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Last week, the MSCI All Country World Index (MSCI ACWI) gained 0.5% (14.5% YTD).
In the US, the S&P 500 Index closed with a small loss of -0.1% (17.3% YTD). The major equity indexes finished mixed, with value stocks leading the market as Brent oil price rose above USD 93 per barrel for the first time since November 2022. Large-cap shares outperformed small-caps. The Russell 1000 Growth Index returned -0.7% (29.7% YTD), the Russell 1000 Value Index 0.5% (5.4% YTD) and the Russell 2000 Index -0.2% (6.0% YTD).
Technology and growth stocks lagged after Apple’s new product introduction event on Tuesday that featured a price increase on its top-of-the-line iPhone 15. The products received mixed reviews, which also seemed to dampen sentiment toward the technology sector over the course of the week. However, broad market sentiment received a boost from the largest initial public offering of 2023 as shares of UK microchip designer Arm started trading on the Nasdaq on Thursday and experienced a first-day price jump. Over the week, the technology-heavy Nasdaq Composite declined -0.4% (31.8% YTD).
In Europe, the MSCI Europe ex UK Index added 1.2% (12.2% YTD) after the ECB raised interest rates but signalled that borrowing costs may have reached a peak. Better economic data out of China also appeared to lift investor sentiment. Major continental stock indexes advanced. Germany’s DAX Index tacked on 0.9% (14.1% YTD), France’s CAC 40 Index firmed 1.9% (17.1% YTD) and Italy’s FTSE MIB Index climbed 2.3% (26.7% YTD). Switzerland’s SMI Index moved up 2.3% (7.5% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.07 for EUR.
In the UK, the FTSE 100 Index jumped 3.1% (6.6% YTD), helped by the depreciation of the UK pound versus the US dollar. The pound ended the week at USD 1.24 for GBP, down from 1.25. A decline in the UK currency helps to support the index, which includes many multinational companies that generate meaningful overseas revenue. The domestically focused FTSE 250 Index was up 1.8% (2.1% YTD).
Japan’s stock markets gained over the week. The Nikkei 225 Index added 2.8% (30.1% YTD), the broader TOPIX Index increased 2.9% (30.2% YTD) and the TOPIX Small Index firmed 1.2% (23.3% YTD). Positive Chinese economic data, amid tentative investor anticipation that the country’s stimulus efforts are having the intended effect on growth and markets, supported sentiment. Strength in US stocks and yen weakness, benefiting Japan’s exporters, added to the favourable investment backdrop.
In Australia, the S&P ASX 200 Index rose 1.9% (8.4% YTD) as strong US economic readings reinforced the “soft landing” view and China industrial production and retail sales beat lifted up spirits. The August Australia employment data did little to move Australian government bond yields. The Australian dollar strengthened against the US dollar by 1.3%.
MSCI Emerging Markets Index closed the week up 1.3% (5.5% YTD), with a positive contribution to performance from the stock market of Taiwan, India, South Korea and Brazil.
Chinese equities were mixed after official indicators revealed that the country’s economy may have bottomed, although data also pointed to ongoing weakness in the property market. The Shanghai Stock Exchange Index was broadly flat, adding 0.1% (3.5% YTD), but the blue-chip CSI 300 Index shed -0.8% (-2.0% YTD). In Hong Kong, the benchmark Hang Seng Index was broadly flat, increasing 0.1% (-4.9% YTD).
In Türkiye, the central bank introduced additional monetary measures intended to limit the attractiveness of bank deposits protected from foreign exchange (FX) fluctuations. Specifically, the central bank raised the reserve requirement ratio (RRR) for FX-protected deposits with maturities up to six months to 25% from 15%, and it reduced the RRR with maturities over six months to 5%. For perspective, more than 80% of Türkiye’s FX-protected deposits have maturities of less than six months.
According to T. Rowe Price sovereign analyst Peter Botoucharov, the risk to the ongoing fight against FX-protected deposits is potential outright demand for US dollars, as local investors and consumers switch back from FX-protected deposits to either lira deposits or plain vanilla deposits denominated in dollars or other currencies. While Botoucharov expects to see further central bank measures to make non-lira deposits less attractive, he also believes that interest rates on lira deposits need to offer an attractive alternative. At present, commercial banks’ deposit rates are hovering around 30%; these would need to rise to at least 40% to 45% to be more attractive in an environment where 12-month inflation expectations are about 50%.
In Brazil, the government reported that inflation in August was lower than anticipated: 0.23% month over month versus expectations of 0.28%. The headline year-over-year inflation rate increased to 4.6%, which T. Rowe Price sovereign analyst Richard Hall says is not surprising because the base effects from former President Jair Bolsonaro’s preelection energy price cuts have dropped off the annual number.
Hall believes that the underlying details of the inflation report look relatively positive. There were two trends that somewhat offset each other, as food price deflation accelerated in August while electricity prices moved higher on a regulatory price change. Regarding core inflation, Hall notes that core services inflation – which is sensitive to monetary policy changes – seems to have moved lower, while there was some pressure in core goods categories, such as beauty products and clothing. Hall concludes that the latest data provide stronger evidence of ongoing disinflation in the Brazilian economy.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.2% (2.1% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.2% (6.7% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -0.2% (2.7% YTD).
US Treasury yields increased modestly over most maturities. The 10-year US Treasury yield increased 6bp during the week, up to 4.33% from 4.27% (up 46bp YTD). The 2-year yield increased 5bp, up to 5.04% from 4.99% (up 61bp YTD).
European government bond yields broadly declined on hopes that the ECB may have finished raising interest rates. However, the yield on the 10-year German government bund increased 6bp over the week, ending at 2.67% from 2.61% (up 11bp YTD).
Bond yields in the UK weakened after a bigger-than-expected drop in monthly GDP in July. The yield on UK 10-year gilt decreased -7bp, from 4.42% to 4.35% (up 69bp YTD).
As a result of the speculation about potential BoJ monetary policy normalisation, Japanese government bonds (JGBs) slumped, sending the yield on the 10-year JGB to 0.71%, the highest since 2013, from 0.65% at the end of the prior week.
Issuance was heavier than expected in the US investment-grade corporate bond market, with the new supply mostly made up of shorter-maturity bonds. According to T. Rowe Price traders, the high yield bond market was mainly focused on the busy primary calendar, and sellers seemed to be making room for new issues. Similarly, bank loan market participants appeared to concentrate on newly issued loans.
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