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Weekly Market Recap


26 February, 2024

 


Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below. 

Economic and political backdrop

The UK

In the UK, the composite PMI output index rose to 53.3 in February from 52.9 in January, accompanied by a solid improvement in customer demand.

Bank of England (BoE) Governor Andrew Bailey told a parliamentary committee that he was “comfortable” with investors betting on rate cuts this year, although he also asserted that the economy was “showing distinct signs of an upturn” after a recession last year. He added: "We do not endorse the market curve. We are not making a prediction of when or by how much [we will cut rates]. But...it's not unreasonable for the market to think that.”

The US

The week featured a relatively light economic calendar, with most data coming in roughly in line with expectations. Initial and continuing jobless claims were exceptions. Both came in below consensus estimates, suggesting that the labour market remained tight. On a seasonally adjusted basis, 201,000 new claims were filed in the week ended 17 February, a decline of 12,000 versus the preceding week. The number of continuing claims slipped 27,000 to 1.862 million.

S&P Global released early estimates of its purchasing managers’ indexes (PMIs) for services and manufacturing. The research group’s gauge of manufacturing activity unexpectedly rose to 51.5, its highest level in 17 months, helped in part by an increase in export orders. Business activity in the services sector cooled slightly, with this PMI pulling back to 51.3 from 52.5 in January. Nevertheless, the latest services PMI reading remained above 50, the dividing line between an expansion and contraction in activity.

In a speech delivered on Thursday, Federal Reserve (Fed) Board Governor Christopher Waller opined that higher-than-expected inflation in January, along with the tight jobs market and the economy’s strength in the fourth quarter, “reinforced his view that we need to verify that the progress on inflation we saw in the last half of 2023 will continue.” Waller believes that inflation is “likely” to return to the Fed’s 2% target. But he also cautioned that he would like at least a few more months of data to see “whether January was a speed bump or a pothole.”

Europe

Early PMI data for February suggested that the eurozone economy could be stabilising, helped by a recovery in the services sector. A provisional estimate of the HCOB eurozone composite PMI for output rose to 48.9 from 47.9 in January, an eight-month high but still in contractionary territory (PMI readings below 50 indicate that business activity shrank). The composite PMI for Germany’s economic output declined for the eighth month in a row. Output likewise weakened in France. However, output in the rest of the eurozone expanded for a second month running.

Separately, final data confirmed Germany’s economy contracted -0.3% in the fourth quarter. Government consumption fell sharply due to budget constraints, and gross fixed capital formation shrank as companies cut investment. Meanwhile, the German government sharply reduced its forecast for economic growth this year to 0.2% from 1.3%, citing weaker global demand, geopolitical uncertainty and higher inflation.

Japan

Early-week data showed that core machinery orders were up a seasonally adjusted 2.7% in December, having contracted -4.9% the previous month. This delivered a better-than-expected -0.7% annual decline in machine orders.

Japanese export data also came in strong, rising to a record high in January. Exports increased 11.9%, a second straight month of growth, allaying some fears about slowing global demand. With energy imports also lower, Japan’s trade deficit shrank to roughly half of what it was a year ago.

Later in the week, data from Japan’s manufacturing sector disappointed, with the latest PMI indicating continuing contraction. PMI for this segment of the economy came in at 47.2, down from 48.0 in January. On the services side, PMI data also softened but remained in expansionary territory, easing from 53.1 in January to 52.5 in February.

Equities received a boost after Bank of Japan Governor Kazuo Ueda expressed confidence that moderate inflation was likely to continue as wages grow. Financial markets remained laser-focused on when the central bank will end its negative interest rate policy and break free from years of ultra-loose monetary policy.

China

Tourism revenue over the weeklong Chinese New Year holiday surged 47% relative to the 2023 holiday and surpassed pre-pandemic levels, according to data from the Ministry of Culture and Tourism. Domestic trips rose 34% from last year, and international trips also increased. However, average spending per trip fell -9.5% from 2019, signalling lingering caution among consumers. Moreover, this year’s holiday lasted eight days, a day longer than the 2019 break.

In monetary policy news, the People’s Bank of China (PBoC) injected RMB 500 billion into the banking system via its medium-term lending facility, compared with RMB 499 billion in maturing loans, and left the lending rate unchanged as expected. The operation was targeted at maintaining ample liquidity in the banking system, the central bank said in a statement.

The PBoC announced that the five-year loan prime rate was lowered by a bigger-than-expected -25 basis points (bp) to 3.95%, marking the largest cut since the reference rate was introduced in 2019. Lowering the five-year rate, a key gauge for mortgages, will reduce mortgage rates for homebuyers and aims to shore up demand in the troubled property sector. Policymakers left the one-year lending rate unchanged.

New home prices in 70 cities fell -0.3% sequentially in January, marking the seventh monthly contraction, according to the statistics bureau.

Australia

The Reserve Bank of Australia (RBA) released on Tuesday the minutes of its February Monetary Board meeting. At the meeting, the RBA discussed the possibility of raising the cash rate by 25bp. While the bank refrained from hiking at the end, the Board made it clear in the minutes that a further rise in cash rate has not been ruled out. Later in the week, the fourth quarter wage growth came in at 0.95% quarter on quarter (q/q), slightly above consensus and the RBA’s forecast of 0.9% q/q. Wage growth was stronger for the public sector (1.3% q/q) versus the private sector (0.9% q/q). This data indicated a potential peak in wage growth.



Markets

Last week, the MSCI All Country World Index (MSCI ACWI) gained 1.5% (4.9% YTD).

In the US, the S&P 500 Index moved 1.7% higher (6.9% YTD) during a week shortened by the Presidents’ Day holiday on Monday. The S&P 500 hit new intraday highs, as did the Nasdaq Composite Index, which posted its biggest daily gain in about a year on Thursday, when Nvidia added a record USD 277 billion to its market capitalisation. After Wednesday’s trading session, the chipmaker reported strong quarterly revenue and earnings that topped Wall Street estimates. The company also increased its full-year guidance on robust demand for its chips, which are used in artificial intelligence applications.

Growth stocks outperformed value shares and large caps outperformed small caps. The Russell 1000 Growth Index returned 1.7% (9.2% YTD), the Russell 1000 Value Index 1.4% (3.5% YTD) and the Russell 2000 Index -0.8% (-0.4% YTD). The technology-heavy Nasdaq Composite Index rose 1.4% (6.7% YTD).

In Europe, the MSCI Europe ex UK Index added 1.4% (4.8% YTD) as stellar quarterly results from Nvidia stoked a global rally and demand for technology stocks. Major stock indexes advanced. Germany’s DAX Index put on 1.8% (4.0% YTD), France’s CAC 40 Index increased 2.6% (5.8% YTD) and Italy’s FTSE MIB Index climbed 3.1% (8.2% YTD). Switzerland’s SMI Index strengthened 1.6% (3.2% YTD). The euro was little changed versus the US dollar, ending the week at USD 1.08 for EUR.

In the UK, the FTSE 100 Index was modestly up 0.1% (0.1% YTD), reflecting weakness in mining and energy stocks, and the FTSE 250 Index was little changed (-2.3% YTD). The British pound appreciated versus the US dollar, ending the week at USD 1.27 for GBP, up from 1.26.

In a shortened week, Japanese equities ended Thursday at a new all-time high, with the Nikkei 225 Index breaking the previous record set more than 30 years ago in December 1989. The TOPIX Index firmed 1.4% (12.4% YTD), finishing at its highest level since February 1999, and the TOPIX Small Index added 1.6% (6.5% YTD), as Japan’s return to steady growth and corporate profitability both continued to underpin confidence. However, it was not all plain sailing, and it took a Thursday rally, ahead of the Emperor’s Birthday holiday, to snap a four-day losing streak. The yen weakened to JPY 150.5 against the US dollar, from 150.2 at the end of the previous week.

In Australia, the S&P ASX 200 Index slightly advanced 0.2% (1.1% YTD) as the optimism from Nvidia’s earnings beat outweighed the impact of lower Dalian iron ore futures prices and early signs of wage growth peaking. Australian government bond yields remained largely unchanged while the Australian dollar strengthened against the US dollar by 0.6%.

MSCI Emerging Markets Index closed 1.2% higher (0.6% YTD), with a positive contribution to performance from the stock markets of China, Taiwan, South Korea, India and Brazil.

Chinese equities rallied as recovery hopes rose following buoyant holiday spending during the prior week’s Chinese New Year holiday. The Shanghai Composite Index rallied 4.9% (1.0% YTD) and the blue-chip CSI 300 Index surged 3.7% (1.7% YTD). In Hong Kong, the benchmark Hang Seng Index jumped 2.4% (-1.9% YTD).

In Türkiye, the central bank held on Thursday its scheduled monetary policy meeting. As was widely expected, the central bank left its key interest rate, the one-week repo auction rate, at 45.0%. According to T. Rowe Price sovereign analyst Peter Botoucharov, the post-meeting statement was hawkish, with policymakers pledging to tighten monetary policy further if they anticipate “a significant and persistent deterioration” in the inflation outlook.

However, Botoucharov believes the main news is that policymakers explicitly stated that a “tight monetary stance will continue to contribute to Turkish lira’s real appreciation process.” He thinks this could be a sign that the central bank is shifting some attention from rebuilding its foreign exchange reserves to supporting the currency as an inflation-fighting tool. All other things being equal, a stronger currency can result in lower import prices, while a weaker currency usually leads to higher import prices.

In Mexico, the government reported on Thursday that consumer price inflation for the first half of February surprised to the downside. According to T. Rowe Price emerging markets sovereign analyst Aaron Gifford, the drop in inflation was driven by non-core items, but core costs were also slightly below consensus. Headline inflation declined to a year-over-year rate of 4.5% versus 4.9% in the previous inflation reading. Similarly, core inflation fell to a year-over-year rate of 4.6% compared with 4.8% in the previous reading. Gifford believes that the data showing the disinflation trend could be enough to convince policymakers to begin reducing interest rates fairly soon.

Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.3% (-0.9% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.6% (0.9% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index 0.6% (-0.5% YTD).

Over the week, the US 10-year Treasury yield decreased -3bp to 4.25% from 4.28% (up 37bp YTD). The 2-year Treasury yield increased 5bp to 4.69% from 4.64% (up 44bp YTD).

European government bond yields were broadly stable as investors trimmed bets on the number of interest rate cuts this year after stronger-than-expected PMIs. Over the week, the 10-year German bund yield declined -4bp, ending at 2.36% from 2.40% (up 34bp YTD).

In the UK, the 10-year gilt yield decreased -7bp, ending the week at 4.03% from 4.11% (up 50bp YTD).

The yield on the 10-year Japanese government bond finished the week at 0.71%, down slightly from 0.73% at the end of the previous week.

A lack of sellers in the US high yield bond market meant that new issues were met with solid demand. The equity rally sparked by technology company Nvidia’s strong earnings also appeared to be supportive of high yield bonds.

Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM

Michael Walsh, FIA, CFA
Solutions Strategist

 

Niklas Jeschke, CFA
Solutions Analyst

 

Eva Wu,
Solutions Analyst

 




202402 - 3410798

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