many traders are waiting for press conferences of these two central banks especially after the rhetoric of the European Central Bank (ECB) turned out to be moderately positive in July. The ECB did not focus on the troubles but emphasised the effectiveness of the adopted measures, and it helped the single European currency to soar and reach 1.19. So, the markets are eager to see whether the commentaries of the two other currency issuers cause another step up for the Australian Dollar or for the British Pound. Again, if the strength of the central banks' economic and monetary arguments are not be enough, then just some flat or even downside corrective movements in AUD/USD, GBP/USD and EUR/USD may continue.
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