Markets last week – 05/02/2024

USA 

S&P 500 breaches 5,000 for first time as narrow advance continues

The S&P 500 surged above the 5,000 mark for the first time, marking new record highs, although the rally was limited in breadth. Despite this milestone, there was a noticeable decrease in the number of stocks trading above their 50-day moving average. With minimal economic data available, investor attention was primarily focused on earnings reports. Overall market sentiment remained positive, largely driven by expectations that the Federal Reserve would conduct a $42 billion auction of 10-year treasury bonds. This move was perceived as a potential signal for the Fed to lower interest rates to stimulate economic growth in the near future. Despite rising input prices, the services sector demonstrated resilience, with S&P Global’s services sector reading unexpectedly reaching a four-month high. However, there was a notable increase in prices paid for services, contrasting with the decline in input prices for manufacturers.

Regional banks encountered challenges amid worries about commercial real estate, leading to pressure on their bonds. Conversely, corporate bonds maintained strength throughout the week, buoyed by increased demand. This demand was fuelled by the attractiveness of investment-grade corporate bonds, which offered favourable coupon payments and saw moderate new issuance.

Europe

European markets closed slightly higher, driven by robust company earnings, although gains were tempered by concerns regarding higher interest rates. Italy’s FTSE MIB and France’s CAC 40 experienced gains, while the UK’s FTSE 100 declined.

Senior officials from the European Central Bank (ECB) reiterated caution against premature interest rate cuts. In an interview with the Financial Times, Executive Board member Isabel Schnabel argued against early rate reductions, citing persistent service prices, a strong labour market, and disruptions to supply chains due to attacks on vessels in the Red Sea.

The UK economy demonstrated resilience, marked by a decrease in unemployment rates and a robust services sector PMI. These positive indicators may postpone the Bank of England’s policy easing. A recent labour market update, utilizing re-weighted survey data, revealed an unemployment rate of 3.9% for the three months ending in November. This figure is lower than the previously reported 4.2% and below the Bank of England’s forecast of 4.3% for the final quarter of 2023.

Japan

Nikkei 225 hits 34-year high amid yen weakness 

Japanese stocks surged, propelling the Nikkei 225 to a 34-year high, as a weak yen bolstered gains amid expectations of an interest rate cut in March. The yen depreciated to around c149 against the US dollar, down from about 148 the previous week. The Bank of Japan (BoJ) reaffirmed its commitment to accommodative financial conditions, which influenced both bond yields and the currency. Strong foreign investment further fuelled this sentiment, bolstered by the BoJ’s monetary policy stance even as it gradually exits its negative interest rate regime. 

China

Mainland Chinese markets are closed for the Lunar New Year holiday from Friday, February 9, and will resume trading on Monday, February 19. In Hong Kong, the benchmark Hang Seng Index experienced a 1.37% increase. 

Chinese stocks surged as stimulus measures counteracted concerns about deflation. Core inflation, which excludes volatile food and energy costs, rose by 0.4%, marking its weakest increase since June 2023. The Consumer Price Index (CPI) declined, driven by falling food prices, while producer prices continued to deflate. Additionally, the Caixin/S&P Global survey indicated a slight decrease in services activity. 

The People’s Bank of China pledged flexible policy support to stimulate domestic demand and predicted a modest rebound in consumer prices. Further stimulus measures are anticipated to address ongoing economic challenges.