5 things to start your day: Europe

Good morning. Global equities are tumbling as the US posts weak economic numbers and big tech's woes mount. Central banks' policy paths dive

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Good morning. Global equities are tumbling as the US posts weak economic numbers and big tech's woes mount. Central banks' policy paths diverge. And 'Trump trades' are unwinding. Here's what people are talking about. Please note: Our email domain is changing, which means you'll be receiving this newsletter from noreply@news.bloomberg.com. Update your contacts to ensure you continue receiving it -- check out the bottom of this email for more details.

Stock market meltdown

European equities will likely follow Asian and US markets lower as risk sentiment staggers from the triple blow of a Japan selloff, more lackluster technology earnings and weakness in the US economy.  The MSCI Asia Pacific Index dropped as much as 3%, the most since June 2022, with Taiwan Semiconductor Manufacturing and Tokyo Electron among the biggest drags. Japan's Topix Index headed for a technical correction, while benchmarks in the tech-heavy markets of South Korea and Taiwan also fell. Traders are taking risk off the table as the investment landscape shifts. Japanese stocks are falling out of favor as the prospect of further interest rate hikes by the country's central bank supports the yen, hitting the shares of exporters. And disappointing earnings from US tech behemoths has cooled optimism over artificial intelligence. The regional declines also came after concerns over the health of the US economy emerged. Thursday data showed unemployment claims hit an almost one-year high while manufacturing shrank. Investors will be monitoring payrolls data due later Friday for further clues.

Tech woes extend

Lack-luster earnings from US technology companies added to the dour mood across Asia. Apple predicted its new artificial intelligence features will spur iPhone upgrades in coming months, helping the company reemerge from a sales slowdown that has hit its China business especially hard. The company returned to revenue growth in the period, but sales from China fell 6.5% to $14.7 billion, missing the $15.3 billion projection from Wall Street. Amazon.com risked investor displeasure by warning that profits for now will take a back seat to heavy spending on artificial intelligence. The shares fell after the company projected operating income for the current quarter will be $11.5 billion to $15 billion in the period ending in September. Analysts, on average, were looking for $15.7 billion. And Intel plunged more than 19% after delivering a barrage of startling news, including grim growth forecasts, plus plans to slash 15,000 jobs and suspend dividend payments starting in the fourth quarter. That adds to signs the chipmaker is ill-equipped to compete in the AI era.

Central banks diverge

Three of the world's largest central banks moved interest rates in different directions this week as a long-awaited, but potentially short-lived, divergence in monetary policies deepened. The Bank of Japan kicked off the action on Wednesday by hiking rates as Governor Kazuo Ueda sounded a more hawkish tone as he lifted his benchmark clearly away from zero. Then came the Federal Reserve's decision to stay on hold but signal a cut may come in September, followed on Thursday by the Bank of England's first reduction since the start of the pandemic. Most leading central bankers are shifting their focus to preserving economic growth and employment, while Japan again plays the outlier. Risk assets moved in opposite directions. For now, domestic factors are in the driving seat, meaning the pace and scale of policy shifts will vary across developed economies, though the divide may not last long. US government bonds, on the heels of their best month this year, are rallying hard after economic data seen as cementing the case for three Federal Reserve interest-rate cuts this year.

Trump trades unwind

The surging popularity of Kamala Harris in US election polls and soaring odds the Federal Reserve will soon start cutting interest rates is dealing a double-blow to the so-called Trump trades. In the 11 days since President Joe Biden declared he wouldn't seek a second term and Democrats united behind Vice President Harris, strategies seen benefiting from a win by Donald Trump have lost steam. The dollar has stagnated, Treasuries have rallied and Bitcoin has slid. Polls now suggest a dead heat between Harris and Trump in swing states, handing markets a harsh reminder on the risk of betting on political events. Just weeks ago, an assassination attempt and doubts over Biden's age were seen as helping Trump. The Republican is seen embracing looser fiscal policy, higher trade tariffs and softer financial regulation if he returns to the White House.

Handbag arbitrage

Luxury powerhouses like LVMH and Kering SA are facing a fast-growing foe in China: a gray market that sells brand-new, authenticated goods procured in other countries for discounts of up to 40% on the mainland. Currency fluctuations and Chinese shoppers' growing price-consciousness are giving new life to arbitrage in luxury goods, dominated by an e-commerce platform called Dewu. The value of Louis Vuitton goods sold over Dewu grew 11% to 2.6 billion yuan in the first half of 2024, compared to the same period last year, people familiar with the matter said. That's over 14% of Louis Vuitton's total estimated sales in China for the same period, said the people. Sales of items from other labels like Christian Dior, Hermès, Chanel, and Prada have also seen double-digit growth. Separately UK retail traffic slumped for a 12th consecutive month in July as shoppers chose to spend on holidays and leisure activities rather than on small-ticket items. The number of people entering stores fell 3.3% in July from a year ago, according to data from the British Retail Consortium and Sensormatic IQ released Friday. That exceeded the 2.3% decline the month before.

Coming up

Friday's economic data include Swiss CPI, and French and Italian June industrial production, while later in the day we get US July nonfarm payrolls and June factory and durable goods orders. Central bank speakers include the BOE's Pill and the Fed's Barkin. Expected earnings include Axa and Erste Group.

What we've been reading

This is what's caught our eye over the past 24 hours. Oil heads for weekly drop as demand woes offset Middle East risk Coatue posts biggest monthly loss this year amid tech-stock rout Deutsche Bank is unloading $1 billion in US real estate loans British Airways parent abandons Air Europa pursuit once more Biden promises Netanyahu 'new US defensive military deployments' Starmer warns social media firms about role in UK violence Russia releases US reporter in major swap for Kremlin agents

And finally, here's what Mary is interested in this morning:

France's government woes may not be hitting the headlines, but they remain a burden for the bond market. The underperformance of the nation's 10-year debt -- known as OATs -- will likely continue until there is some resolution on the formation of the new government. The spread between French and German bonds continues to widen and is about 7bps shy of the June 27 peak of 82bps. French President Emmanuel Macron has said he would name a new prime minister and government after the Paris Olympics, scheduled to end on Aug. 11. But the lack of clarity, particularly over plans for reducing the deficit, will keep investors on edge. In the meantime, the caretaker government is forging ahead. The current finance minister recently defined three pillars to reduce public finances: growth, economic reforms including the pension overhaul and reducing government spending. This would bring the budget deficit under 3% of GDP by 2027 -- but that trajectory will be questioned under new management. Economic growth improved, surprising to the upside last quarter thanks to trade, while the Olympics should provide a boost in the current period, but the outlook thereafter is meager. While the bond market awaits another ECB easing, the recent uptick in eurozone inflation may generate concern that a September rate cut is not a done deal. It will come down to the August reading to determine whether July was an aberration. Irrespective of monetary policy, a lack of political clarity will keep French bonds underperforming, especially against bunds. Mary Nicola is a macro strategist for Bloomberg's Markets Live team, based in Singapore.

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