Markets last week 23/05/2023

United States

Stocks had a strong performance during the week, as the S&P 500 Index reached a level above 4,200 in intraday trading for the first time since late August. However, the index has been trading within a relatively narrow range in recent months. In fact, it experienced its sixth consecutive week with minimal movement, not exceeding a 1% change, which is the longest such period since November 2019. Although the overall market advanced, the equal-weighted S&P 500 Index (SPEXW) lagged behind by 0.77% and showed a year-to-date increase of only 0.93%, significantly trailing the weighted index by 825 basis points.

This discrepancy in performance was evident in the outperformance of certain mega-cap technology-related stocks, particularly Google’s parent company, Alphabet and Facebook’s parent company Meta Platforms, which experienced significant gains. Chipmakers like NVIDIA and Advanced Micro Devices (AMD) also recorded solid increases. Regional bank shares rebounded and recovered from recent losses, with a regional bank exchange-traded fund (ETF) achieving its highest daily gain since early 2021 on Wednesday. On the other hand, defensive sectors such as consumer staples, healthcare, and utilities underperformed.

The driving force behind the week’s gains appeared to be a notable shift in sentiment regarding debt ceiling negotiations. Following a meeting at the White House, President Joe Biden expressed confidence in avoiding a default. At the same time, Republican House Speaker Kevin McCarthy deemed a deal “doable,” Democratic Senate Leader Chuck Schumer stated that a bipartisan agreement was the only way forward. President Biden travelled to Japan for a G-7 leaders meeting but decided to cut his trip short and return on Sunday to continue negotiations. However, stocks showed some uncertainty on Friday after Republican negotiators announced a pause in discussions.

Most of the week’s economic data aligned with consensus expectations, although certain surprises caught investors’ attention. Retail sales in April increased by 0.4%, falling below consensus forecasts and showing the slowest year-over-year growth (1.6%) since the early stages of the pandemic. Adjusted for inflation, spending declined significantly due to a 5.5% rise in the consumer price index during the same period. Industrial production in April rose by 0.5%, surpassing expectations of a flat reading, partly driven by increased auto manufacturing.

The yield on the 10-year U.S. Treasury note experienced a sharp increase during the week, seemingly influenced by the jobs and manufacturing data. This rise in yields was accompanied by pressure on the tax-exempt municipal bond market due to the introduction of several new deals and the FDIC’s sale of tax-exempt holdings, which increased the overall supply.

Europe

European shares made gains on the back of optimism surrounding potential peaking interest rates and avoiding a U.S. debt default. The pan-European STOXX Europe 600 Index ended the week with a 0.72% increase in local currency terms. Notable markets like Germany’s DAX rose 2.27%, while France’s CAC 40 Index gained 1.04%.

Confidence in the European economy and positive developments in U.S. debt ceiling negotiations increased European government bond yields. The yield on the 10-year German bond reached its highest level in over three weeks, nearing 2.5%. In the UK, the benchmark 10-year gilt yield surpassed 4% as policymakers hinted at the possibility of further monetary tightening if inflationary pressures remain unmoderated.

Official data indicated signs of a potential industrial recession in Europe. Eurozone industrial production declined by 4.1% sequentially in March, following a 1.5% rise in February. On a year-over-year basis, industrial output dropped by 1.4% after a 2.0% increase in the previous month. While Irish production experienced the most significant decline due to multinational transfer pricing practices, German, French, and Italian output also weakened.

Germany’s ZEW economic research institute reported a third consecutive monthly decrease in investor morale in May. The sentiment index entered negative territory for the first time since the end of 2022, primarily due to concerns about rising interest rates. ZEW President Achim Wambach expressed concerns that Germany might face a mild recession.

The European Commission raised its economic growth forecasts for the eurozone in the current year and the following year while predicting persistent high inflation. The latest projections anticipate a GDP expansion of 1.1% in 2023 and 1.6% in 2024, up from the previous forecasts of 0.9% and 1.5%, respectively. Wage increases are expected to contribute to inflation, reaching 5.8% in 2023 and 2.8% in 2024, compared to 5.6% and 2.5% previous estimates.

Bank of England (BoE) Governor Andrew Bailey emphasized in a speech that further tightening of monetary policy would be necessary if evidence of persistent inflationary pressures emerged. He predicted a significant slowdown in inflation starting in April as energy price increases were excluded from the annual calculations. However, Bailey noted that the risks to inflation were still significantly skewed to the upside, and unwinding second-round effects would take longer than their emergence.

According to the national statistics office, the UK’s unemployment rate rose slightly to 3.9% in the three months through March, compared to 3.8% in the previous three months. However, wage growth showed little indication of easing during this period, as average weekly pay excluding bonuses, increased to 6.7% year-on-year from 6.6%.

Japan

Japan’s stock markets continued their upward trend, recording their sixth consecutive weekly gain. The Nikkei 225 Index rose by 4.8%, while the broader TOPIX Index saw a 3.1% increase. Both indexes reached levels close to a 33-year high during the week, benefiting from strong domestic earnings, a weak yen, and robust overseas investment in Japanese equities. The positive sentiment was further bolstered by data revealing that the Japanese economy exceeded expectations, experiencing significant growth in the first quarter of the year due to a post-COVID rebound in consumer spending. Investor optimism was also fueled by hopes of a potential agreement on raising the U.S. debt ceiling.

Amid this landscape, the 10-year Japanese government bond yield rose from 0.37% at the previous week’s end to 0.39%. Throughout the week, it reached its lowest level since March, as the Bank of Japan (BoJ) continued to demonstrate its steadfast commitment to maintaining an ultra-loose monetary policy. The yen experienced notable depreciation, with the exchange rate against the U.S. dollar weakening to approximately JPY 138.17, compared to the prior week’s JPY 135.75. However, strong inflation data curbed some of the yen’s depreciation towards the end of the week.

Japan’s gross domestic product (GDP) expanded at an annualized rate of 1.6% in the first quarter, surpassing expectations. The economic growth was primarily driven by resurgent consumption, as both consumers and businesses spent more than anticipated due to the easing of COVID-related restrictions. On the other hand, net trade exerted a drag on growth due to export weakness.

China

Chinese equities displayed a mixed performance as concerns grew regarding the country’s post-COVID recovery losing momentum. The Shanghai Stock Exchange Index saw a gain of 0.34%, while the blue-chip CSI 300 rose by 0.17% in local currency terms. In contrast, the benchmark Hang Seng Index in Hong Kong experienced a decline of 0.90%.

Official data revealed that industrial output, retail sales, and fixed asset investment in April grew slower than expected compared to the previous year. Although unemployment decreased to 5.2% in April from March’s 5.3%, there was a significant increase in youth unemployment, reaching a record 20.4%. This raised concerns about the strength of the post-pandemic recovery and its ability to attract new talent. Investors found these latest figures disappointing, although it’s important to note that the data benefited from a comparison with the prior-year period when China was still under lockdown.

The People’s Bank of China (PBOC) injected RMB 125 billion into the banking system through its one-year medium-term lending facility, surpassing the RMB 100 billion in maturing loans. The medium-term lending rate remained unchanged, as expected. In its quarterly monetary policy report, the PBOC pledged to maintain adequate economic credit growth and liquidity, raising expectations of potential easing measures from the central bank in the coming months.

On Friday, China’s yuan currency depreciated at its fastest rate in nearly three months following the PBOC’s decision to set its central parity rate below RMB 7 per dollar for the first time since December. The slowdown in China’s growth and the surge in the U.S. dollar, driven by hopes of a timely debt ceiling rise by the U.S. government to avoid default, exerted pressure on the local currency.

Market indices

                             

Weekly Index

 

YTD    Index

 

Index

Local Currency

Sterling Pound

Local Currency

Sterling Pound

UK

 

 

 

 

FTSE 100 Index

0.20%

0.20%

5.96%

5.96%

US

 

 

 

 

S&P 500 Index

1.69%

1.96%

9.69%

6.09%

EU

 

 

 

 

Euro Stoxx 50

1.87%

1.43%

15.93%

13.32%

Asia

 

 

 

 

Nikkei 225 Index

4.83%

2.68%

17.20%

7.98%

MSCI Emerging Markets Index

0.65%

0.78%

3.50%

-0.41%

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