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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.
Debt ceiling negotiations resumed after President Joe Biden returned from Japan at the start of last week, but stock markets headed downward as signs emerged that little progress was being made. The S&P 500 Index fell 1.1% on Tuesday, its biggest drop since the start of the month, following reports that some Republicans in the House of Representatives were questioning the urgency of the deadline set by US Treasury Secretary Janet Yellen for when the government would become unable to meet its obligations – the so-called x-date. On Thursday, the Federal Reserve (Fed) released revised data showing that the Treasury’s General Account had dwindled to USD 49.5 billion by Wednesday – USD 18.9 billion less than a week before and USD 752.2 billion below its level a year ago.
Signs of renewed momentum in the talks seemed to spur a market rally on Friday, however. The Wall Street Journal reported that the two sides were nearing a two-year spending deal that also extended the debt ceiling over the same period. Republican House Speaker Kevin McCarthy also told reporters that his White House counterparts were being “very professional, very knowledgeable.”
Friday’s gains may have been capped by some discouraging inflation data. The core (less food and energy) personal consumption expenditures (PCE) price index, considered the Fed’s preferred inflation gauge, rose by 0.4% in April, a tick above expectations. On a year-over-year basis, the index rose by a notch to 4.7%, indicating no progress in bringing inflation down since the start of the year. Meanwhile, the Commerce Department reported that personal spending had jumped 0.8% in April, roughly double consensus expectations and supported by increases in spending on both goods and services.
The German economy lapsed into recession in the first quarter, according to official figures. GDP shrank 0.3% in the three months through March, a downward revision from an early estimate of zero growth that reflected a sizable drop in household consumption. Germany’s economy contracted 0.5% in the final three months of last year. Meanwhile, German companies became more uncertain about the year ahead, with the Ifo Institute’s business confidence index falling in May for the first time in seven months.
A survey of purchasing managers compiled by S&P Global showed that business output in the eurozone grew for the fifth month running in May, although the pace slackened somewhat as weakness in manufacturing offset another strong month of services activity. Optimism about the economic outlook slipped further from February’s 12-month high amid increasing concern about weaker customer demand and higher interest rates.
European Central Bank (ECB) policymakers echoed ECB President Christine Lagarde’s view that interest rates would need to rise further and stay high to curb inflation in the medium term. Bank of Spain Governor Pablo Hernandez de Cos said policy tightening still had “some way to go” and that “interest rates will have to remain in restrictive territory for an extended period of time to achieve our objective in a sustained manner over time.” Banque de France Governor Francois Villeroy de Galhau said: “I expect today that we will be at the terminal rate not later than by summer.”
Inflation slowed in April to an annual rate of 8.7% from 10.1% in March, as the surge in energy prices that occurred last year fell out of the annual comparison. However, core inflation, which excludes volatile energy, food, alcohol and tobacco prices, rose to a 21-year high of 6.8% from 6.2%. The result fuelled market expectations for a 13th consecutive interest rate hike in June.
The International Monetary Fund (IMF) revised its forecast for the UK economy, predicting that resilient demand and falling energy costs would help it to grow 0.4%. Its projection from April had called for UK GDP to shrink 0.3%.
Japanese manufacturing activity expanded for the first time in seven months in May. The services sector also reported robust growth, as the return of domestic and international tourism fuelled a record rise in business activity. In the afterglow of strong purchasing managers’ index (PMI) numbers, investors shrugged off data showing that Japan’s core machinery orders fell for a second straight month in March.
No major indicators or policy measures were released in China during the week. But mounting evidence that the country’s post-pandemic recovery is losing momentum has raised concerns about the economic outlook. Most recently, industrial output, retail sales and fixed asset investment all grew at a weaker-than-expected pace in April, while weak credit growth indicators also pointed to sluggish domestic demand.
Chinese banks kept their one- and five-year loan prime rates steady for the ninth straight month, as expected, after the People’s Bank of China (PBOC) left its one-year policy loan rate unchanged earlier in May. However, speculation is growing that the central bank will ease policy to shore up the economy. The yield on China’s 10-year government bond dropped to a six-month low of 2.70% last week, according to Bloomberg, as traders increased their bets on monetary easing by the PBOC in the near term.
Geopolitical risks also dampened risk appetite after Beijing said it would ban Chinese companies from buying products from Micron Technology, citing security risks it uncovered in a review of the US chipmaker’s products. The ban announced on 21 May applies to domestic telecom firms, state-owned banks, and other companies behind China’s information infrastructure. The Chinese ban on Micron was seen as China’s most significant retaliation to date in response to US controls on certain technology exports.
Last week, the MSCI All Country World Index (MSCI ACWI) lost -0.5% (9.0% YTD).
In the US, the S&P 500 Index closed 0.3% higher (10.3% YTD). The major benchmarks ended mixed as investors watched carefully for signs of progress in negotiations over raising the federal debt ceiling. The technology-heavy Nasdaq Composite outperformed, rallying 2.5% for the week and up 24.4% for the year-to-date (YTD) period – a stark contrast to the -0.2% decline YTD of the narrowly focused Dow Jones Industrial Average. Similarly, the Russell 1000 Growth Index returned 1.7% for the week (21.2% YTD), while the Russell 1000 Value Index – heavily weighted in the struggling financials sector – was down -1.2% (-0.7% YTD). Small-caps fared worse than large-caps, with the Russell 2000 Index ending the week broadly flat (1.2% YTD). Markets were scheduled to be closed on Monday, 29 May, in observance of Memorial Day.
Relatedly, alongside the debt ceiling negotiations, the signal event in the week may have been Thursday’s 24% jump in the shares in chipmaker NVIDIA, taking the company’s market capitalisation to roughly USD 963 billion by the end of the week and making it the sixth most highly valued public company in the world. Shares rose after the company beat consensus first-quarter earnings expectations by a wide margin and raised its profit outlook. The large move in such a heavily weighted stock reverberated throughout the major benchmarks – one of T. Rowe Price’s traders remarked that Thursday was among the most remarkable sessions he had witnessed in the last 25 years.
In Europe, the MSCI Europe ex UK Index fell -1.4% (12.2% YTD) on signs that the economic outlook may be worsening and continued uncertainty over US debt ceiling talks. Major stock indexes also weakened. Germany’s DAX Index slid -1.8% (14.8% YTD), France’s CAC 40 declined -2.0% (15.3% YTD) and Italy’s FTSE MIB tumbled -1.7% (16.4% YTD). Switzerland’s SMI gave up -1.1% (9.7% YTD). The euro depreciated versus the US dollar, ending the week at USD 1.07 for EUR, down from 1.08.
In the UK, the FTSE 100 was down -1.6% (4.2% YTD) and the FTSE 250 lost -2.5% (1.0% YTD). The British pound weakened versus the US dollar, ending the week at USD 1.23 for GBP, down from 1.24.
In Japan, the Nikkei 225 Index rose 0.4% (19.7% YTD). The benchmark touched a 33-year high early in the week before finishing just below the 31,000 mark. Upbeat economic data and encouraging signals regarding the US debt ceiling helped propel the Nikkei 225 to its highest close since July 1990. The broader TOPIX Index declined -0.7% (14.9% YTD) and the TOPIX Small Index moved down -1.3% (10.3% YTD).
Hawkish comments from the Fed during the week added to speculation that US rates will remain higher for longer. Meanwhile, Governor Kazuo Ueda reconfirmed the Bank of Japan’s ultra-loose monetary policy stance until inflation sustainably hits its 2% target. These divergent paths pushed the US dollar to a six-month peak against the Japanese currency, weakening to JPY 140.6 for USD, from the prior week’s 138.0.
Japanese sovereign bond yields drifted higher for most of the week but were limited by the knowledge that the central bank has no imminent plans to tweak its yield curve control policy. Benchmark yields did spike noticeably on Friday, moving above 0.45% on news that US lawmakers were getting closer to an agreement to raise the debt ceiling. By Friday’s close, 10-year government bond yields had settled on 0.41%, up from 0.39% at the end of the previous week.
In Australia, the S&P ASX 200 pulled back -1.7% (4.4% YTD).
MSCI Emerging Markets Index closed -0.4% lower last week (2.6% YTD), with a positive contribution to performance from the stock markets of Taiwan, India, South Korea and Brazil and a negative contribution from that of China.
Chinese stocks fell after a batch of disappointing indicators in recent weeks pointed to a flagging economic recovery. The Shanghai Stock Exchange Index lost -2.1% (4.1% YTD) and the blue-chip CSI 300 Index dropped -2.3% (-0.4% YTD), its biggest weekly drop since the five days ended 10 March and erasing all its gains this year. In Hong Kong, the benchmark Hang Seng Index lost -3.3% (-4.4% YTD), falling below the psychologically key 19,000-point level to its lowest close since December in a holiday-shortened trading week.
In Hungary, as was broadly expected, the National Bank of Hungary (NBH) reduced on Tuesday its depo rate – the interest rate paid on optional reserves – by 100 basis points (bp), from 18.00% to 17.00%. The NBH also reduced the overnight collateralised lending rate, from 20.5% to 19.5%. This interest rate is considered the upper limit of an interest rate “corridor” for the central bank base rate, which remained at 13.0%. The lower limit of the corridor is the overnight deposit rate, which remained at 12.5%.
In their post-meeting statement, policymakers cited “the persistent improvement in risk perceptions” as the reason for their actions. T. Rowe Price credit analyst Ivan Morozov believes that this could be a central bank gesture in response to the government’s efforts to procure more EU funds that had previously been suspended.
Nevertheless, Morozov sees the central bank remaining vigilant in its efforts to bring inflation down, and he believes the NBH is unlikely to reduce the base rate anytime soon. Policymakers expressed their belief that it is “necessary to maintain the current level of the base rate over a prolonged period, which will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner.” That said, Morozov would not be surprised to see additional depo rate cuts in the months ahead, as long as the forint remains fairly stable in the foreign exchange market against the euro.
In Turkey, assets were pressured during the week by news that Sinan Ogan, who won only about 5% of the votes in the first round of the presidential election, was endorsing President Recep Tayyip Erdogan in the second round to be held on Sunday, 28 May. Considering that Erdogan won approximately 49.5% of the votes in the first round, the additional voter support stemming from this endorsement increases the likelihood of the incumbent’s victory over National Alliance candidate Kemal Kilicdaroglu.
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned -0.6% (2.0% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.3% (2.3% YTD) and Bloomberg Emerging Markets Hard Currency Aggregate Index -0.5% (1.1% YTD).
The signs of a resilient consumer and persistent inflation pressures led to a jump in short-term US Treasury yields, with the yield on the two-year note hitting its highest level in over two months. Reflecting debt ceiling worries, the yield on the one-month Treasury bill hit 6.02% at the end of the week, its highest level since its introduction in 2001. Over the week, the yield on the benchmark 10-year US Treasury note increased 12bp, up from 3.68% to 3.80% (down eight basis points YTD). The 2-year Treasury yield rose 29bp, from 4.27% to 4.56% (up 13bp YTD).
European government bond yields broadly climbed on concern that central bank policymakers would extend their policy tightening to cope with persistent inflationary pressures. The yield on the benchmark 10-year German bund increased 11bp from 2.43% to 2.54% (down three basis points YTD). Spain’s and Italy’s sovereign bond yields also rose.
In the UK, robust core inflation data fuelled a broad sell-off in the bond markets. The yield on the benchmark 10-year gilt increased 34bp, from 3.99% to 4.33% (up 67bp YTD).
In the US investment-grade corporate bond market, the front-loaded week of issuance was adequately subscribed to before new issues slowed down as we approached the long weekend, while regional bank issues continued to rebound.
Meanwhile, the high yield market saw lower-than-average volumes throughout the week. Commercial mortgage-backed securities outperformed other types of credit, Treasuries and the broad US high-grade aggregate index. Volumes lightened over the week, but overall supply remained robust and met with solid demand.
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