Most of the major indexes gave back a portion of the previous week’s strong gains and closed modestly lower. Growth stocks lagged value-oriented shares, which were supported by gains in the consumer staples sector. The energy sector underperformed, however, as European oil and natural gas inventories reached near-peak levels. Dispelled reports of a Russian missile strike on Polish territory sparked a brief sell-off on Tuesday, but trading volumes remained muted for much of the week.
The week also brought another round of prominent layoff announcements, particularly from Amazon.com, which announced roughly 10,000 job cuts. Jobless claims over the previous week remained contained, however, with 222,000 workers filing for unemployment benefits—claims have remained within a tight range of 214,000 to 226,000 since late September.
The U.S. Treasury yield curve inverted further during the week, driving the inversion in the two-year/10-year curve segment—historically, a typical but not conclusive indicator of a coming recession—to its deepest level in over 40 years. Short-term U.S. Treasuries repriced to higher yields, particularly after Federal Reserve Bank of St. Louis President James Bullard said that the Fed’s terminal policy rate should reach a minimum level of 5% and may need to go as high as 7% to achieve the central bank’s inflation objectives.
The pan-European STOXX Europe 600 Index ended modestly higher in local currency terms. Major regional stock indexes mostly gained ground. Germany’s DAX Index gained 1.46%, France’s CAC 40 Index advanced 0.76%, and Italy’s FTSE MIB Index added 0.90%. The UK’s FTSE 100 Index rose 0.92%.
European government bond yields held near recent highs as European Central Bank President Christine Lagarde said interest rates need to rise more as policymakers seek to fight inflation. Germany’s 10-year bond yield held above 2%. Benchmark bond yields in Italy, France, and Switzerland steadied as investors assessed the monetary policy outlook in the eurozone. In the UK, 10-year government bond yields rose after the government announced tax rises and spending cuts.
UK finance minister Jeremy Hunt unveiled tax increases, spending cuts, and new fiscal rules in his Autumn Statement, with an eye toward repairing the public finances and restoring Britain’s credibility in international markets. To plug a fiscal hole of GBP 55 billion, the government will raise taxes by GBP 25 billion and cut spending by GBP 30 billion by 2027–2028. Much of a painful squeeze on public spending is slated to occur after the next general election in 2024.
Inflation in the UK accelerated more than expected and hit a 41-year high of 11.1% in October, a significant increase from the 10.1% registered in September. Sharp increases in energy bills and food prices were the primary drivers. Meanwhile, the unemployment rate came in at 3.6% for the third quarter, a slight increase from the three months that ended August 31. The annual increase in average total pay was steady at 6% in the three months through September; however, growth in pay excluding bonuses rose more than forecast to 5.7%.
Japanese equity markets fell over the week, with the Nikkei 225 Index declining 1.29% and the broader TOPIX Index down 0.54%. The rate of core consumer price inflation rose to a 40-year high, exerting fresh pressure on the Bank of Japan (BoJ), which nevertheless remains committed to its ultra-loose monetary policy stance. The Japanese economy unexpectedly contracted in the third quarter of the year, further weighing on sentiment. The yield on the 10-year Japanese government bond rose to 0.24% from 0.23% at the end of the previous week, while the yen weakened modestly, to around JPY 139.8 against the U.S. dollar, from the prior week’s level of approximately 138.8.
Japan’s gross domestic product unexpectedly contracted an annualised 1.2% in the three months to the end of September 2022, weighed down by historic yen weakness. The country continued to struggle to regain momentum following the coronavirus pandemic, with concerns about a global economic slowdown posing a further headwind. Nevertheless, growing private sector demand, the continued reopening of the domestic economy, and the government’s stimulus measures should support a gradual pickup in economic growth.
In political developments, Japan’s Prime Minister Fumio Kishida met with China’s President Xi Jinping at the Asia-Pacific Economic Cooperation summit in Bangkok, Thailand. In their first meeting since Kishida took office last year, the two leaders vowed that they would seek to improve bilateral relations between their countries, agreeing in principle to boost communications on security and to promote cooperation in areas including environmental protection, health, and cultural exchange.
Mainland Chinese stocks were modestly positive for the week, with the Shanghai Composite Index rising 0.32%, while Hong Kong’s Hang Seng Index performed better, gaining 3.85%.
Investors appeared to balance enthusiasm over easing COVID restrictions against worries about rising cases. The seven-day average of new cases reached above 16,000 by the end of the week, with authorities recording a seven-month high of over 25,000 on Thursday alone, according to Reuters. While the breakout remained widespread, China’s National Health Commission announced that it was stopping mass testing in districts, not at risk of community transmission. The Commission also announced plans to create new COVID-focused treatment centers, providing further evidence that the government was backing away from its “zero-COVID” policy despite official statements to the contrary.
The impact of zero-COVID and the troubled housing sector on the consumer was evident in Monday’s October retail sales report, which showed sharp year-on-year declines in nearly all categories; sales of home appliances fell by over 14%, for example. Nevertheless, investors appeared to remain hopeful about recently announced support measures for the property sector. According to Reuters, officials have unveiled 16 new programs to shore up the property markets, including extending loans to both developers and homebuyers.
Late in the week, the People’s Bank of China injected liquidity into the banking system in order to stem a recent rise in bond yields. The rise had prompted retail investors to withdraw funds from fixed income funds, according to Bloomberg, threatening an upward spiral in withdrawals and yields.
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