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Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.3% (5.2% YTD).
In the US, the S&P 500 retreated -0.6% (3.5% YTD). The major indexes ended mixed for the week as recession fears appeared to weigh on sentiment. The narrowly focused Dow Jones Industrial Average performed worst, giving back a portion of its strong rally in the first two weeks of the year, while the technology-heavy Nasdaq Composite recorded a modest gain of 0.6% (6.5% YTD). Relatedly, dampening inflation fears helped growth stocks outperform, as the prospect of lower interest rates increased the implicit value of future earnings. Small capitalisation stocks finished behind large ones. Over the week, Russell 1000 Growth Index returned 0.4% (4.8% YTD), Russell 1000 Value Index -1.5% (2.9% YTD) and Russell 2000 Index -1.0% (6.1% YTD). Markets were closed on Monday in observance of the Martin Luther King, Jr. holiday.
Investors also reacted to the second week of major quarterly earnings reports, although the trickle of early reports was dominated by financial services firms. The flow of reports was expected to pick up the following week, with companies representing roughly 27% of the S&P 500 Index’s market capitalisation reporting results, up from a little over 4%. Shares in Goldman Sachs and insurer Travelers both fell sharply and dragged the broad indexes lower to start trading on Tuesday after reporting earnings misses.
Netflix’s earnings report on Friday, however, appeared to boost sentiment following news that it had added more subscribers than widely expected in the fourth quarter. Shares in Google parent Alphabet also pushed the broad indexes higher after the company announced plans to trim roughly 6% of its workforce.
In Europe, the Euro STOXX 50 Index pulled back -0.7% (8.7% YTD) after ECB policymakers signalled that they would still hike interest rates aggressively, reigniting fears of a prolonged economic slowdown. In local currency terms, the pan-European STOXX Europe 600 Index ended the week modestly lower. Major stock indexes were generally softer. Germany’s DAX Index decreased -0.4% (8.0% YTD), France’s CAC 40 eased -0.4% (8.2% YTD) and Italy’s FTSE MIB was little changed (8.7% YTD). Switzerland’s SMI was broadly flat (5.3% YTD). The euro appreciated versus the US dollar, ending the week at USD 1.09 for EUR, up from 1.08.
In the UK, the FTSE 100 eased -0.9% (4.3% YTD) and FTSE 250 fell -1.2% (4.6% YTD). The British pound strengthened against the US dollar, ending the week at USD 1.24 for GBP, up from 1.22.
Stock markets in Japan rose over the week. The Nikkei 225 Index gained 1.7% (1.8% YTD), the broader TOPIX Index added 1.3% (1.9% YTD) and the TOPIX Small Index increased 1.5% (0.6% YTD). Sentiment was supported by the prospect of China’s reopening boosting the global economy and hopes that the major central banks would slow the pace of their rate hikes amid some signs of waning inflationary pressures. Investors’ focus was on the BoJ, which left its monetary policy unchanged at its January meeting, having surprised markets in December by tweaking its YCC framework. In the absence of further YCC modifications, the yield on the 10-year JGB fell to 0.38% from 0.50% at the end of the previous week. The yen weakened to JPY 129.6 against the US dollar, from JPY 127.9 the prior week, on the BoJ’s commitment to its ultra-loose stance.
In Australia, the S&P ASX 200 climbed 1.7% (5.9% YTD) as the weaker Australia job market data got investors hopeful that the RBA would pause interest rate hikes, the BoJ decided to stick to the YYC programme, and China’s reopening trend continued to boost market sentiment. Australian government bond yields moved lower on rate peaking optimism. The Australian dollar abated slightly against the US dollar as a result.
MSCI Emerging Markets Index firmed 0.6% last week (8.4% YTD), with a positive contribution to performance from the stock markets of China, Taiwan, South Korea, India and Brazil.
Chinese equities rallied for a fourth consecutive week ahead of a weeklong holiday following reports indicating better-than-expected economic growth. The broad, capitalisation-weighted Shanghai Composite Index was up 2.2% (5.7% YTD) and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, advanced 2.6% (8.0% YTD). In Hong Kong, the benchmark Hang Seng Index added 1.4% (11.4% YTD). China’s financial markets will be closed for the Lunar New Year break, which starts on 21 January, and will reopen on Monday, 30 January.
In Turkey, the BIST-100 Index returned 10.1% last week (-0.3% YTD). On Wednesday, President Recep Tayyip Erdogan called for the presidential and general elections to take place on 14 May 2023 – about one month earlier than the final deadline. The final decision will be made by the legislature but with Erdogan announcing the date, T. Rowe Price sovereign analyst Peter Botoucharov has little doubt that it will be approved.
On Thursday, the central bank decided to leave its key interest rate, the one-week repo auction rate, at 9.00%. The decision was widely expected. According to Botoucharov, the post-meeting statement had a small but potentially important change compared with recent statements. Central bank officials did not describe the current level of interest rates as being “adequate.” This could mean that further monetary loosening is possible or that the central bank – following the elections – could return to more orthodox policies (e.g. raising interest rates in response to elevated inflation). Even though the central bank held its key rate steady, Botoucharov notes that monetary conditions have been tightening in Turkey by way of higher lira deposit interest rates.
In Argentina, economy minister Sergio Massa stated on Wednesday that the government intends to buy back about USD 1 billion in Argentine debt. As reported by Reuters, the buyback plan will target sovereign notes maturing in 2029 and 2030. This could mean – though it is unclear – that the government plans to repurchase bonds that are trading at depressed prices but whose face value is actually about USD 3 billion.
Critics suggest that this is an irresponsible move because Argentina probably does not currently have the reserves to be buying back debt – though Massa claimed that changes in economic projections should translate into higher reserves. Also, many note that the timing of this move is not ideal, given that there is a serious drought that could threaten the crucial, upcoming soy harvest. In addition, there could be a political angle to this proposal. Massa has made public his intention to be the Peronist candidate for president, so some suspect he is using this tactic to create some confidence in Argentina and signal that his tenure as economy minister has been successful.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.3% (2.4% YTD), Bloomberg Global High Yield Index (hedged to USD) 0.2% (3.6% YTD) and Bloomberg Emerging Markets Hard Currency Index 0.8% (3.0% YTD).
US Treasuries posted positive returns as the yield on the benchmark 10-year note fell to its lowest intraday level in over four months before rising to end the week. Along with the week’s tepid economic data, the BoJ’s commitment to yield curve control helped a rally in Treasuries on Wednesday. Over the week, the 10-year Treasury yield decreased three basis points from 3.51% to 3.48% (down 40bp YTD).
Over the week, the German 10-year bund yield was little changed, ending the week at 2.17% (down 39bp YTD).
In the UK, 10-year gilt yield increased one basis point, up from 3.36% to 3.37% (down 29bp YTD).
Light issuance also bolstered US investment-grade corporate bonds, although banks were quick to come to market after reporting. Conversely, new deals seemed to drive most of the sales activity in the high yield market and were met with solid demand. The leveraged loan market was fairly quiet, although technical conditions for the loan asset class were generally supportive.
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