United States
Investors looked to be growing increasingly pessimistic that the Federal Reserve will be able to achieve a “soft landing” for the economy by raising rates enough to manage inflation without creating a recession. It marked the sixth consecutive weekly decline for both the S&P 500 Index and the Nasdaq Composite and the seventh for the Dow Jones Industrial Average, the longest stretch for the latter since 2001, according to The Wall Street Journal.
At its low point on Thursday, the S&P 500 was down nearly 18% from its peak, well into correction territory but just above the 20% performance threshold that typically defines a bear market. The benchmarks pared some of their losses on Friday, helped by a rally in Tesla shares after CEO Elon Musk tweeted that his deal to buy Twitter partly funded by sales of a portion of his considerable stake in the electric car maker was “on hold.”
The Fed’s quickened pace of monetary tightening, stubbornly high inflation figures, worries about a slowing economy, disruptions caused by China’s severe COVID-19 lockdowns, and Russia’s invasion of Ukraine are five themes that traders believe are driving the market’s ongoing falls.
The 0.7% monthly increase in consumer prices for services (excluding energy services) may have been particularly alarming to investors, signalling those inflationary pressures were spreading beyond industrial and energy supply chains. For example, airline fares increased by 18.6% in one month, the highest increase on record. Wednesday’s inflation data weighed on consumer sentiment as inflation rose to 8.3% versus an estimate of around 8.1%.
The 10-year Treasury yields rose last week to their highest level since November 2010 amid concerns of surging inflation pressures and slowing economic growth. The 10-year rate broke above the 3% mark after the federal reserve announced its monetary policy intentions. The federal reserve hiked rates by 50 basis points in order to combat rising inflation however it caused concerns over how it could impact the economy’s growth.
Europe
Shares in Europe rebounded compared to earlier weeks’ lower end despite concerns over inflation, tight monetary policies, and the general economic outlook. Italy’s FTSE MIB Index tacked on 2.44%, and France’s CAC 40 Index added 1.67%. Core eurozone government bond yields declined as developed market bond yields rallied, driven by US Treasuries. The yields on peripheral eurozone and UK government bonds closely matched those in core markets.
On the other hand, Finland has applied for membership to join NATO as President Sauli Niinistö and Prime Minister Sanna Marin backed the country to join NATO as soon as possible. Sweden as well would follow suit; however, Russia threatened the countries with military-technical retaliation but only in the chance nuclear or defence bases of NATO are stationed in Finland or Sweden.
Russian sanctions were placed on European Union (EU) energy companies, notably Gazprom Germania, which Germany acquired last month. Gazprom, Russia’s state-owned gas corporation, then announced that shipments to Europe via the Yamal pipeline, which runs through Poland and into Germany, would be halted. Earlier, the operator of one of the two pipelines sending Russian gas via Ukraine to Europe halted operations, claiming Russian military involvement.
Meanwhile, according to the POLITICO website, which cites diplomats, EU diplomats may abandon suggestions to temporarily embargo Russian oil in favour of additional measures that would be part of the sixth package of sanctions. Countries that rely on the Russian oil supply, like Hungary, are opposed to the boycott. Separately, the EU scrapped a plan to prohibit its maritime industry from transporting Russian crude oil after Malta and Greece raised objections, according to the Financial Times.
President Christine Lagarde of the European Central Bank (ECB) indicated in Slovenia that the ECB’s bond-buying programme might finish “early in the third quarter,” followed by a rate hike “just a few weeks” later. Lagarde’s remarks are the clearest indication yet that the ECB will move on rates sooner rather than later. A growing number of officials have looked to support raising interest rates in July since the April policy meeting. During the week, German central bank President Joachim Nagel stated he “would urge the first step normalising ECB interest rates in July, while Frank Elderson, the ECB’s newest member, said the ECB might consider hiking rates in July depending on the circumstances.”
The output indicator of the UK unexpectedly shrunk 0.1% in March, after stagnating in February, due mainly to a decline in service sector activity. The economy grew 0.8% in the first quarter, but this was below the 1.0% expected by economists and the 1.3% expansion that occurred in the fourth quarter of last year.
japan
Expectations that the US Federal Reserve would rapidly tighten monetary policy, concerns about slowing global economy, and the economic repercussions of Russia’s war with Ukraine continued to weigh on risk appetite in Japan’s stock markets this week. However, generally strong profit trends and increased expansion in service sector firm activity provided some support. The TOPIX Index fell 2.70% while the 10-year Japanese government bond yield stayed largely steady at 0.24% this week, while the yen strengthened against the dollar to around JPY 128.12 from around JPY 130.41, but it remained at relatively low levels.
The Bank of Japan (BoJ) Governor Haruhiko Kuroda reiterated the central bank’s commitment to its current monetary policy stance against the backdrop of monetary accommodation being reduced in the United States and Europe, and amid speculation that the BoJ should also scale back its aggressive monetary easing. According to Kuroda, Japan’s economic growth has not recovered to pre-pandemic levels, and the predicted price rise in the short term—driven by energy costs—will be unsustainable, with no substantial rise in medium- to long-term inflation expectations. Given current economic and price trends in Japan, the Bank of Japan believes it is vital to maintain aggressive monetary easing to aid the economy’s post-pandemic recovery and meet the central bank’s price stability target of 2% annual inflation.
Along with other G7 developed nations, Japan agreed to ban Russian oil imports. Japan’s prime minister emphasised coordination and acknowledged how difficult it would be for the resource-poor country’s dependence on Russian fuel and that Japan will take its time to reduce or suspend imports as part of a phased approach to minimize the negative impact on people’s lives and business activities.
China
A drop in coronavirus cases and positive comments from the securities regulator boosted investor confidence in Chinese stocks. The broad, capitalization-weighted Shanghai Composite Index jumped 2.7%, while the blue-chip CSI 300 Index, which measures Shanghai and Shenzhen’s largest publicly traded companies, gained 2.1%.
The China Securities Regulatory Commission aims to increase the participation of institutional investors in the country’s stock markets and expand the investible universe of the exchange link with Hong Kong
After the People’s Bank of China (PBOC) restated commitments to maintain ample liquidity and stable credit expansion in its first-quarter monetary policy report, the yield on the 10-year Chinese government bond declined to 2.834% from 2.848%. The yuan fell to CNY 6.80 per dollar, down from CNY 6.67 a week ago. In the previous three weeks, the currency has lost more than 5% versus the dollar due to rising US interest rates, the Russia-Ukraine conflict, decreasing domestic development, and speculation that the central bank will intervene to prevent the currency’s devaluation.
The depreciation of the yuan comes unwelcomed for issuers of the dollar-denominated bonds, many of which are in the debt-laden property sector and struggling with slowing sales, weak prices, and refinancing pressures. The property sector’s liquidity crisis continued as Sunac China Holdings became the latest developers to discuss debt solutions on their repayment obligations.
Credit demand deteriorated in April, with new loans falling to a worse-than-expected CNY 645.4 billion yuan (USD 95.14 billion) from CNY 3.13 trillion the previous month, as city lockdowns hampered economic activity. In US dollar terms, export growth fell to 3.9% in April from 14.7% in March, while import growth was flat year over year and virtually unchanged from March’s rate. Both sets of data exceeded economists’ predictions.
In terms of inflation, consumer inflation rose to an above expected 2.1% year on year rate and accelerated from March 1.5% pace. Analysts argue that higher fuel and food prices influenced factory gate and consumer inflation readings.
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| Weekly Index |
| YTD Index |
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| Index | Local Currency | Sterling Pound | Local Currency | Sterling Pound | ||
| UK |
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| FTSE 100 Index | -2.06% | -2.06% | -0.56% | -0.56% | ||
| US |
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| S&P 500 Index | -2.37% | -1.32% | -15.26% | -6.08% | ||
| Europe |
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| DAX 30 | 0.48% | -0.13% | -13.50% | -12.27% | ||
| Asia |
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| Nikkei 225 Index | -2.13% | -0.29% | -8.21% | -9.77% | ||
| Hang Seng Index | -0.50% | 0.57% | -14.64% | -6.03% | ||
| MSCI Emerging Markets Index | -3.66% | -3.25% | -15.87% | -10.64% | ||
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