Markets last week 03/10/2022

United States

Over the past week, we have witnessed the disruption in the UK’s financial markets and a continuous increase in the US treasury notes that briefly surpassed the 4% level for the first time since 2008. The S&P 500 also dropped below it mid-June lows and cemented the third week of consecutive declines for the index for the first time in 2009. 

The biggest moves in the equity markets occurred on Wednesday last week, following the Bank of England’s (BoE) surprise decision to purchase long-term UK government bonds. This contributed to some levels of volatility on wall street within the past week 

However, markets reversed their gains on Thursday, with the selling fueled by data showing continued economic resilience and inflationary pressures despite tightening monetary policy. Weekly jobless claims fell to 193,000, far below expectations and the lowest level since late April. 

The housing sector felt the immediate impact of the fed’s rate hikes through the rise of mortgage rates which breached the average level of 7 %, New home sales surprised investors by rising nearly 29% in August to hit a five-month high. 

Prices for US Treasuries rose after the Bank of England intervened to stabilise the UK government bond market, causing the 10-year US Treasury note yield to rise slightly for the week. Throughout much of the week, selling pressures persisted in the municipal bond market. Due to the macroeconomic events that occurred throughout the week, this lapsed to investable corporate bonds, which had a difficult week. 

 The high-yield bond market saw higher-than-average volumes during the week. Despite mostly negative flows from the asset class industrywide, market liquidity was somewhat healthy due to coupon payments and tenders. 

Europe

Shares in Europe fell amid disappointing corporate earnings and fears of recession. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 0.65% lower. France’s CAC 40 Index slipped 0.36%, Germany’s DAX Index slid 1.38%, and Italy’s FTSE MIB Index dropped 1.98%.  

UK government bond (gilt) yields ended higher after experiencing historic swings following the announcement of a new UK fiscal plan proposing large tax cuts, energy subsidies, and significant borrowing the previous Friday. 

Yields jumped at the start of the week amid worries about a severe deterioration in the public finances (pensions) and then eased after the BoE said it would make temporary purchases of long-dated bonds “on whatever scale is necessary” to “restore orderly market conditions.” 

The International Monetary Fund called on the UK to revise the plan to ensure fiscal and monetary policy aren’t working at cross purposes. Meanwhile, core euro zone bond yields fluctuated, ending broadly higher, mostly tracking moves in UK gilts. Higher-than-expected inflation in Germany also added some upward pressure on yields later in the week. Peripheral eurozone bond yields broadly tracked core markets. 

BoE Chief Economist Huw Pill stated the new fiscal policy and the adverse market reaction “will require a significant monetary response.” However, he signaled the bank did not expect to act on rates before its next meeting in early November. However, according to reports, there could be a large rate increase in November that would be proportional to a rise in demand stemming from looser fiscal policy.  

However, the path for rates thereafter will be unclear until the details of promised reforms of the supply side of the economy are known. Revised economic data unexpectedly showed the UK avoided a recession in the three months through June. Gross domestic product (GDP) increased by 0.2% instead of shrinking by 0.1% as previously estimated. 

European Central Bank (ECB) President Christine Lagarde stated at a meeting at Parliament that the economic outlook is adverse and that she expects business activity to struggle in the coming months as high energy and food prices curb spending power. She has insisted on a continuous hike in interest rates as output in the first three months of 2023 will most likely be negative. 

Inflation in the eurozone accelerated to a record 10.1% in September from 9.1% the previous month, according to an official first estimate. The figure exceeded a consensus forecast of 9.7% and reinforced market expectations for another large increase in interest rates in October. 

China

China’s stock markets fell as currency weakness and signs of a slowing economy fueled fears about the economy’s future. According to Reuters, the broad, capitalization-weighted Shanghai Composite Index fell 2.1%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 1.4%. 

The yuan was trading at 7.0898 per US dollar late Friday, down from 7.1066 a week earlier. Last Monday, the currency hit a 28-month low and has lost more than 11% against the US dollar this year. According to Reuters, the yuan is on track to suffer its worst annual loss since 1994, when China unified its official and market rates. The yuan, like many other emerging market currencies, has weakened against a surging US dollar, aided by the Federal Reserve’s aggressive interest rate hikes. 

Officials stepped up efforts to slow the currency’s slide. The People’s Bank of China (PBOC) imposed a 20% reserve requirement ratio for foreign exchange (forex) derivative sales and warned market participants against betting on the yuan currency. 

According to Reuters, citing unnamed sources, the PBOC instructed state-owned banks to prepare to defend the yuan by selling dollars from their foreign exchange reserves. Such a move would represent a significant increase in Beijing’s efforts to stabilise the yuan, compared to previous efforts, which were largely symbolic and ineffective in the face of US dollar strength. 

On the economic front, profits at industrial firms fell 2.1% in the first eight months of the year, compared to a 1.1% drop in the first seven months of the year, according to China’s statistics bureau. 

Markit manufacturing purchasing managers’ index (PMI) fell to a worse-than-expected 48.1 in September from 49.5 in August, below the 50-point reading that separates growth from contraction. Meanwhile, China’s official manufacturing PMI slightly improved in September, but services sector activity contracted as ongoing coronavirus lockdowns continued to hurt consumer spending. 

Japan

The strengthening of the US dollar against Asian currencies has weighed much on sentiment in the Japanese market. The bank of Japan has decided to remain in a Dovish stance as policymakers have voted an 8-1 with the maintenance of a negative interest rate. 

In terms of the JGB (Japanese Bond Market), the government has continued to purchase 10-year bonds and yields will continue to remain around a low percentage. This saw the yen weaken further mid-week, trading in the high 144 range against the U.S. dollar. 

The Fed and other central banks remain hawkish, indicating that they intend to keep raising rates to combat persistently high inflation. Worries about the UK’s fiscal policy, the Ukraine/Russia conflict, and Europe’s energy crisis did little to improve sentiment elsewhere. 

The equity markets did not perform up to par as well, the Nikkei 225 average fell by 4.5% marking its lowest close since July 1. The broader TOPIX benchmark also finished down at 1,836, some 4.2% below where it began the week. 

Markets Last Week

                               

In Local Currency 

In Sterling Pound 

Index 

Last week 

YTD 

Last week 

YTD 

UK 

  

  

  

  

FTSE 100 Index 

-1.69% 

-3.72% 

-1.69% 

-3.72% 

US 

 

 

 

 

S&P 500 Index 

-2.89% 

-24.14% 

-5.15% 

-7.95% 

Europe 

 

 

 

 

Euro Stoxx 50 Index 

-0.91% 

-20.99% 

-2.31% 

-17.42% 

Asia 

 

 

 

 

Nikkei 225 Index 

-4.48% 

-9.91% 

-5.40% 

-13.35% 

Hang Seng Index 

-3.96% 

-23.97% 

-6.20% 

-8.39% 

MSCI Emerging Markets Index 

-2.78% 

-20.75% 

-5.51% 

-11.62% 

 

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