United States
For the second consecutive week, the major U.S. stock indices closed in negative territory as market confidence waned due to a combination of mixed corporate earnings reports and concerns surrounding rising interest rates.
The tech industry unveiled its quarterly results, with a significant portion of the S&P 500 Index on the reporting schedule. Investors emphasised the performance of tech giants like Amazon.com, Google’s parent company Alphabet, Meta Platforms (the owner of Facebook), and Microsoft. These companies are part of the influential group of mega-cap technology stocks often called the “Magnificent Seven,” which had previously driven positive market outcomes.
Although these tech giants posted robust growth metrics that surpassed consensus expectations, markets reacted sensitively to signs of increasing expenses, exerting downward pressure on their stock prices. Amazon’s report, which was released after Thursday’s market close, received a relatively favourable response, leading to an uptick in the company’s shares. Some market participants may have been pinning their hopes on stronger results from these tech giants to counterbalance recent concerns about interest rates and geopolitical risks.
The week’s economic news featured a pleasant surprise in the form of a third-quarter gross domestic product (GDP) report that exceeded expectations. The report indicated that the U.S. economy expanded at an annualised rate of 4.9% in the third quarter, primarily driven by robust consumer spending. This marked the strongest performance since the end of 2021, more than doubling the growth rate seen in the second quarter. Other economic data also painted a positive picture, with home sales reaching a 19-month high and S&P Global’s preliminary U.S. Composite Purchasing Managers’ Index (PMI) ticking up from the September levels.
Conversely, the core personal consumption expenditures (PCE) price index, a favoured measure of inflation by the Federal Reserve, provided mixed signals regarding the inflation trajectory. Every month, the core PCE, which excludes volatile food and energy costs, increased from 0.1% in August to 0.3% in September. However, the year-over-year measure edged down from 3.8% to 3.7% in September. While the latest data indicated that inflation remained significantly above the Fed’s long-term 2% target, the central bank is widely anticipated to maintain its current interest rates at the upcoming October 31-November one policy meeting.
After briefly surpassing the 5% mark on Monday, the 10-year U.S. Treasury note yield exhibited a downward trend, concluding the week around 4.8%. Tax-exempt municipal bonds continued to experience industry-wide outflows, and elevated net supply levels posed challenges.
Europe
Regarding local currency, the pan-European STOXX Europe 600 Index concluded the period with a 0.96% decline, primarily due to heightened uncertainties surrounding interest rates, economic prospects, and conflicts in the Middle East. Key stock indices across Europe also registered losses, with Germany’s DAX slipping by 0.75%, France’s CAC 40 Index easing down by 0.31%, and Italy’s FTSE MIB dipping by 0.25%. The UK’s FTSE 100 Index experienced a more significant setback, losing 1.50%.
Eurozone government bond yields decreased slightly following the European Central Bank’s decision to maintain short-term interest rates at their existing levels. This move heightened expectations that interest rates in the eurozone may have peaked. The 10-year German bund yield dropped to approximately 2.84%, while the 10-year Italian government bond yield declined to around 4.81%.
The European Central Bank (ECB) kept its key deposit rate at 4.0%, following a streak of 10 consecutive interest rate increases. The ECB reiterated that sustaining this level for an extended duration would aid in bringing inflation down to its medium-term target of 2%. The Governing Council highlighted that the prior tightening of monetary policy significantly influenced financing conditions and reduced demand. ECB President Christine Lagarde, during a press conference, characterised the eurozone’s economy as “weak” and anticipated this condition to persist “for the remainder of this year.”
Furthermore, the decline in business activity within the eurozone quickened as the fourth quarter commenced, according to purchasing managers’ surveys by S&P Global. An initial estimate of the HCOB Eurozone Composite Purchasing Managers’ Index (PMI), encompassing both manufacturing and services sectors, declined more than anticipated, dropping from 47.2 in September to 46.5. This latest reading, marking a 35-month low, extended the streak of the PMI staying below 50, indicating shrinking business output for the fifth consecutive month. The manufacturing sector exhibited the most substantial contraction, and the slowdown in services accelerated.
Leading indicators also painted a challenging economic picture for Germany, as the S&P Global composite PMI remained in contractionary territory and reached a two-month low.
In the UK, the unemployment rate increased to 4.2% in the three months ending in August, up from 4.0% in the March-to-May period, based on new data using an updated methodology from the Office for National Statistics. Additionally, a purchasing managers’ survey illustrated that business activity in the private sector remained in contractionary territory for the third consecutive month in October.
Japan
During the week, Japan’s stock markets faced some challenges, as the Nikkei 225 Index dipped by 0.86%, while the broader TOPIX Index remained relatively stable. The initial market sentiment was dampened by factors such as rising bond yields and geopolitical tensions. However, investors engaged in bottom-fishing as the week progressed when stock prices were low. A resurgence in technology stocks and a fresh injection of economic stimulus from China helped the local stock markets recover from their earlier losses.
The foreign exchange and bond markets experienced notable movements, leading to increased speculation about potential intervention by the authorities and potential adjustments to the Bank of Japan (BOJ) yield curve control policy in its upcoming meeting.
At the onset of the week, the 10-year Japanese government bond yield reached a 10-year high of 0.87%, nearing the BOJ’s upper limit of 1.0%. In response, the BOJ conducted an unscheduled bond-purchase operation, targeting bonds with maturities ranging from five to ten years and ten to twenty-five years. This marked the fifth unscheduled operation since July. Some reports suggest that there is market speculation regarding policy considerations, including a possible increase in the upper limit, revisions to BOJ market operations, and the removal of the reference to a target range for yields of plus or minus 0.5%, as this level has now been exceeded.
Meanwhile, the yen’s value weakened against the U.S. dollar, breaching the critical 150 level, which raised concerns about potential intervention by authorities. Finance Minister Shunichi Suzuki cautioned currency speculators that government officials would respond to currency market developments “with a strong sense of urgency.” However, he refrained from confirming or denying any recent interventions to support the currency.
China
China’s equity markets saw gains, indicating a potential stabilisation of the economy, as improvements in industrial profits were noted. The Shanghai Composite Index advanced by 1.16%, while the blue-chipslightly decelerated CSI 300 posted a 1.48% gain. In Hong Kong, the benchmark Hang Seng Index recorded a 1.32% increase in a week shortened by a holiday. Hong Kong’s stock markets were closed on Monday during the Chung Yeung Festival.
Profits for industrial firms in China grew by 11.9% in September compared to the same period the previous year. While this marked the second consecutive monthly increase, it was slightly decelerating from the 17.2% rise seen in August. In the first nine months of 2023, profits showed a 9% decline compared to the previous year, following an 11.7% contraction in the first eight months of the year. The increase in demand during the month raised optimism that certain sectors of China’s economy might have reached a turning point.
Last Tuesday, the Chinese government authorised the issuance of RMB 1 trillion in additional sovereign debt for disaster relief and construction. It also approved a plan to raise the fiscal deficit ratio for 2023 to around 3.8% of the gross domestic product, up from the 3% limit set in March. These budget adjustments from the Standing Committee of the National People’s Congress in Beijing were the latest measures to support the country’s financial markets and economy, which have been facing challenges due to an ongoing housing market crisis.
Country Garden Holdings, previously China’s largest property developer, experienced its first-ever default on offshore debt payments after it was unable to meet interest obligations following a 30-day grace period. The crisis at Country Garden, which recently enlisted financial advisers to facilitate an offshore debt restructuring, underscores the company’s financial strain amid the housing market downturn in China. It is the latest high-profile casualty of the housing market troubles, following China Evergrande’s default on offshore bonds in 2021, which triggered the ongoing crisis.
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