United States
Equities ended on a higher note within the week, for the first time in four weeks. The energy sector saw OPEC introduce a global production cut, which saw prices surging over the week. Stocks bounced off nearly two-year lows on Monday and Tuesday, with its best two-day move since 2020 and the third-best start to an October since 1930.
Inflation speculations seemed to reemerge after the OPEC+, a group of oil exporters announced a 2 million-barrel per day cut in target production on Wednesday. Even though many observers expect the actual cutback will be smaller, the benchmark price for a barrel of domestic oil rose by roughly USD 10 over the week, crossing the USD 90 mark for the first time since late August.
Inflation fears appeared to be enhanced by labour market strength. According to the Labor Department, the economy added 263,000 jobs in September, while the unemployment rate fell to a multiyear low of 3.5%. A surprise drop in participation, to 62.3%, may have been more concerning, indicating that competition for available workers would remain fierce. Nonetheless, wage growth appeared to be slowing, with average hourly earnings continuing to fall on a year-over-year basis to 5%, down from 5.6% in March.
Following the release of non-farm payrolls, US treasury yields increased. The broad municipal bond market rallied for most of the week, outperforming Treasuries significantly. A light issuance calendar aided the technical backdrop of the tax-exempt market, and our traders reported that primary market offerings, including New York City and California general obligation deals, were well received. Various traders also noticed a concentration of retail investors at the short end of the market, while institutional buyers were visible in the longer maturities.
As equities and other risky assets rose, our traders saw the positive effects of a rebound in risk sentiment on investment-grade corporate bonds. While the rally slowed around midweek as Treasury yields rose, credit spreads on investment-grade corporates tightened week over week. As new issuance was relatively low, technical conditions provided additional support.
Europe
European stocks rose alongside their global counterparts on expectations that central banks will begin to taper interest rate hikes. The STOXX Europe 600 Index ended the week 0.98% higher in local currency. The major indices also rose.
The German 10-year bonds reversed back to their highs as the ECB showed policymakers how worried they were in terms of inflation. This produced a potential for interest rate increases in October. Yields rose broadly for the eurozone as sovereign bonds showed data of a 10% inflation acceleration of 10% in the last month. In the UK, yields on 10-year gilts climbed after Fitch Ratings cut the UK’s credit outlook to negative following a similar move by Standard & Poor’s a week earlier.
A larger-than-expected increase in eurozone producer prices in August highlighted the risk of headline inflation. Factory gate prices increased 5.0% and 43.3% year on year, owing primarily to rising energy costs. Price pressures remained high in September, according to the final version of S&P Global’s survey of manufacturing and services purchasing managers’ indexes (PMIs). With such outcomes, this saw companies passing the rise in costs to consumers as German companies had already been planning to increase inflation. Weaker-than-expected industrial output and retail sales for August suggested that the economic slowdown in Germany could be deepening.
China
From October 1 to October 7, China’s stock markets were closed for the National Day holiday, also known as Golden Week. The weeklong break came after a risk-off September for Chinese assets, with foreign investors selling Chinese stocks and bonds, pushing the offshore yuan to a month-end low against the US dollar. According to Bloomberg, the onshore yuan exchange rate ended in September near levels not seen since the 2008 global financial crisis.
According to the Institute of International Finance, investors sold USD 1.4 billion in Chinese bonds and USD 700 million in stocks in September in response to the country’s deteriorating outlook, which was exacerbated by Beijing’s zero-tolerance approach to the coronavirus. China reported the highest number of new infections in about a month, owing to holiday travel, prompting a new round of lockdowns in several cities. China’s finance ministry has announced that it will issue CNY 5.5 billion (USD 773.18 million) in yuan-denominated sovereign bonds in Hong Kong on October 12.
China’s foreign exchange reserves declined to USD 3.029 trillion at the end of September from USD 3.055 trillion at the end of August. September’s decline marked the third month of losses for China’s foreign exchange reserves, the world’s largest, bringing it closer to the psychologically important USD 3 trillion thresholds.
China property stocks rose in Hong Kong trading on reports that mainland financial regulators have instructed the largest state-owned banks to extend at least CNY 600 billion (USD 85 billion) in net financing to the beleaguered property sector in the coming months. With the Chinese President securing a third term, Beijing has increased support for the country’s indebted property, which will begin on the 16th of this month. This has also provided analysts with insight into China’s leadership and policy direction, as the government may consider relaxing the covid-zero policy.
Japan
Japanese equities finished the week much higher as Asian markets saw an unfavourable September, the broader TOPIX climbed above 1,900 to finish at 1,907 (+3.86%). The week began positively, with expectations of a dovish pivot by the US Federal Reserve. As confident investors sought bargains in beaten-down heavyweights and growth stocks, Japanese shares rose the most in a single day since March 10. Despite the week’s strong gains, the market ended on a down note on Friday, with Japanese equities ending lower, snapping a four-day winning streak. Solid private payrolls and services sector data from the United States released on Thursday dampened hopes for a policy shift, while hawkish comments from U.S. Fed officials on Friday harmed confidence.
Midweek, the Yen rallied, briefly reaching highs of JPY 143 against the US dollar. However, this was only temporary, and by the end of the week, the Yen was back in the high JPY 144 range and testing JPY 145 versus the US dollar. This was due to the strengthening of the US dollar following comments from Fed officials in support of further rate hikes. Core consumer prices in Tokyo increased 2.8% year on year in September, the largest increase since 2014. However, data released on Friday showed that Japanese households cut back on spending for the second month in a row in August, as rising living costs strained their budgets.
On the other hand, the Ministry of Finance stated Japan’s foreign reserves fell by a record USD 54 billion to USD 1.238 trillion at the end of September. This was due to the government’s efforts to lessen the Yen’s decline by selling dollars in order to support the local currency. In the bond market, the yield on Japan’s 10-year government bond dipped sharply midweek, falling to 0.210% as U.S. Treasuries strengthened. However, yields rallied late in the week, briefly moving above the Bank of Japan’s 0.25% curve control tolerance level before settling around 0.245%.
Indices for the week
|
|
Weekly Index |
YTD Index |
||
|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
3.12% |
3.12% |
-2.35% |
-2.35% |
|
US |
|
|
|
|
|
S&P 500 Index |
-15.53% |
2.72% |
-22.97% |
-6.29% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-14.16% |
-11.92% |
-19.61% |
-15.85% |
|
Asia |
|
|
|
|
|
Nikkei 225 Index |
-5.75% |
-12.38% |
-5.82% |
-9.42% |
|
Hang Seng Index |
-25.36% |
-10.36% |
-21.69% |
-5.38% |
|
MSCI World |
-14.46% |
-1.17% |
-20.52% |
-7.76% |
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