Markets last week 20/09/2022

United States

Stocks slumped in the last week as inflation fears have grown and short-term bond yields have risen to levels not seen since 2007. The S&P 500 experienced its lowest drop since mid-June, and growth stocks fared the worst, with the Nasdaq falling nearly 5.5%. As Google parent Alphabet and Facebook parent, Meta Platforms hit new 52-week lows, communication services, and information technology stocks led the S&P 500 declines. Industrials and materials shares were particularly low. Weekly jobless claims fell to 213,000, the lowest level since early summer, according to data released Thursday. 

In terms of wage inflation, large corporations posed a concern because they may be forced to lay off employees, with firms such as Goldman Sachs, Ford Motor Company, and Microsoft reacting negatively to inflation figures. The Consumer Price Index, which came in above expectations and dampened some investors’ hopes, prompted the reactions. Headline prices increased 8.3% in the year ended August, exceeding consensus expectations of an increase of around 8.1%. More concerning may have been the fact that core inflation with the exclusion of food and energy jumped to 6.3%, its highest level since March and higher than the 6.1% expected. A 0.7% increase in housing costs in August was partly to blame but rising food and medical care prices also played a significant role. 

U.S. Treasury yields continued to push higher, particularly on short- and intermediate-term maturities, as disappointing inflation data and a further decline in jobless claims cemented investors’ expectations for a minimum 0.75-percentage-point interest rate hike at the Federal Reserve’s next meeting, the broad municipal bond market also traded lower as the continuous outflow of funds industrywide hindered market performance. 

In terms of the corporate bonds, the US Treasury yields weighed on the corporate bond sector, however, they proved to be resilient after the CPI announcement. Higher yields also somewhat drove demand for IG corporate bonds. Our traders reported that the high-yield bond market advanced as the week began, with investors mostly focused on sourcing BB and B-rated bonds amid positive flows to the asset class. Despite limited new issuance, our traders noted that a few large mergers and buyout deals are still expected later in the month.

The EU/ UK

Fears of a recession appear to be spreading as the British pound has fallen to levels last seen in 1985 against the US dollar, contributing to Sterling’s weakness. Concerns have also been raised that the Bank of England will raise interest rates again at its next meeting, albeit by a smaller amount than the US Federal Reserve is expected to announce. As a result of these factors, ten-year yields in the United Kingdom increased to their highest level in more than a decade. 

European stock markets fell as signs of a worsening economic slowdown emerged. The pan-European STOXX Europe 600 Index fell 2.89% in local currency. The DAX Index in Germany fell 2.65%, the CAC 40 Index in France fell 2.17%, and the FTSE MIB Index in Italy finished flat. 

In the United Kingdom, inflation was 9.9% in August. This figure was lower than the 10.1% recorded in July. This slowdown was caused by falling fuel prices. Core inflation, which excludes food and energy costs, however, increased to 6.3% from 6.2%. Producer output prices were up 16.1% from a year ago, still high, but down from 17.1% in July. 

The unemployment rate fell to 3.6% in the three months to July, the lowest level since 1974. However, the number of people working decreased, indicating that the labour market may be losing steam. Nonetheless, pay increased faster than expected in the three months ending in July due to a lack of job applications, with wages, including bonuses, rising 5.5% year on year. 

The slump in Germany has resulted in a drop in industrial production and exports because of low sentiment caused by energy concerns and shortages. The researchers’ economic sentiment index fell 61.9 points, the lowest level since October 2008. 

Due to rising energy costs and supply chain bottlenecks, Eurozone industrial production fell 2.3% sequentially in July. The drop was the largest in more than two years, exceeding the 1.0% drop predicted by analysts. Capital goods production fell the most. 

The European Commission proposed raising up to EUR 140 billion to offset the impact of rising energy costs. The measures include a windfall tax on fossil fuel company earnings, a revenue cap for non-gas power producers, and a monthly reduction in electricity demand. 

China

China’s stock markets fell as currency weakness and weak real estate data overshadowed surprisingly strong factory output and retail sales figures. According to Reuters, the broad, capitalisation-weighted Shanghai Composite Index fell 4.2%, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, fell 3.9% in its biggest weekly drop in two months. 

The People’s Bank of China drew most of its liquidity from the banking system, taking a more accommodating approach as markets have been volatile in recent months. China held interest rates steady as it sought to alleviate yuan selling pressure caused by a widening policy divergence with the Federal Reserve. To stabilise the currency, China’s central bank has recently set a string of stronger-than-expected yuan fixings against the US dollar and reduced banks’ foreign reserve requirements. 

The Yuan fell to its lowest level since July 2020. Yields on the 10-year Chinese government bonds also rose to 2.692% from 2.663% a week ago. China reported better-than-expected growth in factory output and retail sales last month. Industrial production rose 4.2% year on year in August, up from 3.8% in July, while retail sales jumped 5.4% year on year from July’s 2.7% growth. Fixed asset investment, another closely watched metric, rose a surprisingly strong 6.4% in August from a year earlier, up from July’s 3.6% increase. Unemployment rates for cities and young people both declined. 

China’s property market worsened in August, with official data showing home prices, sales and investment all falling in August, as a mortgage boycott and developers’ financial strains further hurt confidence in the sector. 

The property sector’s woes are one of several mounting headwinds facing China’s economy, leaving many economists skeptical that it will meet Beijing’s 5.5% growth target this year. According to a recent Bloomberg survey, economists expect China’s economy to grow by 3.5% in 2022, the second-lowest annual growth rate in more than four decades. 

Japan

Japan’s stock markets fell over the week, with the Nikkei 225 Index dropping 2.29% and the broader TOPIX Index declining 1.37%. The Japanese government announced that it will drop its COVID-related ban on individual tourists and remove its limit on daily international arrivals to the country. Trade data for August showed that Japan’s exports grew 22.1% from August 2021, building on a 19% annual increase in July. Japan’s top export market was the U.S. 

In terms of currency, the yen finished around JYP143 compared to JYP 142 in the week prior, rumours circulated midweek that the Bank of Japan (BoJ) would intervene in currency markets to stop the yen’s decline against the US dollar, but the central bank did not intervene. The Fed’s rapid rate hikes have contributed to the yen’s steady decline against the greenback in 2022. 

The 10-year yield of Japanese bonds increased to 0.25% compared to last week’s 0.23%. The Bank of Japan entered the market to buy bonds at 0.25%, the upper limit of the 10-year note’s yield range under the central bank’s yield curve control policy. With the 10-year US Treasury note yielding nearly 3.45% at the end of the week, international investors see little reason to own Japanese government debt, which has diminished trading sentiments. 

Markets

 

In Local Currency 

In Sterling Pound 

Index 

Last week 

YTD 

Last week 

YTD 

UK 

 

 

 

 

FTSE 100 Index 

-1.57% 

0.98% 

-1.57% 

0.98% 

US 

 

 

 

 

S&P 500 Index 

-4.74% 

-18.08% 

-3.50% 

2.95% 

Europe 

 

 

 

 

Euro Stoxx 50 Index 

-2.42% 

-17.10% 

-1.26% 

13.37% 

Asia 

 

 

 

 

Nikkei 225 Index 

-2.29% 

-4.25% 

-1.36% 

-8.94% 

Hang Seng Index 

-3.07% 

-17.24% 

-1.81% 

-2.62% 

MSCI Emerging Markets Index 

-1.98% 

-15.78 

-1.37% 

-7.05% 

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