United States
The major benchmarks ended lower during the week with relatively few important economic releases or other concrete sentiment drivers. Within the S&P 500 Index, sector performance was relatively uniform, with energy stocks being the notable upside outlier and communication services stocks being the notable laggard.
The most significant stock-specific event for the broad benchmarks was a drop in Alphabet shares, which lost roughly USD 100 billion in market capitalization last Wednesday and dropped roughly 10% for the week. The stock fell after Reuters reported that Google’s new artificial intelligence (AI)-based chatbot, Bard, misidentified the first satellite to photograph an exoplanet in its first public demonstration on Monday.
Some investors are concerned about Google’s ability to maintain its dominance in internet search and AI following the recent debuts of rival chatbots such as ChatGPT and Perplexity. Microsoft has made a significant investment in OpenAI, the creator of ChatGPT, and on Monday unveiled a prototype of the two companies combined search engine.
In other news, on Tuesday and Wednesday, statements from Federal Reserve officials appeared to send stocks in opposite directions. Stocks rose on Tuesday after Fed Chair Jerome Powell said in a question-and-answer session at the Economic Club of Washington that the disinflationary process had begun. Some investors were concerned that the significant upward surprise in the January payrolls report, released the previous Friday, would cause Powell’s tone to shift.
Weekly jobless claims were slightly higher than expected, at 196,000, but remained near recent nine-month lows. The University of Michigan’s preliminary gauge of February consumer sentiment, released Friday, moderately exceeded expectations and reached its highest level (66.4) since January 2022.
The yield on the 10-year U.S. Treasury note rose significantly this week as investors appeared to digest the previous week’s strong January payrolls report. As fears grew that the Fed would need to push the economy into recession to tame inflation, the yield curve inverted further—Bloomberg reported that two-year Treasury yields moved to their highest level over 10-year yields in four decades.
Europe
Concerns about overly aggressive central bank policy prolonging an economic downturn weighed on European stocks. The pan-European STOXX Europe 600 Index ended the week 0.62% lower in local currency. The major stock market indices were mixed. The FTSE MIB Index in Italy increased by 1.18%. However, the CAC 40 Index in France fell 1.44%, the DAX Index in Germany fell 1.09%, and the FTSE 100 Index in the United Kingdom underperformed.
Following the most recent rate-setting meeting, several European Central Bank (ECB) policymakers reaffirmed their hawkish stance, warning against complacency in the fight against inflation. At the start of the week, comments by Executive Board member Isabel Schnabel piqued the market’s interest. She argued that the recent slowing in inflation was not necessarily due to ECB policy while emphasising that underlying inflation remained extremely high. According to German Bundesbank President Joachim Nagel, Latvian Central Bank Governor Martins Kazaks, and Dutch Central Bank Governor Klaas Knot, Rates are expected to rise another half-point in March.
The German Finance Ministry predicted a mild winter slowdown due to strong industrial order books, improved confidence, and easing supply bottlenecks. Previously, data showed that industrial production fell 3.1% sequentially in December, owing primarily to slowdowns in energy-intensive industries. Industrial orders, on the other hand, increased 3.2% month on month, the largest increase in more than a year, thanks to strong domestic and eurozone demand.
Meanwhile, delayed data showed that inflation in Germany slowed more than expected when compared to other EU countries, reaching a five-month low of 9.2% in January.
According to official data, the United Kingdom avoided a recession in December last year despite a sharp economic contraction. GDP remained flat in the final three months of last year, avoiding a second consecutive quarter of economic contraction. A drop in services output—hit by a series of one-off factors such as strikes, fewer visits to doctors and hospitals, and the lack of Premier League soccer matches during the World Cup—was the biggest drag on growth. After expanding in October and November, GDP contracted by 0.5% in December, when rail strikes began.
The Riksbank raised interest rates by another half percentage point to 3.0%. The central bank’s latest economic projections pointed to another quarter-point rate hike in April.
Japan
Over the week, Japan’s stock markets rose, with the Nikkei 225 Index rising 0.59% and the broader TOPIX Index rising 0.85%. Speculation abounds about the potential nominees for the Bank of Japan’s next governor and deputy governor (BoJ). Following the close of Japanese markets on Friday, the Nikkei news agency reported that the government intends to appoint Kazuo Ueda, an economist and former member of the Bank of Japan Board who was not mentioned as a shortlisted candidate, as the central bank’s next governor. This came as a surprise after a week of speculation that current Deputy Governor Masayoshi Amamiya would be the government’s nominee.
With incumbent BoJ Governor Haruhiko Kuroda’s term expiring in April, investors are watching for any shift in the central bank’s ultra-easy monetary policy stance as signs of wage growth emerge (the most recent data showed real wages turning positive), especially if more hawkish candidates are appointed. Against this backdrop, the yen rose to around JPY 130.5 per US dollar, up from around JPY 131.2 at the end of the previous week. The yen rose on Friday due to reports of Ueda’s possible appointment and some investor expectations of monetary policy changes. The 10-year Japanese government bond (JGB) yield remained broadly unchanged this week, hovering around the 0.50% level at which the Bank of Japan attempts to cap JGB yields.
Prime Minister Fumio Kishida will consider the potential impact on financial markets when deciding on the new governor of the Bank of Japan. He noted that an essential characteristic of Kuroda’s successor would be the ability to closely coordinate with other major central banks and understand and communicate with market participants domestically and internationally. Kishida has not confirmed that the government will nominate Ueda to succeed Kuroda but has stated that the nominees will be presented to parliament in February.
Ueda’s previous comments and actions suggest a more balanced tone, considering the risks of excessive easing and the importance of maintaining 2% inflation over time (with a focus on wage growth). He recently stated that the current rise in Japanese inflation is primarily the result of a negative supply shock caused by global increases in food and energy prices. He has also expressed concern about using unusual monetary policy frameworks for an extended period, implying that a review is required.
China
The spy balloon controversy heightened tensions with the United States, offsetting expectations of faster economic growth following China’s withdrawal from pandemic controls. The Shanghai Stock Exchange Index and the CSI 300 Index both fell slightly for the second week in a row as the diplomatic crisis over the balloon in US airspace reminded investors of the country’s geopolitical risks.
The spy balloon incident raised the prospect of further sanctions on China from the U.S. after the Biden administration announced a sweeping ban on U.S. companies selling advanced semiconductors and certain chip manufacturing equipment to China last October. Relations with China and the U.S. debt ceiling will be the key public policy catalysts moving markets in 2023, and risks for both are skewed to the downside.
Following a three-month rally driven by reopening optimism that began last November amid speculation that China was preparing to unwind its strict zero-COVID policy, which Beijing rolled back in December, investors appear to have become more cautious about China’s outlook. Despite a surge in economic activity during the Lunar New Year holiday at the end of January, analysts have recently warned of significant growth headwinds, for China, including waning export demand and a weak property market.
in economic news, China reported that its consumer price index rose 2.1% year on year in January, as expected, while producer prices fell more than expected due to lower commodity costs. The most recent data showed that China is unlikely to experience runaway inflation like the United States and Europe have, raising expectations that the central bank will maintain a supportive policy to support the economy.
Market indices
|
Index |
Weekly Index |
Year to Date |
||
|
Currency |
Local |
Sterling Pound |
Local |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
-0.25% |
-0.25% |
5.80% |
5.80% |
|
US |
|
|
|
|
|
S&P 500 Index |
-1.08% |
-0.83% |
6.66% |
6.23% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-1.32% |
-2.73% |
10.89% |
10.50% |
|
Asia |
|
|
|
|
|
Hang Seng Index |
-2.17% |
-1.98% |
9.61% |
8.54% |
|
MSCI Emerging Markets Index |
-1.35% |
-2.16% |
5.69% |
5.62% |
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