United States
Investors closely monitored the major benchmarks amid negotiations over raising the federal debt ceiling, resulting in a mixed performance. The Nasdaq Composite, which primarily focuses on technology stocks, outperformed other indices, marking a year-to-date gain of 23.97%. In contrast, the Dow Jones Industrial Average experienced a slight decline of 0.16%. Similarly, the Russell 1000 Growth Index showed a positive trend with a gain of 20.75%, while the Russell 1000 Value Index, heavily influenced by the struggling financials sector, faced a decline of 1.64%. Observing the Memorial Day holiday, markets remained closed on Monday, May 29.
Notably, a significant event during the week was the remarkable 24% surge in shares of chipmaker NVIDIA on Thursday. This surge propelled the company’s market capitalization to approximately USD 963 billion, making it the sixth most valuable public company globally. NVIDIA’s stock price rise was driven by surpassing consensus first-quarter earnings expectations by a wide margin and raising its profit outlook. Such a substantial movement in a stock with considerable market weight had a ripple effect across the major benchmarks.
Debt ceiling negotiations resumed after President Joe Biden’s return from Japan at the beginning of the week. However, the markets experienced a downward trend as indications emerged that little progress was being made. On Tuesday, the S&P 500 Index witnessed a significant 1.1% drop, the largest decline since the start of the month. This decline followed reports of some Republicans in the House of Representatives questioning the urgency of the deadline set by U.S. Treasury Secretary Janet Yellen, known as the x-date, which signifies when the government might be unable to fulfil its obligations.
On Thursday, the Federal Reserve released revised data indicating that the Treasury’s General Account had decreased to USD 49.5 billion by Wednesday. This amount was USD 18.9 billion lower than the previous week and USD 752.2 billion below its level from a year ago. However, the negotiations’ renewed momentum triggered a market rally on Friday. The Wall Street Journal reported that the two sides were nearing a two-year spending deal extending the debt ceiling for the same duration. Republican House Speaker Kevin McCarthy mentioned that his White House counterparts conducted the negotiations professionally and knowledgeably.
Nevertheless, due to discouraging inflation data, Friday’s market gains were somewhat limited. The core personal consumption expenditures (PCE) price index, which excludes food and energy, rose by 0.4% in April, slightly exceeding expectations. On a year-over-year basis, the index increased to 4.7%, indicating no progress in reducing inflation since the beginning of the year. Additionally, the Commerce Department reported a significant 0.8% surge in personal spending for April, roughly double the consensus forecast, supported by increased spending on goods and services.
These signs of a resilient consumer and persistent inflation pressures led to a rise in short-term U.S. Treasury yields, with the two-year note yield reaching its highest level in over two months. Reflecting concerns about the debt ceiling, the one-month Treasury bill yield reached 6.02% by the end of the week, marking its highest level since its introduction in 2001.
Europe
European shares faced declines amid concerns about a deteriorating economic outlook and ongoing uncertainty surrounding U.S. debt ceiling negotiations. The pan-European STOXX Europe 600 Index dropped 1.59% in local currency terms. At the same time, major stock indexes like Germany’s DAX, France’s CAC 40 Index, Italy’s FTSE MIB, and the UK’s FTSE 100 Index also experienced weakening, with declines ranging from 1.67% to 2.93%.
Government bond yields in Europe rose broadly due to worries that central bank policymakers would implement tighter policies to address persistent inflationary pressures. The 10-year German government bond yield surpassed 2.5%, and Spain’s and Italy’s sovereign bond yields climbed. In the UK, robust core inflation data triggered a significant sell-off in bond markets, pushing the 10-year UK government bond yield towards 4.3%.
Official figures confirmed that the German economy entered a recession in the first quarter, with a contraction of 0.3% in gross domestic product (GDP) from January to March. This revision reflected a significant decline in household consumption, following a 0.5% contraction in the German economy during the last quarter of the previous year. German companies grew more uncertain about the future, as the Ifo Institute’s business confidence index declined in May for the first time in seven months.
A survey conducted by S&P Global, compiling data from purchasing managers, indicated that business output in the eurozone continued to grow in May, marking the fifth consecutive month of growth. However, the pace of growth slowed due to weaknesses in the manufacturing sector, offsetting strong performance in the services industry. Optimism regarding the economic outlook declined further than the 12-month high observed in February, primarily due to concerns about weaker customer demand and rising interest rates.
European Central Bank (ECB) policymakers echoed the view of ECB President Christine Lagarde, stating that interest rates would need to rise further and remain high to control inflation in the medium term. Bank of Spain Governor Pablo Hernandez de Cos noted that policy tightening still had a long way to go and that interest rates would have to stay in restrictive territory for an extended period to achieve their objectives sustainably. Banque de France Governor Francois Villeroy de Galhau stated his expectation that the terminal rate would be reached no later than the summer.
Inflation in the eurozone slowed to an annual rate of 8.7% in April, down from 10.1% in March, as the previous year’s surge in energy prices was excluded from the annual comparison. However, core inflation, which excludes volatile energy, food, alcohol, and tobacco prices, rose to a 21-year high of 6.8% from 6.2%. This result raised market expectations of a 13th consecutive interest rate hike in June.
The International Monetary Fund (IMF) adjusted its forecast for the UK economy, predicting growth of 0.4%. In contrast to the April estimate of a 0.3% contraction in UK GDP, the revised projection was driven by expectations of resilient demand and declining energy costs.
Japan
The Nikkei 225 benchmark reached a 33-year high early in the week, only to close just below the 31,000 level. Positive economic data and optimistic signs regarding the U.S. debt ceiling contributed to the Nikkei 225 achieving its highest closing point since July 1990. On the other hand, the broader TOPIX index ended the period slightly lower.
In May, Japanese manufacturing activity expanded for the first time in seven months, while the services sector reported robust growth. The resurgence of domestic and international tourism played a significant role in driving record business activity. Despite this positive trend, investors largely disregarded the data indicating a second consecutive monthly decline in Japan’s core machinery orders in March, as they focused on the strong purchasing managers’ index (PMI) figures.
Hawkish comments from the U.S. Federal Reserve during the week further fueled speculation that U.S. interest rates would remain elevated for an extended period. Concurrently, Governor Kazuo Ueda reaffirmed the Bank of Japan’s commitment to an ultra-loose monetary policy until sustainable 2% inflation is achieved. These divergent paths led to the U.S. dollar reaching a six-month peak against the Japanese currency, trading in the higher JPY 139 range by the end of Friday.
Japanese sovereign bond yields experienced a gradual increase throughout most of the week. However, they were limited due to the understanding that the central bank had no immediate plans to adjust its yield curve control policy. However, benchmark yields notably spiked on Friday, surpassing 0.45%, following news that U.S. lawmakers were nearing an agreement to raise the debt ceiling. By the close of Friday, 10-year government bond yields had settled around 0.41%.
China
Chinese stocks experienced a decline as a series of disappointing indicators in recent weeks pointed to a slowdown in the economic recovery. The CSI 300 Index, a benchmark, dropped by 2.4%, marking its largest weekly decrease since the five days ending on March 10. This decline wiped out all the gains the index had made this year. Similarly, in Hong Kong, the Hang Seng Index fell below the psychologically significant level of 19,000 points, reaching its lowest closing point since December. The trading week was shortened due to a holiday.
No significant indicators or policy measures were released in China throughout the week. However, mounting evidence indicating a loss of momentum in the post-pandemic recovery has raised concerns about the economic outlook. In April, indicators such as industrial output, retail sales, and fixed asset investment grew weaker than expected. Additionally, weak credit growth indicators pointed to sluggish domestic demand.
Chinese banks maintained their one- and five-year loan prime rates unchanged for the ninth consecutive month, in line with expectations. This decision followed the People’s Bank of China’s earlier move in May to keep its one-year policy loan rate steady. However, speculation is growing that the central bank will adopt a more accommodative monetary policy to support the economy. Traders increased their bets on monetary easing by the People’s Bank of China, leading to a drop in the yield of China’s 10-year government bond to a six-month low of 2.70%, as reported by Bloomberg.
Market indices
|
|
Weekly Index |
|
YTD Index |
|
|
Index |
Local Currency |
Sterling Pound |
Local Currency |
Sterling Pound |
|
UK |
|
|
|
|
|
FTSE 100 Index |
-2.35% |
-2.35% |
3.46% |
3.46% |
|
US |
|
|
|
|
|
S&P 500 Index |
0.34% |
1.19% |
10.06% |
7.35% |
|
EU |
|
|
|
|
|
Euro Stoxx 50 |
-1.14% |
-1.05% |
14.61% |
12.13% |
|
Asia |
|
|
|
|
|
Nasdaq Index |
3.59% |
4.47% |
31.18% |
27.96% |
|
MSCI Emerging Markets Index |
-0.26% |
0.43% |
3.24% |
0.02% |
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