United States
Stocks recovered much of the previous week’s losses in hopes that the Federal Reserve will be able to control inflation without triggering a recession. The gains lifted the S&P 500 Index out of the bear market territory, leaving it down 19.1 % from its January peak as of Friday’s close. Within the index, the large communication services, consumer discretionary, and information technology sectors performed best. Energy stocks fell sharply on Tuesday as markets were closed Monday for Independence Day, and domestic oil prices fell below USD 100 per barrel for the first time in nearly two months, but they recovered alongside crude prices later in the week.
The Labor Department’s payrolls report on Friday, which showed employers added 372,000 nonfarm jobs in June, far exceeding consensus expectations of around 270,000, was the most closely watched data. There were also significant payroll increases in the healthcare, information, transportation, and warehousing industries. Manufacturing added 29,000 jobs and has fully recovered from the pandemic. Construction payrolls grew by 13,000 people.
Fed officials continued to publicly state their resolve to raise rates as much as necessary to keep inflation expectations. By the end of the week, federal funds futures tracked by CME Group were no longer pricing in any chance that the Fed would hike rates by less than 75 basis points (bps) at its upcoming policy meeting and were even anticipating a small possibility of a 100bps hike.
The stronger than expected jobs report lifted the yield on the benchmark 10-year U.S. Treasury note to roughly 3.10% at the close of trading on Friday amid a broad rise in U.S. rates. The closely watched 2-year and 10-year segment of the Treasury yield curve inverted as the 2-year yield climbed above the 10-year yield a common if imperfect, a signal of a coming recession.
The EU/UK
After three months of losses, European stocks rose in the first week of July. However, the gains were limited by China’s reimposition of some restrictions aimed at limiting the spread of the coronavirus, as well as concerns that an energy shortage could cause a recession in Europe. The pan-European STOXX Europe 600 Index finished the week 2.45 % higher in local currency. The DAX Index in Germany increased 1.58 %, the CAC 40 Index in France increased 1.72 %, and the FTSE MIB Index in Italy increased 1.96 %.
Core eurozone sovereign yields changed little. German bund yields, on the other hand, began to rise following the better-than-expected employment report in the United States on Friday morning. This week, gilt rates in the United Kingdom rose significantly. The sharp rise in the US dollar weighed heavily on all currencies, but the USD/EUR currency pair approached parity this week.
According to the minutes of the European Central Bank’s (ECB) June meeting, most members agreed to a 25-basis-point increase in the deposit rate in July, with a 50-basis-point increase expected in September. In the eurozone, producer prices increased by 36.3 % year on year in May. Prices rose 16% excluding energy. Meanwhile, retail sales volumes increased by a smaller than expected 0.2 % in May. April sales volumes were revised up to 1.4 %.
Germany’s trade balance showed a EUR 1 billion deficit in May, the first since 1991, as exports fell unexpectedly, owing in part to supply constraints. Meanwhile, imports increased due to higher food, energy, and material prices. After falling for three months in a row, German factory orders unexpectedly increased by 0.1%. Furthermore, the magnitude of the month-to-month contraction in April’s factory orders was revised to 1.8% from 2.7%. However, industrial output rose sequentially by a smaller than expected 0.2% due to supply chain problems.
japan
Shinzo Abe, Japan’s former and longest-serving prime minister, was shot and killed while giving a campaign speech in the western city of Nara on July 10. Campaigning for the parliamentary upper house election on July 10 was halted. As a member of parliament and the leader of the LDP, Abe remained powerful. The fundamental tenets of Abe’s signature economic policy were based on the three pillars of monetary easing, fiscal stimulus, and structural reforms, which have been maintained by the government of current Prime Minister Fumio Kishida.
Japan’s stock markets rose last week, with the Nikkei 225 Index rising 2.24 % and the broader TOPIX (Tokyo Stock Price Index) index rising 2.30 %. The yield on the 10-year Japanese government bond (JGB) increased to 0.24% from 0.23% at the end of the previous week in the fixed income markets. The Bank of Japan (BoJ) set a monthly record in JGB purchases in June as it sought to limit the rise in long-term yields above the 0.25% cap set under its yield curve control policy.
The central bank’s dovish stance has weighed heavily on the yen, which has fallen to around JPY 135.90 per US dollar from 135.22 the previous week, remaining near its lowest levels in 24 years. The Bank of Japan’s steadfast commitment to monetary easing stands in stark contrast to the tightening efforts of other central banks around the world, which are attempting to contain rising inflation. While consumer prices in Japan have been rising, inflation remains low in comparison to other developed economies.
China
Rising coronavirus cases and increased geopolitical tensions weighed on Chinese stocks. According to Reuters, both the broad, capitalisation-weighted Shanghai Composite Index and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell around 1%.
The number of coronavirus cases in China increased to 478 on Thursday, up from 409 on Wednesday. Most cases were discovered in the eastern province of Anhui, where more than a million people have been quarantined in small towns. Several new cases have also been reported in Jiangsu and other provinces. A senior health official said on Friday that Shanghai, which recently ended a two-month-long lockdown, faces a “relatively high” risk of further community transmission of COVID-19.
According to Reuters data, the yuan currency was stable at CNY 6.70 to the US dollar. According to Dow Jones, the 10-year Chinese government bond yield increased slightly to 2.858 % from 2.847% a week ago, as the People’s Bank of China made its largest cash withdrawal from the financial system in three months. Analysts said the central bank’s move indicated that policymakers are gradually departing crisis mode as monetary easing measures were implemented during recent nationwide lockdowns.
China’s Ministry of Finance is considering allowing local governments to sell CNY 1.5 trillion (USD 220 billion) of special bonds in the second half of this year to boost infrastructure funding in addition China will set up a state infrastructure investment fund worth CNY 500 billion (USD 74.69 billion) to spur infrastructure spending and support the economy. In economic news, the Caixin Services Purchasing Managers’ Index (PMI) for June increased to a better-than-expected 54.5 from 41.4 in May, providing further evidence that China’s economy is recovering from virus-reduction measures.
Weekly Indices
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Weekly Index |
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YTD Index |
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Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
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UK |
|
|
|
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|
FTSE 100 Index |
0.47% |
0.47% |
-0.53% |
-0.53% |
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US |
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S&P 500 Index |
1.96% |
1.79% |
-17.72% |
-7.33% |
||||
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EU |
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|
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||||
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Euro Stoxx 50 |
1.75% |
-0.56% |
-16.67% |
-16.04% |
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Asia |
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Nikkei 225 Index |
2.24% |
1.36% |
-7.90% |
-12.52% |
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Hang Seng Index |
-0.11% |
0.86% |
-4.91% |
6.38% |
||||
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MSCI Emerging Markets Index |
1.15% |
0.77% |
-13.21% |
-7.08% |
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