Market Update Monday 19th December 2022
Central Bank rhetoric leads markets lower
In a week that was dominated by major central banks action, equity markets finished broadly lower. Markets came under pressure by the end of the period after central banks, particularly in the US, Eurozone and UK all raised interest rates and signalled the fight against inflation was not over.
In the US, the Federal Reserve (Fed) took the unanimous decision to raise its target interest range by 0.5% to a range of 4.25% to 4.5%. Whilst this was anticipated by investors and ended the successive 0.75% rate rises of late, it was the hawkish tones of meetings that sent stocks lower. Fed Chair, Jay Powell, said it would take “substantially more evidence to give confidence that inflation is on a sustained downward path”. Meanwhile, in Europe, the European Central Bank (ECB) also raised rates by 0.5%, with comments from the ECB that “inflation remains far too high”. In the UK it was a similar story with the Bank of England also raising rates by 0.5%, to 3.5%, the highest level in 14 years. Again, the central bank warned of likely further tightening.
As of 8.30am London time, given the outlook of tighter monetary policy, the US ended lower by 0.98%, with the US technology index down further by 1.78%. UK and European stocks also struggled, lower by 0.67% and 2.19% respectively. Weaker Chinese retail sales and uncertainty over rising Covid numbers did not help matters, with the Hong Kong index falling 2.17% and the Shanghai Composite also down for the week by 1.22%. The Japanese market fell by 0.58%, and the Australian market declined by 0.89%.
Global growth worries keep investors nervous
In addition to the prospect of further monetary tightening, economic data releases this week did no favours for investor sentiment. China, despite a gradual ease of restrictions, still posted disappointing retail sales and industrial production, both declining 5.9% and 2.2% respectively year on year, worse than forecast. Meanwhile, Japan’s manufacturing activity shrank at the fastest pace in more than two years in December. US retail sales also disappointed falling 0.6% month on month, the biggest drop in 11 months. That said, in the US, 211,000 Americans applied for unemployment aid in the past week. This was less than last week and lower than forecast, signalling that the domestic labour market is still tight and likely to rationalise the Feds decision to keep rates higher.
Yield curve inversion remains entrenched
Shorter-term bonds in major economies continue to trade at higher yields than longer-dated bonds, and this inverted relationship to the normal is one that signals an impending recession. Bond yields, which move inversely to their price, fell marginally despite the rate move this week; the 2-year US treasuries fell by 10 basis points to 4.24% as of 8.30am London time and with the US 10-year treasuries trading at 3.47%, this illustrates the inversion in the yield curve.
In Europe, shorter-term debt reacted more to central bank action with 2-year German bund yields rising by 30 basis points to 2.45% whilst its longer 10-year debt trades at 2.16%. In the UK bond moves were less muted with 2-year Gilts rising just 3 basis points over the week to 3.45% whilst 10-year gilts trade at 3.3%.
Optimism over China’s Covid restrictions helps oil price rises
The demand outlook for China, the biggest oil importer in the world, continues to improve with its re-opening after harsh Covid lockdowns. Brent crude traded back above $80 per barrel marking a 6.08% rise, whilst WTI crude oil trades at $75.54 per barrel, a 6.36% increase. The shutting of the Keystone pipeline across Canada and US due to a leak also limited short-term supply earlier this week.