Markets last week 13/09/2022

United States

Stocks recovered this week, breaking a streak of weekly losses, as investors appeared to be more optimistic after markets had reached a temporary bottom after surrendering half of the summer rally. Some inflationary fears surfaced in the middle of the week, causing oil prices to fall to their lowest levels since Russia’s invasion of Ukraine. However, the discretionary sector had a good week as Tesla performed well despite the fact that markets were closed on Monday for Labor Day in the United States.

At the start of the trading week, the 10-year yield rose to its highest level since mid-June, owing to the European Central Bank’s increase in interest rates over the week. Municipal bonds also retreated throughout the week, which was aided by rising interest rates. This had an adverse effect on investment-grade corporate bonds, within their primary issue markets.

The U.S. high yield market advanced heading into Friday on a broad rebound in risk sentiment, while the bank loan market posted flat returns. Various traders noted that bank loan investors continued to focus on the new issue calendar as they digested commentary from Fed officials and awaited the release of key inflation data the following week.

The Institute for Supply Management (ISM) and S&P Global published widely disparate final readings on August service sector activity, with the ISM index revised upward to 56.9, the fastest rate of expansion since April. The S&P Global index, on the other hand, fell more than expected, to 43.7, the largest drop since early 2020.

The ISM index is slightly broader, including construction and other nonmanufacturing industries not included in the S&P services index. The labour market appeared to be holding up well, with weekly jobless claims coming in much lower than expected at 222,000, compared to roughly 240,000 and reaching their lowest level since the beginning of the summer.

The EU/ UK

European stock markets rose after some countries announced plans to address the energy crisis and boost their economies. The pan-European STOXX Europe 600 Index finished the week 1.06% higher in local currency. Major indices gained ground as well, Germany’s DAX Index increased by 0.29%, France’s CAC 40 Index increased by 0.73%, and Italy’s FTSE MIB Index increased by 0.79%.

The British pound depreciated further against the US dollar before retracing to around USD 1.16, a level close to the 1985 low. This weakness appeared to be caused in part by uncertainty about new UK Prime Minister Liz Truss’s economic agenda. The euro rose above parity with the US dollar after the European Central Bank raised interest rates by a record amount. To regulate inflation, the ECB raised key interest rates by a record 0.75 percentage points. The deposit rate is now 0.75%, while the refinancing rate is 1.25%, both at their highest levels since 2011.

Truss announced that the government would engage itself by helping reduce soaring energy costs for British households and businesses. The Financial Times reported that internal government estimates showed the size of the package could be around GBP 150 billion bigger than bailouts during the COVID-19 crisis and would be funded by government borrowing. In Germany, Chancellor Olaf Scholz stated that the government will spend EUR 65 billion to shield households and businesses, raising the monies from a tax on electricity companies and a planned corporate tax. However, the bank of England’s chief of the Economy also hinted that an energy bailout would also on the other hand force the central bank increase its interest rates even more. He emphasised having a balance in introducing fiscal policies as he is weary it would increase inflation to some degree.

Finland, Sweden, and Switzerland, on the other hand, have issued emergency liquidity support for electricity generators in anticipation of a potential energy crisis as well as a cash flow bottleneck due to an increase in the collateral required to begin production. In the near future, European energy ministers will meet to discuss energy price caps on Russian imported gas, price regulation on electricity, and additional ways to improve energy efficiency across the continent.

Japan

Japan’s stock markets rose last week, with the Nikkei 225 Index rising 2.04% and the TOPIX Index rising 1.83%. The government announced new measures to assist Japan in dealing with rising inflation, while the yen fell to its lowest level in 24 years, prompting officials to issue new statements. The Japanese yen fell to around JPY 142 per US dollar, down from around JPY 140 the previous week. The yield on a 10-year Japanese government bond fell to 0.23% from 0.24% at the end of the previous week.

To assist the country deal with rising inflation, the government proposed a new package due in October. The package consists of cash assistance for low-income households as well as measures to keep commodity and food prices stable. Prime Minister Fumio Kishida stated that the government’s priority was to protect both households and businesses from the impact of higher import prices caused primarily by the conflict in Ukraine.

Gross domestic product expanded at an annualized rate of 3.5% in the second quarter, higher than the preliminary estimate of 2.2% growth. The economy was boosted by the lifting of coronavirus restrictions, which encouraged business spending and private consumption. While Japan’s economy has now regained its pre-pandemic size, there are some expectations that growth may slow due to the ongoing coronavirus pandemic, supply chain disruptions impeding production, rising prices, and global economic uncertainty.

China

Stock markets in China rose as tighter monetary data and expectations of additional policy support prompted buying. According to Reuters, the broad, capitalisation-weighted Shanghai Composite Index rose 2.4%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, rose 1.7%.

Last week, China reduced the amount of foreign currency that domestic banks were required to hold in reserves, to strengthen the yuan. According to a PBOC statement, financial institutions will be required to hold 6% of their foreign currency deposits in reserves beginning September 15, down from the current 8%.

According to the Securities Finance Times, a state-backed news outlet, the PBOC is more concerned with the rate of the yuan’s depreciation than with a specific exchange rate. This year, the Federal Reserve’s hawkish policy has boosted the dollar while weighing on most emerging market currencies. China’s unexpected decision to lower key interest rates in August in order to boost a slowing economy has also contributed to the yuan’s decline.

Last Friday, the yuan recorded its fourth weekly loss against the dollar, according to Reuters, and is down nearly 8% against the greenback this year as of the end of August. Last week the People’s Bank of China (PBOC) set firmer-than-expected guidance for the yuan exchange rate against the U.S. dollar for the 13th straight trading day, a move viewed by analysts as part of the government’s efforts to slow the pace of the currency’s depreciation. Each trading day, China’s central bank releases a so-called daily fixing against the dollar, a reference rate for the onshore yuan that limits its moves by 2% in either direction.