Month: May 2023

Weekly Market Update Monday 29th May 2023

US technology stocks buck the trend as the semiconductor company Nvidia, beats sales forecasts by 50%

Markets were choppy this week, with the US yet to reach an agreement on the debt ceiling, with a potential default less than a fortnight away. Economic data released this week both in the US and Europe painted a picture of continued inflationary pressures, with bond yields rising (bond yields move inversely to price) across the maturity spectrum. However, the US company Nvidia, a designer and manufacturer of semiconductor chips released results on Wednesday, with sales exceeding analysts’ expectations by more than 50%. This was driven by a surge of interest in artificial intelligence (AI), dragging the whole semiconductor sector up with it as well as technology names with an interest in AI such as Microsoft and Alphabet, Google’s parent company.

As of 2pm on Friday, London time, US equities fell 1.0% over the week, whilst US technology stocks rose by 0.3%, helped by the stratospheric rise in Nvidia which increased in value by over 25% following its results, with its market capitalisation rapidly closing in on $1 trillion. European stocks fell 2.2%, as did UK equities. The Japanese market fell by 0.7% whilst Australian stocks lost 1.7%. Emerging markets also lost money, falling by 1.4% with Chinese onshore listed ‘A’ share stocks falling by 2.2% and offshore Hong Kong Stocks losing 3.6%.

UK Gilt prices sell off back to levels last seen during the ‘mini-budget’ crisis of last October

US Treasury yields rose, with 2-year yields now trading at 4.57%, and 10-year yields yielding 3.82%. Equivalent German bunds are yielding 2.91% and 2.52% respectively. Whilst one of the biggest moves for the week was reserved for UK gilts following the release of inflation numbers that remained stubbornly higher than expectations. The UK consumer price index (CPI) for the year to April came in at 8.7%, a sharp fall from the previous reading of 10.1%, but significantly higher than forecasts of 8.2%. Perhaps even more significantly, excluding food and energy, CPI actually rose by 0.6% to 6.8% for the year. This pushed 2-year and 10-year gilt yields higher by 0.54% and 0.34% respectively to 4.50% and 4.34% as markets priced in peak UK interest rates of 5.5% by the year end.

Industrial metals weaken on rising recessionary risks

As higher rates were priced into markets, industrial metals fell on rising concerns of recessionary risk. The copper price fell by 3.5%, now trading at $7,915 a tonne. Iron ore prices fell over 5%. European natural gas prices took yet another leg down, now priced at €24.25 per MegaWatt Hour, taking the price beneath its 50-year average, having wiped out all the increases resulting from the Russian invasion of Ukraine. Gold also fell by 1.7%, now priced at $1,967 an ounce as the market priced in a further rate rise in the US. On Friday, the latest Personal Consumption Expenditures (PCE) index data was released in the US, the Fed’s preferred measure of inflation. For the year to April, PCE rose by 4.4%, higher than forecasts and higher than the prior reading. Excluding food and energy, the PCE rose by 0.1%, coming in at 4.7%. Crude oil bucked the trend, as Brent crude traded higher by 1.9%, with a barrel now priced at $77.0.

US Dollar strength returns

The US dollar traded higher this week, with the Dollar index rising by 0.8% against a basket of internationally traded currencies. Versus the Euro and Sterling, the dollar rose by 0.6%, now trading at $1.074 and $1.237% respectively.

Weekly Market Update Monday 22nd May 2023

Equities rise as hopes to a resolution over the US debt ceiling rise.

Equities gained this week as investors gambled that the US debt ceiling would be raised, and thus in turn avoiding a default by the US government, with a bill potentially being put to a vote next week. Aside from this, economic data releases were mixed with some early signs of an economic slowdown raising hopes of a pause in the US rate cycle, whilst others pointed to continued strength in the jobs market suggesting the US Federal Reserve may have further tightening ahead. The Japanese stock market benefitted from stronger than expected growth data, whilst Chinese stocks stuttered as data pointed to a weaker post-covid pandemic recovery than investors had hoped.

As of 12pm on Friday, London time, US equities rose 1.8% over the week, with the US technology sector rising by 3.3%. The European market increased by 0.8% and UK equities were up by 0.3%. The Japanese market was particularly strong, rising by 3.1% as the economy grew by an annualised 1.6%, twice that of economists’ estimates. Australian stocks increased by 0.3%. Emerging markets rose by 0.5%, with South Korea rising by as much as 2.5%, but Chinese offshore stocks, listed in Hong Kong, fell 0.9%.

Haven assets fall as worries over a US government default recede.

Government bonds sold off this week, with the yield on 10-year US Treasuries, which moves inversely to price, rising to 3.65%. German bunds and UK gilts followed suit, with yields rising to 2.48% and 4.02% respectively.

European natural gas prices tumble further, close to their long run average price.

The gold price fell as optimism over the US debt ceiling being resolved rose, with the precious metal now trading at $1,985 an ounce, a fall of 2.6% over the week. For industrial commodities the picture was mixed. Copper fell by just over 1%, now priced at $8,128 a tonne, whilst iron ore rose by 6.2%. European natural gas prices continued their downward spiral as the premium built up since the invasion of Ukraine by Russia evaporates. Dutch natural gas futures fell by over 8%, priced at €30.22 per megawatt hour (MWh), which compares to a peak price of over €300 MWh, and very close to the longer-term average. Crude oil, having fallen in recent weeks, staged a rally as Brent crude rose by 3.5%, now trading at $76.7 a barrel.

Mixed economic data provides little clues as to the next rate move by central banks.

Data released this week painted a mixed picture as to the strength of economic growth and therefore the likelihood of further interest rate rises. The Empire Manufacturing index, a manufacturing activity index for the state of New York, plummeted to minus 31.8, down from the previous reading of plus 10.8, and far lower than forecasts of minus 3.9. Eurozone industrial production fell by 1.4% for the year to March, versus expectations of a small rise of 0.1%. Whilst the German gauge of economic sentiment, the Zew index, dropped from 4.1 in April to minus 10.7. Retail sales growth in the US fell short of expectations, rising by 0.4% in April, half that of forecasts.

However, US new residential construction rose by 2.2% in April, a key driver of economic growth. New unemployment claims also fell in the US, coming in at 242,000 versus 264,000 in the week before. Walmart, the world’s largest retail also released strong results, in direct contrast to Home Depot, a DIY store, and Target, a discount retailer, whilst also raising their full year sales growth forecast.

Weekly Market Update Monday 15th May 2023

Investor sentiment remains mixed amidst banking worries and US debt ceiling concerns.

Jitters over the health of the US regional bank sector resurfaced, dragging down indices towards the end of the week. PacWest Bancorp, the Los Angeles-based lender, announced it had lost 10% of its deposits in the first week of May, prompting its shares to fall 23% on the news. The US regional bank index fell 2.4%.

Meanwhile, sentiment soured as the impasse over the raising of the US government debt ceiling continues. The debt ceiling is a law that limits the total amount of money that the government can borrow and periodically US Congress votes on whether to raise the debt ceiling. Albeit typically after much political sparring between Democrats and Republicans. Historically the US has never defaulted on its debts, but nonetheless a meeting between President Joe Biden and top lawmakers scheduled for today has been postponed, stoking further investor concern. The federal government could run out of money to pay its bills as soon as 1st June if the ceiling is not raised.

As of 9am London time, the US index fell just into negative territory, down by 0.14%, though the technology index fared better rising 0.76%, with growth companies rising on the prospect of a pause in interest rate rises after weaker than expected US inflation data. Performance in Europe was mixed, with the UK declining 0.34%, and Europe ex UK flat over the week. Stocks in China fared worse, with the Hong Kong and Shanghai indices falling 1.86% and 1.95% respectively, after Chinese import volumes declined 7.9% year on year, far deeper than analysts’ expectations of a 0.2% contraction. Japan had a better week however, up 1%.

US inflation comes in weaker than expected.

US inflation came in slightly below expectations. The Consumer Price Index for April eased to 4.9%, annualised slightly below forecasts of 5%. Core inflation excluding food and energy remains more elevated however and dipped slightly to 5.5% year on year. Meanwhile, Producer price data also came in weaker than expected coming in at 2.3% for April, down from 2.7% annualised in March. The data so far suggests the Federal Reserve is making progress in taming inflation. Weekly US initial jobless claims also rose to 264,000, hitting their highest level since October 2021, which is expected to reduce pressure on wage growth.

Bank of England raises interest rates again.

With inflation cooling in the US, the difference is starker in the UK. Inflation remains much higher at 10.1% year on year and so the Bank of England has yet again hiked interest rates, the 12th consecutive rise since December 2021. The central bank increased rates by 0.25% taking the base rate to 4.5%. At the latest meeting the Monetary Policy Committee pushed back its forecast of inflation reaching its 2% target to 2025.

Government bond yields hold steady.

US government bonds rallied somewhat on the weaker inflation data. 10-year yields, which fall inversely to the bond price, fell 7 basis points on the day of the data release. Over the week, as of 9am London time, the 10-year US Treasury yield is trading at 3.39%. 10-year UK Gilt and German Bund yields were relatively unchanged over the week, trading at 3.40% and 3.71% respectively.

Weekly Market Update Monday 8th May 2023

Continued US regional bank stress and further rate rises leads to a flight to safety.

Global equity markets fell this week, whilst US Treasuries rallied against a background of continued stress amongst US regional banks. The US Federal Reserve (Fed) raised rates by 0.25%, its tenth increase since early 2022. However, comments from the Fed governor gave hope as to a pause in the hiking cycle, stressing that further increases would be dependent on economic developments. The European Central Bank also raised rates by 0.25% but, despite their robust statement that the fight against inflation is not over yet, this represented a moderation versus recent hikes. Later today the latest US employment figures are due for release, with the non-farm Imagepayrolls forecast to have added 180,000 new jobs in April, down from 236,000 in March.

Global equities fall.

As of 12pm on Friday, London time, US equities have fallen 2.6%, with the US technology sector having dropped by 2.1%. European markets are down 0.9%, whilst UK stocks have lost 1.5%. The Australian market fell by 1.2%, whilst Japanese equities rallied by 0.9%. Emerging markets fell by 0.1%, with much of the pain being experienced in Latin America, where Brazilian stocks fell by 2.2% as crude oil weakened sharply following weak demand from the US and China. Chinese onshore Imageand Hong Kong stocks rose by 0.3% and 0.8% respectively.

Government bonds rally.

10-year US Treasury yields, which move inversely to price, fell to 3.40% and 2-year yields also dropped, now trading at 3.82%. It was a similar story for German bund yields, with the 10-year currently priced at a yield of 2.26%. However, UK gilt yields rose slightly, now trading at 3.75%, as the market expects further tightening from the Bank of England to combat inflation. This was matched by an appreciation of Sterling against both the US dollar and the Euro, now trading at $1.26 and €1.10, whilst the Euro/US dollar exchange rate remained unchanged at $1.10.

Industrial commodities come under pressure, whilst gold rises

Gold rose on expectations that the rate hiking cycle is nearing its peak in the US, increasing by 2.3% to trade at $2,045 an ounce. Whilst industrial commodities had a tougher week, with copper falling by 1.2% to trade at $8,474 a tonne, Brent crude losing 6.4%, now priced at $74.4 a barrel, and iron falling by just over 3%. On the bright side for Europeans, there was a further fall in natural gas prices which fell by 4.6% to trade at €36.25 per megawatt hour.

Crisis amongst US regional banks continues.

Ripples continue to travel through US regional banks despite depositors having been protected following the collapse of Silicon Valley Bank and Signature Bank, as well as the recently arranged takeover of First Republic Bank by JP Morgan, which resulted in First Republic’s shareholders being wiped out. However, rather than solve the issue, further banks are being pressured, with PacWest, Western Alliance and Trust Bank, amongst others, suffering further sharp falls in their share prices and deposit withdrawals. These banks share in common a weakness, be it an over reliance on an industry, particular securities or loans losses. Whatever it might be, the market one by one is feeding off these weaknesses. This is an environment that very much suits the larger, better capitalised, more tightly regulated banks that are able to pick up the pieces at favourable prices.

Weekly Market Update Monday 1st May 2023

A string of strong earnings reports helped U.S. stocks end the month on a high note, with the broad S&P 500 Index, blue-chip Dow Jones Industrial Average, and tech-focused Nasdaq all notching their second-straight day of gains Friday, despite a looming meeting by the Federal Reserve’s rate-setting committee next week.

U.S. GDP report confirmed that the economy is losing momentum

Last week’s release of the latest U.S. GDP report confirmed that th e economy is losing momentum, with GDP slowing to 1.1% in the first quarter, compared with 2.6% in the prior quarter and 3.2% in the quarter before that.

Looking under the hood, the news was mixed. Consumers continue to show resiliency, with household spending increasing at a healthy 3.7% rate last quarter, a notable acceleration from the previous period and well above the average of 1.7% over the prior four quarters. Elsewhere, however, signs of a slowdown were more evident in the first quarter. Business investment declined materially, including a sharp drag from inventories, which aligns with recent manufacturing surveys and signals that companies are tightening their belts. Additionally, residential investment fell in the quarter, though there are signs of stabilization in the housing market, and mortgage rates have come off their peak.

Markets get a boost from better-than-feared corporate earnings results

Corporate earnings announcements were also in the spotlight last week, with markets getting a boost from better-than-feared results. With roughly half of S&P 500 companies having reported quarterly results, earnings for the period are down 1.7%, while revenues are up 4% versus the same quarter a year ago. Of the 267 companies that have reported earnings to date for 23Q1, 77.9% have reported earnings above analyst estimates. This compares to a long-term average of 66.3% and prior four quarter average of 73.5%.

US Markets lead weekly returns

In the US the S&P 500 Index was up 0.8% and the tech focused Nasdaq Composite was up 0.7% for the week. Shares in Europe fell as fears that interest rate increases might tip the economy into recession intensified. The pan-European STOXX Europe 600 Index ended 0.50% lower whilst the UK’s FTSE 100 Index lost 0.55%. Chinese stocks ended mixed ahead of a five-day holiday as Beijing reaffirmed its supportive policy stance, assuaging concerns about an uneven economic recovery. The Shanghai Stock Exchange Index rose 0.67%, while the blue chip CSI 300 pulled back 0.09% in local currency terms.

Government Bond Yields Endure volatile week

U.S. Treasury yields modestly decreased amid volatility ahead of the following week’s Federal Reserve policy meeting, where an additional quarter-point rate hike is widely expected. The 10-year Treasury yield was down about 9 basis points at 3.437%. Core eurozone government bonds and UK Gilts also endured a volatile week as investors debated inflation prints and slowing economic activity.