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Global markets saw an uplift as stock futures rose following a softer-than-expected U.S. inflation report, easing concerns about aggressive Federal Reserve rate hikes. This positive economic news was complemented by robust performance in the tech sector, particularly for AI-related companies like ASML and the Nvidia-Mitsubishi Heavy partnership. However, geopolitical tensions flared with U.S. strikes on Iran pushing oil prices higher, and China reported its slowest GDP growth since 2022.
Global stock futures saw an upward trend early Wednesday, extending a rally initiated by a surprisingly soft inflation report that eased fears of aggressive rate hikes by the Federal Reserve. This positive sentiment was, however, interwoven with escalating geopolitical developments in the Middle East and mixed economic signals from China.
Futures tied to the Dow Jones Industrial Average edged 0.1% higher, while S&P 500 futures advanced 0.2%, and Nasdaq 100 futures led with a 0.7% gain. These movements followed a robust Tuesday session where U.S. equities climbed significantly after a cooler-than-anticipated inflation reading.
The U.S. consumer price index (CPI) showed a 0.4% monthly decline in June, bringing the annual inflation rate down to 3.5%. This was better than the 0.2% monthly decline and 3.8% annual rate economists surveyed by Dow Jones had forecast. The favorable data prompted traders to significantly scale back expectations for near-term Fed tightening, with the probability of a rate hike at the central bank's July meeting plummeting from 42% to 17%, according to CME's FedWatch Tool. However, markets still anticipate a rate increase later in the year, pricing in a 63% chance of a quarter- or half-percentage point hike by September.
Adam Crisafulli, founder of Vital Knowledge, commented on the report, noting, "While energy played a big role in the price deceleration, the easing was pretty broad and spread across a bunch of categories, a relief to investors." Yet, he cautioned that "the Fed and economy aren't in the clear – inflation is still elevated on an absolute basis, oil is back on an upswing, and AI is proving to be very inflationary at the moment."
Asia-Pacific markets mirrored the positive trend, opening higher on Wednesday. South Korea's Kospi surged an impressive 6.3%, with the small-cap Kosdaq gaining 4%. Japan's Nikkei 225 and Topix each added 0.9%, while Australia's S&P/ASX 200 was up 0.6%.
On the corporate front, earnings season has shown a strong start. Major banks like JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs all surpassed analysts' expectations with their Tuesday reports. Investors now turn their attention to Wednesday's busy earnings schedule, featuring results from United Airlines, Morgan Stanley, Johnson & Johnson, and BlackRock.
Key Market and Economic Highlights:
- ASML Raises Forecast on AI Chip Demand: Dutch semiconductor equipment maker ASML hiked its full-year sales guidance for the second time, now expecting between 43 billion and 45 billion euros ($49-$51 billion) and a gross margin of 54-56%. This surge is attributed to continued strong demand for AI chips from its customers. The company also beat Q2 estimates with net sales of 9.3 billion euros and net profit of 2.9 billion euros.
- Oil Prices Climb Amid U.S. Strikes on Iran: Oil prices rose after the U.S. military conducted another round of strikes against Iran and reinstated a naval blockade near the Strait of Hormuz. U.S. West Texas Intermediate futures for August delivery increased 1.01% to $80.14 per barrel, and September Futures for international benchmark Brent were up 1.23% at $85.77. These attacks, involving fighter jets, drones, and naval vessels, targeted missile, drone, naval assets, and coastal defense systems.
- Gold and Treasurys Fall: Following the U.S. military actions, safe-haven assets saw a decline. The 10-year U.S. Treasury yield rose 2 basis points to 4.602%, while spot gold fell 0.6% to $4,030.25 an ounce. Silver also dropped 0.5% to $58.35 per ounce.
- China's GDP Slows to 4.3%: China's economy recorded its slowest growth since 2022 in the second quarter, expanding by 4.3%. This figure missed economists' forecasts of 4.5% and was a slowdown from 5% in the first quarter. The downturn was attributed to an accelerating slide in investments and subdued consumption, despite robust industrial production and exports fueled by the global AI investment boom. Mainland China's CSI 300 saw choppy but ultimately positive trade, up 0.3%, while Hong Kong's Hang Seng index gained 0.8%.
- Mitsubishi Heavy and Nvidia AI Data Center Tie-Up: Shares of Mitsubishi Heavy Industries rose 4.88% after a Nikkei Asia report detailed its collaboration with Nvidia. The partnership will focus on developing cooling systems and energy management equipment for next-generation AI data centers, aiming to enhance energy efficiency.
- IBM Drags on Major Averages: International Business Machines (IBM) shares tumbled 25%, marking their worst day on record. The company warned that second-quarter profits would fall short of expectations due to soft demand in its software and infrastructure businesses. IBM was the biggest detractor for both the Dow Jones Industrial Average and the S&P 500 on Tuesday.
- Pentair Shares Drop on Disappointing Results: Pentair shares fell over 14% in extended trading after the water-treatment equipment maker issued preliminary second-quarter results below Wall Street expectations. The company projected adjusted earnings of $1.12 a share and revenue of approximately $930 million, significantly missing analyst consensus.
