Markets give way to geopolitical tension following best month since 2020

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

Major US stock indices slipped on the first trading day of August, after finishing their best month since 2020, as investors became more cautious ahead of another slew of economic data and earnings reports. The S&P 500 shed 0.3%, the Nasdaq fell 0.2% and the Dow was down 0.1%. The energy sector was a big drag as oil prices fell, while gains in Boeing helped to contain the loss after the US approved a plan to resume 787 deliveries. Elsewhere, European markets also struggled to make headway, ending the day lower, dragged by energy and real estate shares. 

Summary

• Equities in Asia mainly fell Tuesday, with the Hang Seng and the Shanghai Composite tumbling near 2.5%, each, amid escalating tensions between Beijing and Washington ahead of US House Speaker Nancy Pelosi’s visit to Taiwan today. Markets in Japan fell over 1%, while the ASX was almost flat as the RBA raised its cash rate for the 4^th straight month. 
• Oil prices slipped further this morning after tumbling almost 5% in the previous session, as weak manufacturing data in major economies highlighted the darkening global economic outlook. In the meantime, there is speculation in the market that Saudi will push OPEC+ to increase oil production at a meeting of the group on Wednesday, as assured by Saudi King Salman bin Abdulaziz to US President Joe Biden when they met on 16^th July. 
• European shares are expected to open on the back foot similar to their US counterparts, as geopolitical tensions rise over US House Speaker Nancy Pelosi’s expected visit to Taiwan later today. 
• The White House sought to dial back rising tension with China over Pelosi’s expected visit to Taiwan on Tuesday, insisting the trip doesn’t signal a change in US posture toward the island and urging Beijing to refrain from an aggressive response.  
• The Reserve Bank of Australia raised the cash rate by 50 bps to 1.85% during its August 2022 meeting. The move followed a 50-bps hike in July and June and a 25-bps rise in May, bringing the cash rate to a level not seen since April 2016. The board said that rate hikes over recent months have been required to bring inflation down and to create a more sustainable demand and supply, adding that the RBA was committing to take further tightening but it is not on a pre-set path, as the size and timing will be guided by the incoming data. 
• The ISM Manufacturing PMI edged lower to 52.8 in July of 2022 from 53 in June, beating market forecasts of 52. The reading pointed to a 26^th straight month of rising factory activity but the weakest rate since June of 2020, as new order rates continue to contract although supplier deliveries improved and prices softened to levels not seen in two years. 
• Ukraine laid out plans to cautiously ramp up grain exports after the first shipment since Russia’s invasion was hailed as an encouraging early step toward unblocking millions of tons of crops and easing global food prices.  The first two weeks will be treated as a trial period, with no more than three vessels a day in each direction through new safe-passage corridors. 
• President Joe Biden said Monday evening that the US conducted a drone strike that killed al-Qaeda leader Ayman al-Zawahiri in Afghanistan, a revelation expected to degrade the terror group’s ability to operate. 
• Elliott Investment Management on Monday said it had become the largest shareholder at Pinterest Inc and that it saw potential for growth at the photo pin-board company. Shares rallied by over 20% after hours.