Markets last week 28/06/2022

United States

This week’s economic data provided evidence that the Federal Reserve’s aggressive monetary tightening is having the desired impact of reducing the economy and stabilising inflation. The National Association of Realtors reported on Tuesday that domestic sales fell to their lowest level in May since June 2020, and the organisation’s chief economist predicted further declines in the face of rising mortgage rates. The Chicago Fed also reported that its gauge of national economic activity had fallen to an eight-month low. On Thursday, S&P Global’s index of June manufacturing activity fell far short of expectations 52.4 versus approximately 56, while its services measurement also fell short of expectations and achieved its lowest level since January. 

Stocks fought back sharply over the holiday-shortened week, lifting the S&P 500 Index, on signs that inflation may be moderating as growth slows. Almost every sector in the index saw big improvements towards the end of the business week. Energy stocks were the notable exception, as crude oil continued to pull back from recent highs. Investors appeared to react favourably to the S&P Global data, in part because it showed that manufacturing input inflation, although still elevated, fell to its lowest level in five months. The week’s biggest gains came Friday, following signs that consumers were stabilising their inflation expectations as confidence in their finances reached new lows. 

On Wednesday and Thursday, Fed Chair Jerome Powell testified before Congress that inflation expectations were anchored, which played a role in boosting sentiment in both equity and fixed income markets. The broad municipal bond market posted solid gains for the majority of the week, aided by a drop in Treasury yields. Municipal bond traders reported that favourable supply conditions, as evidenced by manageable issuance levels and low dealer inventories, mitigated technical headwinds from industrywide fund outflows. 

U.S. Treasury yields were lower on Wednesday as risk-off sentiment returned to global markets. Concerns over a possible recession have weighed on investor sentiment in recent weeks. Federal Reserve Chairman Jerome Powell on Wednesday told Congress the central bank is “strongly committed” to curbing inflation which is running at a 40-year high. However, Investors are increasingly concerned aggressive monetary tightening would tip the U.S. economy into a recession. 

Given the movement in Treasury rates, higher-quality credits outperformed in the high yield market. market participants observed some increased selling across sectors and ratings to maintain cash levels in the face of continued asset class outflows. There were no new deals announced in the primary market. It was also a quiet week in the bank loan market, with new collateralised loan obligations driving much of the buying. 

The EU/UK

European stocks reversed three weeks of losses as signs of a slowing economy cast doubt on whether central banks would seek to raise interest rates aggressively. The pan-European STOXX Europe 600 Index rose 2.40 % in local currency whilst other major stock market indices were mixed. The CAC 40 Index in France increased by 3.24 %, while the FTSE MIB Index in Italy increased by 1.52%. Core eurozone government bond yields fell, as weaker than expected Purchasing Managers’ Index (PMI) readings sparked fears of an economic slowdown and prompted the market to reduce expectations for policy tightening. Peripheral euro zone government bond yields broadly tracked core markets, as did UK gilt yields. Record UK inflation and a drop in consumer confidence intensified fears about the economic outlook, exerting further downward pressure on yields, as interest rates in Norway were also increased to 1.25%. Core eurozone government bond yields fell weaker than expected Purchasing Managers’ Index (PMI) readings fuelled concerns about an economic slowdown and prompted the market to reduce expectations for policy tightening. Eurozone peripheral government bond yields broadly tracked core market yields, as did UK gilt yields. Fears about the economy were heightened by record UK inflation and a drop in consumer confidence, putting further downward pressure on yields. Norway’s central bank raised interest rates by 50 basis points, to 1.25%, a larger-than-expected increase. 

The Flash Eurozone Composite PMI, which quantifies manufacturing and services activity, fell from 54.8 in May to 51.9 in June, its lowest level since February 2021, according to S&P Global. (PMI readings above 50 indicate expansion.) A sharp drop in business confidence and new orders drove the decline. For the first time in two years, manufacturing output tumbled, Service demand has also greatly reduced and consumer confidence in the eurozone unexpectedly tumbled to -23.6 points in June, according to an early estimate published by the European Commission. UK inflation accelerated to a record 9.1% in May as food costs rose at the fastest rate in 13 years. Meanwhile, the S&P Global/CIPS UK Flash Composite PMI remained at a 15-month low of 53.1 in June, as businesses struggled with falling orders. Consumers reined in their spending, the Office of National Statistics reported, with the volume of retail sales falling 0.5% in May from April. 

japan

Japan’s stock markets gained ground last week, with the Nikkei 225 Index rising and the broader TOPIX index rising 1.68%. Expectations that the Bank of Japan (BoJ) would maintain ultra-loose monetary policy despite rising consumer prices and the Yen hitting new lows boosted sentiment. Data from the Purchasing Managers’ Index showed a significant increase in business activity in the services sector, which also provided a boost. However, fears that the US Federal Reserve’s aggressive monetary policy tightening would lead to a global recession kept risk appetite in check. 

The 10-year Japanese government bond yield fell to 0.23%, down from 0.24 % the previous week. The Yen remained close to a 24-year low against the US dollar, ending the week at the upper end of the JPY 134 range. Haruhiko Kuroda, Governor of the Bank of Japan, reiterated that recent rapid Yen moves were undesirable and that the central bank hoped to respond appropriately to currency markets in close collaboration with the government. 

Japan’s core consumer price index rose 2.1% year on year in May, topping the BoJ’s 2.0% inflation target for the second consecutive month, as positive contributions increased in non-fresh food, household durable, and the contribution from energy during the month. The minutes of the BoJ’s April monetary policy meeting released during the week showed that, while inflation expectations had risen particularly in the short term and at a more moderate pace over the medium- to long-term many members expressed the view that underlying inflation, excluding such factors as energy, remained relatively low. Members shared the recognition that there was no change in the BoJ’s stance, for the time being, it would closely monitor the impact of the coronavirus pandemic and not hesitate to take additional easing measures if necessary. 

As border restrictions related to the coronavirus pandemic were eased, PMI data showed a strong expansion in services sector business activity in June. While operating conditions in the manufacturing sector improved moderately, output growth slowed due to weaker demand because of coronavirus restrictions in mainland China and pressure on supply chains. Prime Minister Fumio Kishida reiterated his belief that the current monetary policy status quo must be maintained. He also stated that the government will prioritise the implementation of measures to mitigate the effects of high energy and food prices. 

China

Chinese stock markets rose on the back of stimulus hopes after President Xi Jinping pledged to implement additional measures to support the economy and mitigate the effects of COVID-19. The Shanghai Composite Index gained 1.0 %, while the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, gained 1.97 %. 

The yuan was marginally firm at CNY 6.69 per U.S. dollar from CNY 6.70 last week. The yield on the 10-year China government bond dipped to 2.81% from 2.83% a week ago after the People’s Bank of China (PBOC) injected seven-day reverse repos totalling CNY 60 billion into the financial system. The PBOC kept its benchmark lending rates constant to avoid further monetary policy divergence as other global central banks began increasing interest rates to prevent inflation. Observers think that Beijing is worried about the yuan depreciating and capital outflows rising if borrowing costs are cut to support a slowing economy. 

Many analysts have lowered their growth forecasts for China after the country’s zero-tolerance approach to the coronavirus led to widespread lockdowns that disrupted economic activity and global supply chains this year. According to the European Union Chamber of Commerce in China, 23 % of European companies are considering shifting current or planned investments outside of China because of the country’s coronavirus policy. 

However, at the virtual BRICS (Brazil, Russia, India, China, and South Africa) Business Forum, President Xi stated that China will “strengthen macro-policy adjustment and adopt more effective measures to strive to meet the social and economic development targets for 2022 and minimise the impacts of COVID-19.” Separately, China’s Finance Minister Liu Kun said that Beijing will accelerate fiscal spending and the sale of special local government bonds.

This Week’s indices  

 

In Local Currency 

In Sterling Pound 

Index 

Last week 

YTD 

Last week 

YTD 

UK 

 

 

 

 

FTSE 100 Index 

5.50% 

-3.05% 

5.50% 

-3.05% 

US 

 

 

 

 

S&P 500 Index 

5.50% 

-9.55% 

0.09% 

-9.55% 

Europe 

 

 

 

 

Euro Stoxx 50 Index 

1.91% 

-16.20% 

1.80% 

-14.37% 

Asia 

 

 

 

 

Nikkei 225 Index 

0.72% 

-9.18% 

-0.74% 

-15.59% 

Hang Seng Index 

3.15% 

-5.76% 

2.24% 

3.16% 

MSCI Emerging Markets Index 

0.95% 

-13.21% 

-0.10% 

-8.48% 

 

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