USA
Stocks continued their retreat from recent highs as geopolitical tensions and concerns about interest rates weighed on investor sentiment. Mega-cap technology shares faced pressure due to rising rates, exacerbated by a revenue miss from ASML Holdings. Small-cap stocks struggled, pushing the Russell 2000 Index further into negative territory.
The trading week began with optimism following Iran’s retaliatory strike on Israel, which was largely intercepted by air defenses. However, sentiment soured as reports of potential Israeli retaliation surfaced. Economic data showed strong retail sales, driven partly by rising gas prices, but weakness in the housing market raised concerns about inflation and interest rate cuts.
Federal Reserve officials expressed caution regarding recent economic data, leading to higher Treasury yields. Municipal bond yields initially rose amid a flood of new issuance but stabilised later in the week. In the corporate bond market, high yield bonds faced selling pressure amid geopolitical tensions.
Europe
Europe experienced a downturn as tensions escalated in the Middle East, with the STOXX Europe 600 Index closing 1.18% lower. While Germany’s DAX fell 1.08%, Italy’s FTSE MIB gained 0.47%, and France’s CAC 40 Index remained relatively stable.
In the UK, consumer prices moderated to 3.2% in March, slightly below expectations, with wage growth also showing a slight deceleration. Despite these trends, the Bank of England’s Governor David Bailey expressed optimism at the IMF meeting, suggesting a delay in interest rate cuts until later in the year. Meanwhile, European Central Bank policymakers reiterated plans for a June rate cut, emphasising a cautious approach amid uncertainties, particularly regarding oil prices and geopolitical tensions.
China
Chinese equities surged following better-than-expected first-quarter economic expansion. The Shanghai Composite Index rose by 1.52%, while the blue chip CSI 300 climbed by 1.89%. However, in Hong Kong, the benchmark Hang Seng Index dropped by 2.89% due to escalating geopolitical tensions in the Middle East, denting investor sentiment.
China’s gross domestic product outpaced expectations, expanding by 5.3% in the first quarter from a year ago, slightly higher than the previous quarter’s 5.2% growth. Despite this growth, other economic indicators presented a mixed picture. Industrial production in March increased by a lower-than-expected 4.5% year-on-year, down from 7% growth in the preceding months, while retail sales grew by 3.1%, also below expectations.
Fixed asset investment exceeded forecasts for the quarter, although property investment experienced a significant 9.5% decline year-on-year. On the monetary policy front, the People’s Bank of China injected RMB 100 billion into the banking system, resulting in a net withdrawal of RMB 70 billion, marking the second cash extraction this year. Additionally, new home prices in China continued to decline, falling by 0.3% in March, indicating that the housing sector’s slump persists, posing a considerable challenge to the economy despite efforts to stimulate it through relaxed restrictions and increased lending.
Japan
Amid escalating Middle East tensions, Japan’s stock markets faced significant losses, with the Nikkei 225 Index dropping 6.2% and the broader TOPIX Index down 4.8%. Concerns about waning AI-related demand further weighed on market sentiment.
In fixed income, the yield on the 10-year Japanese government bond remained stable at around 0.84%. Bank of Japan Governor Kazuo Ueda suggested that significant yen weakness might prompt a rate hike to counter inflation. Despite speculation about intervention to bolster the yen, authorities remained cautious. However, discussions among U.S., Japanese, and South Korean leaders focused on recent currency market developments.
The historic weakness of the yen provided a boost to export growth, with March’s 7.3% increase contributing to the fourth consecutive month of export growth. Additionally, while March’s core consumer price index was slightly lower than expected, solid growth in inbound tourism from South Korea and China may support services inflation.
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