Stocks rose but offered widely divergent returns for the week, as investors reacted to a busy calendar of third-quarter earnings reports. Energy and other industrial economy stocks handily outperformed growth shares, with the latter weighed down by steep declines in several mega-cap technologies and internet-related stocks, including Microsoft, Amazon.com, Alphabet (parent of Google), and especially Meta Platforms (parent of Facebook), following earnings misses and lowered outlooks. Traders noted that the Cboe Volatility Index (VIX), widely considered Wall Street’s “fear gauge”, fell below its 50-day moving average on Wednesday—only the fourth time that has happened since February.
The week’s economic data offered conflicting signals on how much room the Fed has to manoeuvre. S&P Global’s gauge of U.S. manufacturing activity fell into contraction territory for the first time since June 2020, while its service sector gauge also surprised on the downside and indicated an even sharper slowdown in activity. The Conference Board’s index of consumer confidence fell for the first time in three months, reflecting persistent inflation fears, but weekly jobless claims surprised on the downside.
The Commerce Department released its first estimate of gross domestic product (GDP) growth in the third quarter, which showed the economy expanding at an annualised rate of 2.6%, above consensus estimates of around 2.4% and the first positive reading this year. A mid-week rally in Treasuries sent the benchmark 10-year U.S. Treasury note yield back below 4.00% before rising a bit on Friday.
Shares in Europe rose strongly on hopes that central banks might slow the pace of interest rate increases. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 3.65% higher. The main stock indexes also surged. Germany’s DAX Index advanced 4.03%, France’s CAC 40 Index added 3.94%, and Italy’s FTSE MIB Index climbed 4.46%. The UK’s FTSE 100 Index gained 1.12%.
European government bond yields softened across the board. The yield on Germany’s 10-year government bond fell to a three-week low. Italian bond yields also retreated, with the 10-year yield falling to a five-week low. UK gilts enjoyed a week of calm amid hopes the new conservative government could offer more stability. Ten-year yields also slipped to a five-week low.
The European Central Bank (ECB) raised its key interest rates for a second consecutive time by 0.75 percentage points and said it may have to raise them further to curb inflation that is still “far too high.” The deposit rate now stands at 1.5%, its highest level since 2009. However, markets reduced their bets on higher rates and the euro fell below parity against the U.S. dollar on hints in the policy statement that the ECB’s approach may have begun to shift and that the size of the next hike could be smaller.
Japanese equities finished higher for the week. The benchmark Nikkei 225 ended the week above the 27,000 mark—at 27,105—while the broader TOPIX index finished essentially flat at 1,899. Local markets rose early in the week, amid hopes that the U.S. central bank may adopt a less aggressive policy stance than previously anticipated. Late in the week, however, local markets lost some ground as investors digested domestic earnings reports and the announcement by Prime Minister Fumio Kishida of a JPY 71.6 trillion government economic stimulus package. The yen started the week on a softer trend, despite signs that the government was ramping up its intervention strategy. On Wednesday, the Bank of Japan (BoJ) increased its purchases of Japanese government bonds (JGBs), adding a further JPY 100 billion in 10- to 25-year debt and JPY 50 billion in longer-dated purchases. This increase was not unexpected, but it nevertheless prompted sharp gains at the long end of the yield curve, where yields fell sharply to their lowest levels since mid-October.
China’s stock markets pulled back, as investor sentiment was dampened by new COVID-related lockdowns in several parts of China. Several Chinese cities doubled down on COVID-19 curbs after the country reported three straight days of more than 1,000 new cases nationwide. Data also showed that profits at China’s industrial firms declined at a faster pace in September. The broad, capitalisation-weighted Shanghai Composite Index fell 4.05%.
Reports emerged that major Chinese state-owned banks sold U.S. dollars in both onshore and offshore markets during the week after the yuan’s recent slide. The 10-year Chinese government bond yield fell to 2.691% from last week’s 2.75%, according to Dow Jones, amid growing expectations that global central banks may stall their aggressive rate-hike policies.
Growth worries rattled investors despite better-than-expected GDP data reported for the third quarter during. China’s economy expanded 3.9% in July-September from a year earlier, faster than the 0.4% growth in the second quarter.
Retail sales grew 2.5%, missing forecasts for a 3.3% increase and easing from August’s 5.4% pace. Exports grew 5.7% from a year earlier in September, beating expectations but coming in at the slowest pace since April. Imports rose a feeble 0.3%, undershooting estimates for 1.0% growth.
After the closing of the Communist Party’s 20th Congress, the People’s Bank of China and the State Administration of Foreign Exchange issued a joint statement that they would maintain the healthy development of stock and bond markets.
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