United States
Stocks finished the week lower as investors digested the implications of messages from Federal Reserve officials. The S&P 500 Index extended its daily losing streak that began on August 26, with Fed Chair Jerome Powell’s widely perceived speech at the central bank’s Jackson Hole conference through Wednesday before recovering slightly on Thursday. Value stocks continued to outperform high-priced growth stocks, and large-cap stocks fared far better than small-cap shares. Energy stocks suffered as West Texas Intermediate crude, the US benchmark, fell below USD 90 per barrel. As a result, certain individual stocks experienced significantly higher volatility than the broad indexes, particularly software companies whose earnings missed estimates later in the week.
The August jobs report released by the Department of Labor on Friday showed that the economy added 315,000 jobs last month, a number considered solid but down from a revised 526,000 in July. As the labour force participation rate increased, the unemployment rate rose to 3.7% from 3.5% in July. Earlier this week, the Bureau of Labor Statistics for July revealed an unexpected increase in job postings, reaching two per unemployed worker.
Fed officials’ public statements have continued to reinforce the message that the central bank is determined to raise interest rates enough to bring inflation under control. Cleveland Fed President Loretta Mester stated that she believes interest rates will need to rise significantly for the Fed to effectively combat inflation. Raphael Bostic, President of the Atlanta Fed, echoed that sentiment, saying that “we have some work to do” before the central bank’s drive to contain inflation is complete.
The evidence of continued tightness in the labour market helped push U.S. Treasury yields higher, with the two-year Treasury yield reaching levels not seen since late 2007, investment-grade corporate bonds suffered from the weaker macro-economic backdrop. Secondary trading volumes were below daily averages, and no new issuance occurred. The sell-off in Treasuries pressured high-yield bonds and bank loans as the market continued to assess the Fed’s hiking trajectory and its impact on growth. As expected, no new high-yield bond issues were announced this week, but several financing deals are anticipated after Labor Day. Rising interest rates continued to hamper the municipal debt market, although municipal bonds fared better than Treasuries at the broad market level.
The EU
Europe’s stocks plunged on fears that central banks will tighten monetary policy aggressively for an extended period. Concerns that Russia might cut off natural gas supplies to Europe weighed on sentiment as well. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 2.37% lower. Major indexes were mixed with France’s CAC 40 Index dropping 1.70%, and Germany’s DAX Index gaining 0.61% as the week closed off.
The yields on core eurozone government bonds increased in response to central bank comments and record-high inflation. Core market yields were broadly tracked by peripheral euro zone bond yields and UK gilt yields. Following a chorus of comments by policymakers and data showing record inflation, eurozone money markets were pricing in a roughly 80% chance of an exceptionally large 0.75 percentage point rate hike by the European Central Bank (ECB) at its next meeting. In the eurozone, inflation rose faster than expected to a record 9.1% in August, up from 8.9% in July with energy and food prices being the primary drivers.
After a three-day maintenance outage, Russia’s state-owned energy company Gazprom was ready to reopen the Nord Stream 1 pipeline to Germany as planned. However, after the market closed on Friday, Gazprom announced that a technical fault would cause the pipeline to be closed for an extended period. Meanwhile, Gazprom said it would reduce deliveries to France due to a contract dispute, despite France and Germany having saved 90% and 80% in reserves for the winter.
UK
Liz Truss is set to succeed Boris Johnson as Prime Minister of the United Kingdom. She will commence her tenure as Prime Minister of the United Kingdom at a time of economic uncertainty and political upheaval in the country. After Margaret Thatcher and Theresa May, she becomes Britain’s fourth prime minister in six years and the third female leader. She defeated former finance minister Rishi Sunak in the leadership race, promising to reduce tax cuts and address deepening energy and living costs. Ms Truss will face double-digit inflation, a looming recession, labour unrest, soaring household energy bills, and fuel shortages this winter as she takes over at 10 Downing Street.
She will formally assume the prime minister’s title on Tuesday(today) in a meeting with Queen Elizabeth II at Balmoral Castle in Scotland, where the queen is vacationing.
In financials, The British pound fell the most in a month against the US dollar since October 2016, three months after the Brexit referendum, as economic and political uncertainty in the country increased during the ruling Conservative Party’s election campaign to replace outgoing Prime Minister Boris Johnson. The pound fell more than 4% to USD 1.16 in August. Furthermore, the pound fell by 3% against the euro.
Japan
Investor sentiment was dampened by a hawkish outlook for US interest rates. The 10-year Japanese government bond yield rose to 0.24% from 0.22% at the end of the previous week, despite a sell-off in global bonds. The yen fell on expectations of continued monetary policy divergence between the Federal Reserve of the United States and the Bank of Japan (BoJ), which remains committed to maintaining ultralow interest rates.
For the first time since 1998, the Japanese yen broke through the JPY 140 level against the US dollar. Shunichi Suzuki, Japan’s Finance Minister, acknowledged recent currency market volatility and its potential negative impact on the economy and financial conditions. Furthermore, he stated that the government was ready to take appropriate action as needed to restore stability, in collaboration with monetary authorities in other countries.
While the weak yen has boosted Japan’s competitiveness and benefited the country’s exporters, it has also increased the cost of importing energy and food, putting pressure on businesses and households. Japan, as a net energy importer, is affected by rising energy prices. With core inflation exceeding the Bank of Japan’s 2% target for four months in a row, the government has promised new measures to mitigate the impact of rising food and energy prices.
Prime Minister Fumio Kishida announced a further relaxation of Japan’s strict COVID-19 border controls, raising the daily entrant limit to 50,000 from the current 20,000 beginning September 7, as well as eliminating the requirement for foreign tourists to travel on guided tours. The testing requirements for those who have been vaccinated at least three times will be relaxed as well. Without elaborating, Kishida stated that the government will ease border controls even further to make people’s entry as easy as it is in the other Group of Seven developed nations. Coronavirus cases in Japan remain high, but the government has refrained from imposing travel restrictions, despite vaccination rates being among the highest in the world.
China
Stock markets in China fell as coronavirus outbreaks in major cities prompted new lockdowns and dampened the economic outlook. According to Reuters, the broad, capitalization-weighted Shanghai Composite Index fell 1.54%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 2.01%.
The majority of Shenzhen’s 18 million residents were under virus-related control during the city’s most serious outbreak since the spring. Chengdu, the capital of Sichuan province in southwestern China, went into lockdown on Thursday, with mass testing planned through the weekend. Guangzhou, China’s southern port city, also imposed restrictions with an overall of 41 Chinese cities, accounting for 32% of the country’s GDP, dealing with coronavirus outbreaks, the highest number since April.
China announced that it would carry out a landmark audit agreement reached with the United States last month. On August 26, both countries signed a preliminary agreement that would allow US accounting officials to review the audit papers of US-listed Chinese companies, ending a years-long dispute that threatened to delist about 200 Chinese companies from US exchanges. The agreement marked a retreat from Beijing, which had previously refused to allow US regulators access to Chinese companies’ audit papers, citing national security concerns. The United States will closely monitor developments in the coming months to ensure that China abides by the terms, according to Securities and Exchange Commission Chair Gary Gensler.
The official manufacturing Purchasing Managers’ Index (PMI) increased to 49.4 in August from 49.0 in July, exceeding expectations but remaining below the 50-point threshold separating contraction from growth. The official non-manufacturing PMI fell from 53.8 to 52.6 owing to nationwide power outages and virus lockdowns.
Weekly Indices
|
|
In Local Currency |
In Sterling Pound |
||
|
Index |
Last week |
YTD |
Last week |
YTD |
|
UK |
|
|
|
|
|
FTSE 100 Index |
-1.87% |
1.60% |
-1.87% |
1.60% |
|
US |
|
|
|
|
|
S&P 500 Index |
-3.25% |
-17.04% |
-1.51% |
-3.00% |
|
Europe |
|
|
|
|
|
Euro Stoxx 50 Index |
-1.62% |
-15.67% |
0.25% |
-13.05% |
|
Asia |
|
|
|
|
|
Nikkei 225 Index |
-3.42% |
-3.93% |
-3.15% |
-7.49% |
|
Hang Seng Index |
-3.41% |
-14.59% |
-1.71% |
-0.80% |
|
MSCI Emerging Markets Index |
-2.75% |
-14.14% |
-1.67% |
-5.65% |
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