United States
Last week we witnessed major indices experiencing their fifth week of losses as interest rates have been very temperamental with sentiments, especially in growth stocks. Losses have been most prominent in the Dow Jones index industrial average, forcing it into a correctional territory with a decline of more than 10% from its previous highs. Along with it, we have seen the S&P 500, and the Nasdaq falling into bear territory approaching the end of the business week.
On Tuesday and Wednesday, the federal reserves’ much-anticipated meeting saw wall street expecting volatility coupled with several economic data releases. On Wednesday, the Federal Policymakers announced a 50-basis point increase in the federal fund’s target rate, which marks it the highest since 2000. Officials also announced that the Fed would begin allowing its holdings of Treasuries and agency mortgage-backed securities to decline in June at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion.
The Commerce Department reported that non-farm unit labour costs jumped 11.6% in the first quarter, well above elevated consensus forecasts of a rise of around 9.9%. this was mainly due to a severe drop in production of 7.5%. There was also an addition of 428,000 jobs as compared to an expected 390,000 despite previous months’ gains being lower but showing a similar gap of 39,000.
The market’s immediate reaction was modest since the movements were mostly in accordance with forecasts. However, during his post-meeting press conference, Fed Chair Jerome Powell startled many by saying that a rise of 75 basis points (0.75 percentage points) was “not something we are actively considering”. In late Wednesday trade, bond prices surged as longer-term bond yields fell, while equities indexes rallied strongly.
Amid an increase in treasury rates, the 10-year Treasury note rates breached 3% for the first time since 2018 increasing as high as 3.13% on Friday. The yield curve continued with its steep trend with long-term inflation and long-maturity Treasury yield expectations increased as more investors lost confidence that the curve would flatten. At the current market level, tax-exempt bonds continue to sell moderately compared to US Treasuries as low liquidity results from municipal bond money’s continued outflow.
Traders observed lower-than-average secondary trading volumes within the investment-grade corporate bond market and a pickup in new issuance to start the week. In general, the new deals were priced with attractive concessions and were met with strong demand. Amid risk-off sentiment in the wake of the Fed meeting, investment-grade corporate bonds lost ground.
Traders holding positions that benefit from a price decline drove most of the buying activity in the high-yield market ahead of the federal reserves’ announcement on Wednesday.
The bank loan market was mostly focused on higher-quality names, while lower-rated loans and market segments more vulnerable to inflationary pressures, such as building products suppliers and retailers, underperformed. They also noted that buyers paused in the second half of the week given the broad market volatility.
Europe
As continuous fears to contain inflation grow, this resulted in stocks dropping with a potential to compromise economic growth in Europe. The lockdown effects in China and its strive to prevent the spread of the virus as well as the situation in Ukraine seem to have increased Europe’s concern. The STOXX Europe 600 Index sank 4.55% in local currency, while France’s CAC 40 Index fell 4.22%, and Germany’s DAX Index declined. Bonds yields rose mostly in parallel to the US treasury after the 50-basis point increase. UK gilt yields fell after the Bank of England (BoE) raised rates but cut its forecast for economic growth and warned of a potential recession.
After facing resistance from Hungary, Slovakia, and the Czech Republic, which rely heavily on these energy imports, EU envoys will continue to discuss a possible embargo on Russian oil over the weekend. While most nations are anticipated to enact a ban within six months, the Financial Times stated that Brussels may now provide the Czech Republic a deadline of June 2024, while Hungary and Slovakia may have until the end of that year.
Key interest rates were increased by the BoE by 25 basis points to 1% citing its highest level since 2009 to dampen inflation. However, the central bank has put off lowering its bond holdings acquired under its asset purchase program. The bank also warned that the UK could enter a recession by the end of the year and that inflation could top 10% in the fourth quarter. The British pound fell to a two-year low because of these developments.
More Policymakers at the European Central Bank (ECB) appeared to be pushing for an early rate hike after the quantitative easing program ended in the third quarter. Executive Board member Isabel Schnabel, Bank of France Governor Francois Villeroy de Galhau, Bank of Finland Governor Olli Rehn, and Bank of Austria Governor Robert Holzmann have all signalled that a rate hike might happen as soon as July.
With the eurozone industrial production falling 3.9%, the German manufacturing orders fell more than expected by 4.7% at the end of March. Additionally, the eurozone production dropped by 3.9%, the highest decline since the beginning of the pandemic. The supply chain disruption has resulted from the pandemic restrictions and the Russian invasion of Ukraine.
japan
Japanese stocks increased moderately during a holiday-shortened week as the markets were closed from the 3rd to the 5th of May. Despite the volatility caused by the US Federal Reserve’s decision to impose the first 50-basis-point interest rate hike since 2000, the TOPIX Index gained 0.86%. The 10-year Japanese government bond yield jumped to 0.24 % from 0.21 % at the end of the previous week, following the trend in US Treasuries. The Yen concluded the period marginally weaker versus the dollar, at around JPY 130.51 (from around JPY 129.76), maintaining its two-decade low. Exporters benefit from the weakening Yen, which increases the value of their foreign revenues.
In April, the Tokyo core consumer price index (CPI) increased 1.9 percent year on year, up from 0.8 percent in March. The number implied an enhanced possibility of Japan’s CPI meeting the Bank of Japan’s (BoJ) 2 percent inflation target in the coming months, as it is seen as a leading predictor of nationwide pricing patterns. The Bank of Japan recently raised its inflation forecast, noting the impact of a large increase in energy prices, however, the increase is expected to be temporary.
Prime Minister Fumio Kishida indicated that Japan’s border controls will be eased again in June, when a faster entry process, like that used by other Group of Seven leading industrialized nations, will be implemented. He did say, though, that adjustments would be phased in, following the advice of public health experts. The number of persons allowed to enter Japan is currently regulated at 10,000 per day, and tourists are still not permitted. Additionally, the prime minister stated that Japan would focus on carbon neutrality by 2050 and the goal of reducing greenhouse gas emissions by 46% by 2050. Alternatives such as renewables and nuclear power would be their aim by 2030.
China
Chinese markets fell as Beijing showed no sign of relaxing its zero-tolerance approach to the coronavirus, raising worries about the economic cost of widespread lockdowns. The broad, capitalization-weighted Shanghai Composite Index fell 1.5%, and the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, sank 2.7%.
According to a statement made after a meeting of the Chinese Communist Party’s Politburo, relaxing viral prevention and control procedures will certainly result in large-scale infections, major illnesses, and deaths. Unlike earlier remarks, the statement made no mention of harmonizing China’s focus on viral eradication with economic growth or minimizing economic impact. Beijing announced mass testing and increased restrictions in response to a growing outbreak. In a sign of how the virus restrictions have hit domestic consumption, spending over China’s five-day Labor Day holiday plummeted 43% from a year earlier to CNY 64.7 billion, or roughly USD 9.8 billion
China’s service sector activity shrank in April at the second-steepest rate on record, according to the latest Caixin services Purchasing Managers’ Index (PMI). The drop in the private Caixin survey was consistent with the official PMI, which fell for the second straight month in April as lockdowns curbed production and disrupted supply chains.
The US Securities and Exchange Commission (SEC) added over 80 U.S.-listed Chinese corporations to its list of organizations facing possible delisting from US exchanges, escalating tensions with the US. The SEC’s expanding list of Chinese businesses facing expulsion derives from a long-running disagreement with China over auditing standards, which could result in dual-listed Chinese companies being delisted as early as 2024 if they do not follow US auditing norms
According to Bloomberg, China has ordered key government institutions and state-owned firms to replace foreign-branded personal computers with domestic alternatives within two years, indicating escalating tensions with the West. One of Beijing’s most significant steps to date to lessen the country’s reliance on US technology is the makeover.
Markets this Week
|
|
Weekly Index |
|
YTD Index |
|
||
|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
||
|
UK |
|
|
|
|
||
|
FTSE 100 Index |
-0.54% |
- 0.54% |
3.11% |
3.11% |
||
|
US |
|
|
|
|
||
|
S&P 500 Index |
-0.19% |
-1.45% |
-13.20% |
-4.82% |
||
|
Europe |
|
|
|
|
||
|
DAX 30 |
-1.63% |
-0.37% |
-12.70% |
-11.50% |
||
|
Asia |
|
|
|
|
||
|
Nikkei 225 Index |
-0.11% |
-0.16% |
-6.85% |
-11.22% |
||
|
Hang Seng Index |
-5.16% |
-3.65% |
-14.20% |
-6.57% |
||
|
MSCI Emerging Markets Index |
-1.40% |
-0.16% |
-10.68% |
-5.38% |
||
About Author
