United Kingdom
Liz Truss resigned as prime minister after 45 tumultuous days in office, becoming the country’s shortest-serving prime minister. Her government imploded as a result of market turmoil caused by her proposals to cut taxes while increasing borrowing and spending. On October 28, Conservative Members of Parliament (not the entire party membership) will vote on a new leader. Chancellor of the Exchequer Jeremy Hunt, on the other hand, pressed ahead with a new budget due on October 31 that will seek to reverse most of Truss’ tax pledges and cut spending to plug a GBP 40 billion hole in the public finances.
In September, a rise in food prices rekindled an acceleration in UK inflation. The consumer price index increased 10.1% year on year, matching July’s 40-year high, and represents an acceleration from the 9.9% inflation rate recorded in August. Core inflation, which excludes food and energy costs, increased as well, reaching a 30-year high of 6.5%. That month, British shoppers cut their spending as well. Retail sales volumes fell 1.4% in September compared to August. The decline was driven by a sharp drop in fuel sales and a bank holiday commemorating Queen Elizabeth II’s funeral. Meanwhile, the GFK consumer confidence index, a closely watched indicator of how people perceive their finances and economic prospects, fell to 50-year lows in October.
German producer prices rose 2.3% sequentially and 45.8% year on year in September, as energy prices continued to rise. Prices for metals, intermediate goods, capital goods, durable and non-durable goods all increased significantly. Meanwhile, investor sentiment in Germany rose from near-record lows in October, according to a ZEW economic research institute survey. However, as the economic outlook deteriorated further, pessimism about current conditions increased significantly.
United States
Equities rose sharply as investors appeared to react to some notable earnings reports and hints that the Federal Reserve may slow the pace of interest rate hikes. The S&P 500 Index posted its best weekly gain in nearly four months, while the Dow Jones Industrial Average gained for the third week in a row. Energy stocks outperformed the S&P 500, as oil prices remained stable despite the official statement of a release from the United States Strategic Petroleum Reserve.
The week began on a high note, which was attributed in part to a reversal in the UK government’s fiscal stimulus plans, However, the week’s economic calendar provided conflicting evidence about how deeply the Fed’s rate hikes are reducing growth. Reports suggest that the weak housing market was a focus in Wednesday’s pullback, which came in the wake of sharp declines in mortgage applications and housing starts, as well as analyst downgrades of home supply stores Home Depot and Lowe’s. A sentiment index for homebuilders fell more than expected and reached a 10-year low. On the other hand, manufacturing output increased more than expected in September (up 0.4%), and jobless claims fell much more than expected to their lowest level since late September.
The hawkish Fed comments pushed the 10-year US Treasury note yield to a 14-year high of 4.33% on Friday morning. Municipal bonds delivered marginally negative returns for most of the week, as rising US Treasury yields and a heavier-than-average new issue calendar weighed on the asset class.
Investment-grade corporate bonds outperformed equity futures at the start of the week, but our traders noted that expectations of an active primary calendar limited positive momentum. While the expected increase in supply did not materialise, lower equity market movements and hawkish Fed rhetoric weighed on the asset class later in the week. Our traders also noticed quick reactions to earnings announcements and noted that fundamentals remained a driving force.
Europe
At the start of the week, investment-grade corporate bonds outperformed equity futures, however, market participants noted that expectations of an active primary calendar limited positive momentum. Even though the anticipated increase in supply did not occur, lower equity market movements and hawkish Fed rhetoric weighed on the asset class later in the week.
Government bond yields in Europe also rose ahead of a European Central Bank meeting, which is expected to result in another 0.75 percentage point increase in interest rates. Germany’s 10-year bond yields have risen to their highest levels in more than a decade. In the United Kingdom, 10-year gilt yields jumped above 4% in another volatile week of trading, owing to political uncertainty and data showing that inflation hit a 40-year high in September. Furthermore, the Bank of England (BoE) confirmed that it will begin selling bonds accumulated under its quantitative easing program on November 1.
Japan
Japanese equities finished the week lower than they started, as global recessionary fears and further currency weakness remained dominant themes. Despite a strong midweek rally in which investors snapped up battered stocks at rock-bottom prices because of recent market weakness, the Nikkei 225 ended the week 0.7% lower at 26,891, while the broader TOPIX index fell 0.8% to 1,882. The previous week’s U.S. inflation data appeared to have a delayed impact on Japanese markets, amid growing expectations that the Federal Reserve will announce another 75-basis-point rate hike at its November meeting.
Yen weakness was once again in the spotlight after it surpassed the 150 level against the US dollar, a 32-year low. Further dollar strength saw the yen test 151 territory (150.9 USD/JPY) by Friday’s close. While some expected a meaningful policy response to this level, Finance Minister Shun’ichi Suzuki simply stated that he is “ready to take decisive action” in response to the currency’s sharp movements. To combat rising bond yields, the Bank of Japan launched emergency bond-buying operations late last week, purchasing bonds with maturities ranging from 10 to 25 years on Thursday and Friday. The rising trend puts the central bank’s ultra-easy policy stance under further strain.
Late last week, data showed that Japan’s core inflation, excluding the impact of tax increases, reached 3% for the first time in more than three decades. Meanwhile, in response to high inflation, Japan’s largest labour organisation, the Japanese Trade Union Conference, announced that it will seek the largest pay raise for union members in nearly 30 years.
China
China’s stock markets fell for the week after Beijing delayed the release of key economic data without explanation. According to Reuters, the broad, capitalization-weighted Shanghai Composite Index fell 1.1%, while the blue-chip CSI 300 Index (which tracks the largest listed companies in Shanghai and Shenzhen) fell 2.6%.
Last Monday, China’s statistics bureau announced that it would delay the release of third-quarter GDP and other key indicators, such as monthly readings of industrial production, fixed asset investment, and retail sales. The data were supposed to be released the next day. The bureau did not specify when the data would be made public.
The delay fueled speculation that the third-quarter GDP report would show that China’s economy was on track to fall short of the official growth target of 5.5% this year and that officials wanted to avoid any fallout from its release during the weeklong Communist Party congress, which began on October 16. The twice-a-decade gathering of the country’s top leaders was set to end on October 23 and award President Xi Jinping a third five-year term as party leader.
Despite state bank efforts to support the currency, the onshore yuan fell to its weakest closing level against the US dollar since the 2008 global financial crisis. According to Reuters, the onshore yuan closed Friday at 7.2494 per dollar, its lowest close since January 14, 2008. The yuan and most other developed and emerging market currencies have been under pressure as the Fed has aggressively raised interest rates to combat inflation, while China’s central bank has eased policy to support a slowing economy. The People’s Bank of China maintained its benchmark one-year and five-year loan prime rates last week.
Chinese technology shares fell on reports that officials from the Ministry of Industry and Information Technology met with domestic chipmakers in an emergency meeting to discuss the Biden administration’s recently announced restrictions on tech exports to China. Property developer shares advanced, aided by reports that the China Securities Regulatory Commission will allow certain companies with small property interests to raise money by selling domestic shares. The yield on the 10-year Chinese government bond rose to 2.75% from 2.719% the prior week, according to Dow Jones, tracking multiyear highs struck by U.S. Treasury yields.
Indices for the week
|
| Weekly Index | YTD Index | ||
| Index | Local Currency | Sterling Pound | Local Currency | Sterling Pound |
| UK |
|
|
|
|
| FTSE 100 Index | 1.64% | 1.64% | 2.59% | -2.59% |
| US |
|
|
|
|
| S&P 500 Index | 4.75% | 5.57% | 20.59% | -3.63% |
| Europe |
|
|
|
|
| Euro Stoxx 50 | 2.81% | 4.07% | -17.20% | -13.48% |
| Asia |
|
|
|
|
| Nikkei 225 Index | -0.74% | -1.04% | -6.60% | -13.33% |
| Hang Seng Index | -2.27% | -1.66% | -28.44% | -13.78% |
| MSCI Emerging Markets Index | 0.44% | 0.99% | -21.30% | -12.59% |
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