Markets last week 13/03/2023

United States

Investors were met with more tough talk from Federal Reserve Chair Jerome Powell, signalling that he and his fellow policymakers still had work to do in cooling inflation and the hot labour market, causing a sharp pullback in stocks over the week. The S&P 500 Index dropped on Friday to its lowest intraday level since January 5th, with small-caps underperforming large-caps and value stocks falling more than their growth counterparts, leading the Russell 1000 Value Index into negative territory for the year-to-date period.

Financials, particularly value stocks, suffered significant declines, with SVB Financial facing concerns over its health as customers pulled deposits. The bank was forced to sell and release losses in securities held on its balance sheet to meet capital requirements, marking the second-biggest bank failure in U.S. history. Trading in SVB stock was halted, and the FDIC placed the bank into receivership to protect depositors. Other regional banks also saw a decline in their stocks, albeit only moderately, indicating that investors believed SVB’s risk exposure was exceptional. However, central “money center” banks such as Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo held up better due to stricter banking regulations that required them to previously mark down the value of some securities.

The market downturn began after Fed Chair Powell’s congressional testimony on Tuesday, where he warned of speeding up the pace of tightening and raising rates higher than anticipated if inflation maintains its current trajectory. He also noted that getting inflation down to the Fed’s long-term 2% target would likely be a bumpy process, but stronger recent economic data suggested that the ultimate level of interest rates may be higher than expected. Powell emphasised that history strongly cautions against prematurely loosening policy.

The possibility that SVB’s issues could lead to the Fed scaling back its interest rate hikes to prevent further stresses in the financial system appeared to trigger a sharp drop in short-term Treasury yields. At the start of trading on Friday, the two-year yield plummeted from 4.9% to just above 4.6%, while futures markets began factoring in a quarter-point hike at the next Fed meeting instead of a half-point hike, according to CME Group data. By the end of the day, futures also indicated a roughly 23% probability that the federal funds rate would remain at its current level or decline by the year’s end.

Europe

European stocks dropped in tandem with global markets due to concerns about the banking system’s stability and the potential consequences of a sustained period of high interest rates. In local currency, the pan-European STOXX Europe 600 Index finished 2.26% lower, with major indexes such as Germany’s DAX Index, France’s CAC 40 Index, and Italy’s FTSE MIB Index all seeing losses of 0.97%, 1.73%, and 1.95%, respectively. Additionally, the UK’s FTSE 100 Index decreased by 2.50%.

Bank of Italy Governor Ignazio Visco voiced his dissatisfaction with fellow European Central Bank (ECB) policymakers for making statements regarding future interest rate hikes, which appeared to contradict a previous agreement not to offer such guidance. Visco’s remarks, made during a speech in Rome, could suggest mounting tensions among policymakers ahead of next week’s policy decision. “The level of uncertainty is so high that the Governing Council of the ECB has agreed to decide ‘meeting by meeting,’ without ‘forward guidance’,” he stated. “Therefore, I do not appreciate my colleagues’ comments on the likelihood of future and prolonged interest rate hikes.” Throughout the week, a group of hawks, including ECB Chief Economist Philip Lane and Dutch central bank chief Klaas Knot, called for the ECB to continue raising interest rates after its March meeting to curb inflation.

The initial estimate of Eurozone economic growth in Q4 was revised from 0.1% to 0%. In addition, consumer demand was weakening in January as retail sales grew only 0.3% sequentially, falling short of expectations, and declined 2.3% compared to the same period last year.

Official data showed that the UK economy experienced a greater than anticipated rebound in January, fueled by expansion in the services sector. Gross domestic product increased by 0.3% sequentially, following a contraction in December. This exceeded the 0.1% growth forecast by economists surveyed by FactSet.

Japan

The Nikkei 225 Index and the broader TOPIX Index both recorded moderate gains for the week in Japan, increasing by 0.78% and 0.60%, respectively. Despite a sell-off in Japanese bank stocks on Friday due to a decline in their U.S. counterparts and the Bank of Japan’s decision to keep its accommodative monetary policy unchanged in March, the stock markets were resilient. The BoJ’s commitment to its ultra-loose stance led to a significant drop in the yield of the 10-year Japanese government bond (JGB), ending the week at 0.42%, down from 0.50% the previous week. The yen weakened against the U.S. dollar, trading around JPY 136.7, compared to JPY 135.8 the prior week, due to the dovish BoJ, better-than-expected U.S. economic data, and hawkish messaging from the Fed, which raised concerns that central banks may prolong interest rate hikes.

The Bank of Japan (BoJ) kept its monetary policy unchanged at the final meeting chaired by outgoing Governor Haruhiko Kuroda, who will be stepping down in April. The central bank maintained its short-term interest rate at -0.1% and its 0% target for 10-year Japanese government bond (JGB) yields. The BoJ also reiterated its commitment to yield curve control (YCC), which allows 10-year JGB yields to fluctuate within a range of about plus and minus 0.5% from the target level, through its large-scale bond buying.

Investors are now turning their attention to the BoJ’s April meeting, the first under incoming Governor Kazuo Ueda, who was confirmed by parliament on Friday. Ueda has suggested various possibilities for the future of the YCC framework while stressing that the outlook for underlying prices will determine whether it will be reviewed towards normalisation. Some speculate that the BoJ may further widen the range of JGB yield fluctuations or abandon the framework altogether.

China

Chinese stocks experienced a decline due to concerns about a lower 2023 growth target announced by Beijing and signs of weakening demand, despite alleviating concerns about the country’s prospects. The Shanghai Stock Exchange Index recorded its worst weekly loss in over two months, decreasing by 2.95%, while the blue-chip CSI 300 fell by 3.96% in local currency terms. According to Reuters, Hong Kong’s benchmark Hang Seng Index experienced its most significant weekly loss in over four months, plummeting roughly 6%. During the National People’s Congress (NPC), China’s parliament, which began on March 5 and ended on March 13, Beijing announced an economic growth target of around 5% for this year. Although this target was lower than most predictions, it is an improvement from last year’s 3% growth, which was impacted by coronavirus lockdowns, a weakened property sector, and declining export demand, resulting in China’s lowest economic growth in decades.

China’s consumer price index increased 1% YoY in February, falling short of expectations, compared to a rise of 2.1% the previous month. Meanwhile, core inflation rose 0.6% in February from 1% in January, and producer prices fell more than anticipated due to lower commodity costs. This latest data indicates that inflation in China remains subdued, unlike in the US and Europe, and reinforces expectations that the central bank will maintain its accommodative monetary policy.

In addition, Chinese trade activity was affected by the global economic slowdown as exports and imports continued to decline in the first two months of the year. Exports dropped by 6.8% during January and February compared to the same period the previous year, which was an improvement from the 9.9% drop in December. Imports fell by 10.2% over the same period, larger than the 7.5% decrease in December. China combines trade data for the first two months of the year to smooth out distortions arising from the weeklong Lunar New Year holiday.

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