United States
Although Friday’s rally provided a temporary boost, the S&P 500 Index finished the week in negative territory due to comments from Federal Reserve Chair Jerome Powell indicating that a rate reduction may not happen as quickly as expected. In addition, concerns about the U.S. debt ceiling added to the unease, as Treasury Secretary Janet Yellen informed congressional leaders that the agency might be unable to meet its debt obligations as early as June 1. The information technology sector performed well and finished higher, while the energy sector pulled back due to the decline in West Texas Intermediate crude oil prices.
At the beginning of the week, yields on 10-year U.S. Treasuries fell due to concerns about regional banks and the debt ceiling, but they moderated during Friday’s trading session. Traders reported limited activity in the high-yield space, and risk markets evaluated regional bank risk and the Fed’s interest rate outlook. Although there was a surge in issuance with the announcement of several new deals, trade volumes were light before and after the central bank’s decision.
California-based First Republic Bank, Silicon Valley Bank, and Signature Bank faced difficulties with significant deposit outflows, leading regulators to take control of the bank over the weekend. JPMorgan Chase acquired most of the bank’s assets, and only deposits not covered by federal insurance suffered losses. This event caused significant volatility in the regional bank’s subsector of the S&P 500, reflecting concerns about potential bank failures and credit pressures if the economy slows and unemployment increases.
On May 3, the Fed increased interest rates by 25 basis points, raising the benchmark fed funds rate to a target range of 5.00% to 5.25%. The FOMC’s statement omitted previous language anticipating “additional policy firming” and highlighted that future actions would depend on economic developments and incoming data. During the press conference, Fed Chair Powell suggested that the Fed funds rate might have reached its peak level for this cycle. However, Powell also left the option for further monetary tightening on the table, stating that “a decision to pause was not made today.” Powell deemed rate cuts “inappropriate” if inflation does not decrease quickly.
According to data from the U.S. Department of Labor, the number of job openings fell for the third consecutive month in March, declining from 9.97 million to 9.59 million. The decline was most significant in small businesses with up to 49 employees. Despite this, the labour market remains tight with 1.6 job openings for every unemployed person. The report also revealed layoffs at 1.8 million, marking an increase of 248,000 and the highest level since December.
Europe
During the five trading days ending May 5, the pan-European STOXX Europe 600 Index ended 0.28% lower in local currency terms, as concerns about a possible recession and issues in the banking sector continued to affect market sentiment. Major stock indexes had mixed results, with Germany’s DAX rising 0.24%, France’s CAC 40 Index weakening by 0.78%, and the UK’s FTSE 100 Index sliding 1.17%.
Following the European Central Bank’s (ECB) quarter-point increase of its interest rate, European government bond yields decreased, with the yield on benchmark 10-year German government debt falling near one-month lows. In the UK, yields remained stable, holding near one-month highs at around 3.8%, as investors prepared for further policy tightening from the Bank of England.
As expected, the ECB raised its key deposit rate by a quarter of a percentage point to 3.25%, marking its fourth increase this year but scaling back from previous half-point increases. The bank also announced it would halt its program of reinvesting money from its bond purchases by July. ECB President Christine Lagarde stated that interest rates would rise to “sufficiently restrictive levels” until inflation was reduced to the 2% target. Although some policymakers argued for a half-point increase, the Governing Council was concerned about the banking industry’s turmoil and its impact on the economy’s credit supply. Lagarde confirmed that “everybody agreed that increasing rates was necessary, that we are not pausing, that is very clear. And we know we have more ground to cover.”
Official data showed that inflation in the eurozone rose to 7.0% YoY in April, up from 6.9% in March. However, the core rate, which excludes food, energy, alcohol, and tobacco and is a measure of underlying pricing pressures, unexpectedly decreased from a record level to 5.6%. Separately, the jobless rate in the eurozone fell to 6.5%, while in Germany, it declined to 2.8%, the lowest rate among bloc members.
In the UK, the housing market appeared to stabilise in March, with mortgage approvals for home purchases rising for a second consecutive month to 52,011, up from 44,126 in February and the highest number since October. Nevertheless, home loans remained below their average of approximately 70,000 before former Prime Minister Liz Truss’s mini-budget proposal last September, which caused long-term interest rates to spike and prompted lenders to withdraw funds from the market.
Japan
Due to the Golden Week national holidays, Japan’s stock markets only opened for the first two days of the week. During this time, the Nikkei 225 Index and the broader TOPIX Index rose by 1.0% and 0.9%, respectively. On Monday, the markets rallied, primarily due to a sell-off in the yen, which boosted the outlook for Japanese exporters. The Bank of Japan’s decision to maintain its ultra-easy monetary policy stance at its April 27-28 meeting also contributed to the positive sentiment. However, the yen strengthened over the full week against the U.S. dollar due to safe-haven demand amid U.S. recession fears, concerns about the health of certain U.S. regional banks, and the U.S. Federal Reserve signalling a pause in its interest rate hiking cycle. The 10-year Japanese government bond yield remained broadly unchanged at 0.42%.
According to Economy Minister Shigeyuki Goto, banking sector problems in the U.S. and Europe are not expected to impact Japan’s economy and financial system. He also expects the Bank of Japan to guide monetary policy flexibly and appropriately, considering the economy and financial markets.
To fully normalize social and economic activities, Japan’s government announced that from May 8, COVID would be reclassified to a level on par with seasonal influenza. A panel of infectious disease experts approved the reclassification based on the current pandemic situation and the preparedness of the healthcare system for a potential countrywide resurgence in cases. This announcement follows the lifting of remaining coronavirus border control measures ahead of the Golden Week national holidays.
China
After a shortened week due to the Labour Day holiday, Chinese equities closed mixed as weak manufacturing data weighed on sentiment. The Shanghai Stock Exchange Index rose 0.34%, while the blue-chip CSI 300 fell 0.3% in local currency terms. The manufacturing purchasing managers’ index (PMI) fell to 49.2 in April, indicating a contraction for the first time since December. The non-manufacturing PMI also softened but remained above the 50 threshold. The downturn in factory activity raised concerns about China’s recovery losing momentum. However, domestic tourism during the holiday rebounded to pre-pandemic levels, with spending activity surging about 129% over the year-earlier period, fuelling optimism for a sustained recovery in the services sector.
Market indices
|
|
Local Currency |
Sterling Pound |
||
|
Index |
Last week |
YTD |
Last week |
YTD |
|
UK |
|
|
|
|
|
FTSE 100 index |
0.07% |
2.78% |
0.07% |
2.78% |
|
US |
|
|
|
|
|
S&P 500 Index |
-0.50% |
11.32% |
-1.26% |
6.02% |
|
Europe |
|
|
|
|
|
Euro Stoxx 50 Index |
-0.09% |
15.69% |
-0.62% |
13.23% |
|
Asia |
|
|
|
|
|
Nikkei 225 Index |
0.12% |
11.24% |
1.21% |
3.63% |
|
Hang Seng Index |
0.59% |
3.19% |
-0.15% |
-2.06% |
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