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Weekly Market Update Monday 29th 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

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

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

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.

Market Update Monday 1st May 2023

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.

Market Update Monday 24th April 2023

Fear gauge hits lowest level since late 2021

The major benchmarks ended mixed following a week in which first-quarter earnings reports seemed to grab the spotlight from a relatively light economic calendar and the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, fell to its lowest level since late 2021.

Corporate Earnings dominate market focus

88 of the S&P 500 companies have reported first quarter earnings so far and whilst showing a decline year on year of around 7%, many have surpassed analyst estimates. The consensus is forecasting an increase in earnings of 10% or so over the coming year. But if a recession were to unfold, further declines look certain to be seen and this remains one of the clear downside risks still hanging over equities.

The chance of a recession depends in part on how quickly inflation pressures ease and whether we are close to the peak in interest rates. Headline inflation has now fallen back substantially in the US to 5.0% from a high of 9.1% and in the Eurozone to 6.9% from 10.6%.

Unfortunately, the same cannot be said for the UK where annual UK consumer price growth in March slowed by less than expected to 10.1% from 10.4% in February, driven by surging food and drink prices, posting a gain of close to 20%, the largest rise for 30 years. Separate data from the Office for National Statistics indicated that wage growth showed few signs of moderating in the three months through February. Food prices were a major culprit, posting a gain of close to 20%, the largest rise for 30 years.

Global Equities flat for the week

Global equities were flat for the week with the S&P 500 -0.1% and the Nasdaq -0.4% in the US. Europe and the UK fared best with gains of around 0.5%, while emerging markets were dragged down by a 2% decline in China. Despite the release of GDP data confirming a strong rebound in the first quarter as the economy reopened, Chinese equities suffered from worries that the US might further increase restrictions on its tech sector. Robust export growth and infrastructure investment, and a rebound in retail spending and property prices, drove the recovery. The data prompted several banks to raise their annual growth forecasts for China as consumption continues to recover.

Government Bond Yields Rise

The yield on the benchmark 10-year U.S. Treasury note jumped following positive data released in the form of private sector employment and PMI data both surprising to the upside. European government bond yields edged higher as investors weighed the prospect of another interest rate hike from the European Central Bank (ECB) in May. The minutes of the March meeting of the ECB showed policymakers were split over the decision to raise benchmark interest rates by half a percentage point. A “very large majority” voted in favor of the decision, as “inflation remained far too high and was projected to remain high for too long.” Yields on 10-year German government debt climbed toward 2.5%, while yields on French sovereign bonds of the same maturity also ticked higher. In the UK, yields also rose on benchmark 10-year debt on strong inflation and wages data.

Market Update Monday 17th April 2023

Investors speculate on slowing interest rates

Equity markets are set for further gains, on hopes that the Federal Reserve (Fed) and other central banks are nearing the end of their interest rate hiking cycles. Speculation that the Fed may moderate its rate rises to combat inflation was particularly high this week after the release of US producer price index (PPI) and consumer price index (CPI) figures. For producers, the price index declined unexpectedly by 0.5% for March. Two-thirds of the decline can be attributed to a 1% fall in goods prices, particularly gasoline. Whilst for households, headline CPI cooled to a 5% annualised rate in March, falling from 6% in the previous month. That said, core inflation, which strips out the more volatile food and energy price components, rose marginally from 5.5% in February to 5.6% in March in line with expectations. More than 70 per cent of traders now expect another 25-basis point raise at the Fed’s next meeting in May.

US equity markets broadly took the news positively, with the main index finishing up 1.00% over the week with the technology index up 0.65%, as of 12pm London time. In Europe markets were also strong with the European ex UK index up 1.63% after stronger industrial production, whilst the UK managed a gain of 1.88% after news that the economy narrowly avoided recession, as figures showed growth flatlining in the final quarter of 2022.
Higher returns were also experienced in Asia with the Shanghai and Hong Kong Composite rising 0.32% and 0.56% respectively. Whilst the Australian market gained 1.98%, benefitting from commodity producers in its index.

US Labour market reveals a slowing picture

Data from last Friday and this week showed further evidence that labour market conditions are gradually easing as high interest rates dampens demand in the economy. Last Friday, during the bank holiday, the Bureau of Labour Statistics showed the economy added 236,000 jobs last month, a step down from 326,000 jobs added in February, and well below the 472,000 in January. This week also saw an increase in claims for unemployment benefits, climbing more than forecast to 239,000.

German government bond yields on track for its biggest weekly rise in months.

Eurozone benchmark 10-year German bund yields, which move inversely to the bond price, is set for a rise of 19 basis points, the biggest rise since December 2022. With fears over a banking crisis fading the demand for the safe haven asset receded and the 10-year yield is trading at 2.37% as of 12pm London Time. In contrast US Treasuries were largely unchanged over the period. The 10-year US Treasury yield did fall briefly on the news of cooler inflation; however, the yield has trended back up to 3.45%, a 6-basis point rise.

Gold continues to shine.

Within the commodities space, the precious metal reached its highest price since March 2022 on Thursday. Gold trades at $2,048 per troy ounce as of 12pm London time, a rise of 1.11% over the week. The metal’s latest rally comes after Federal Reserve minutes on Wednesday indicated that several policymakers considered pausing rate increases and projected that the US would enter a mild recession later this year.

Market Update Monday 10th April 2023

Analysts observing light and fluctuating trading activity

The primary market indices mostly declined during a week shortened by holidays, with traders observing light and fluctuating trading activity. American markets, along with the majority of markets in the Americas, were closed on Friday due to Good Friday, while Passover began on Wednesday evening. Traders pointed out that investors seemed to take a break following the previous week’s end-of-quarter portfolio adjustments by some institutional investors, which took place before their quarterly public disclosures.

Since markets were closed on Friday, investors could not respond to the Labor Department’s nonfarm payrolls report for March, but other crucial economic releases appeared to influence sentiment. On Monday, the Institute for Supply Management’s (ISM) March factory activity index dropped to its lowest point in nearly three years, reversing a slight increase in February. The ISM’s services sector index, released two days later, showed that the services sector was still growing, but at a significantly slower pace than anticipated.

Indications of a cooling labor market

Recession concerns intensified, and hopes for lower interest rates increased when the Labor Department announced on Tuesday that job openings in February fell more than expected, dropping to 9.9 million, a level last seen in May 2021. The number of people quitting their jobs increased from 3.9 million to 4.0 million. Some economists argue that the number of voluntary job departures is a more reliable indicator of the overall labor market health.

Analysts observed that pessimistic statements from a Federal Reserve official and a prominent bank executive also dampened sentiment. Cleveland Fed President Loretta Mester said at an economic conference that she anticipated the federal funds rate to exceed 5% and remain there, while JPMorgan Chase Chairman and CEO Jamie Dimon cautioned in a letter to shareholders that “the [banking] crisis is not yet over” and that “there will be repercussions from it for years to come.”

European shares increased as fears of a banking crisis subsided. In local currency terms, the pan-European STOXX Europe 600 Index ended the five days through April 6 with a 0.90% gain. Major stock indexes exhibited mixed results.

ECB’s Lagarde, de Guindos, and Lane suggest more rate hikes; others believe rates are approaching their peak

European Central Bank (ECB) President Christine Lagarde, Vice President Luis de Guindos, and Chief Economist Philip Lane indicated that inflationary pressures necessitate additional interest rate increases. Several other policymakers, including Bank of France Governor François Villeroy de Galhau, Bank of Lithuania Governor Gediminas Šimkus, and Bank of Greece Governor Yannis Stournaras, concurred that rates might rise but also stated that they believed rates were nearing their peak.

EU house prices drop for the first time in eight years; producer prices decline for the fifth consecutive month

For the first time since 2015, European Union house prices fell in the fourth quarter of the previous year, decreasing by a record amount, according to Eurostat data. House prices fell by 1.5% sequentially as higher interest rates reduced housing demand. Concurrently, eurozone producer prices fell for the fifth consecutive month and more than expected in February, primarily due to declining energy prices.

BoE’s Pill suggests May rate decision could be a close call

Bank of England (BoE) Chief Economist Huw Pill indicated that policymakers face a tight decision on whether to raise interest rates for the 12th consecutive time in May, signaling that monetary policy tightening in the UK may be nearing its end. Speaking in Geneva, he stated, “On balance, the onus remains on ensuring enough monetary tightening is delivered to see the job through and sustainably return inflation to target.”

Market Update Monday 3rd April 2023

Relative calm helped to lift equity markets, whilst haven assets gave back some of their recent gains.

Following weeks of stress in financial markets caused by the collapse of SVB and Signature bank in the US, culminating in the takeover of Credit Suisse by UBS in Switzerland to prevent a similar run on deposits, markets continued to consolidate and stabilise this week with most areas making gains. The swift action by regulators to protect both insured and uninsured depositors has, at least for the moment, brought some relative calm.

European inflation data benefits from weaker energy prices

Inflation data is being released this afternoon in the US which will help determine the future path of interest rates, which has led to the distress in the banking sector along with some questionable balance sheet management by some banks and a lack of regulatory oversight. European headline inflation data released this morning, whilst still high, moderated by more than forecasted, coming in at 6.9% for the year to March, against the previous reading of 8.5%. However, core inflation, i.e., excluding food and energy, was up by 5.7% for the year, an increase of 0.1% over the previous month’s reading. Whilst the US Personal Consumption Expenditures index, the Federal Reserve’s preferred measure of inflation, is forecast to fall to 5.1%, but core inflation is expected to remain stable at 4.7%, still sharply above the 2.0% target.

As of 12pm on Friday, London time, US equities rose 2.0% over the week, with the US technology sector increasing by 1.6%. European stocks rose by 3.8% and UK equities climbed by 3.0%. The Japanese market rallied 2.5% and Australian stocks rose by 3.2%. The Emerging markets increased by 1.4%.

Government bonds, having rallied during the last few weeks as a safe asset, continued to give up some of their gains with yields, which move inversely to price, rising. 10-year US Treasury yields are now yielding 3.55%, whilst German bunds are trading at a yield of 2.36% and UK gilts 3.55%.

Crude oil stages a rally as recession fears abate

Gold, also a haven asset, gave back a little of its recent gains but still remains close to its near term high, now trading at $1,998 an ounce, having been as high as $2,013 last week. Crude oil has benefitted from the stabilisation in markets, with Brent crude increasing by 5.7%, now trading at $79.5 a barrel.

Whilst the Yen and the Dollar weaken as calm returns to markets

In currency markets, both the US Dollar and the Japanese Yen, which often benefit during times of stress, weakened. The US Dollar index, which measures the strength of the Dollar against a basket of currencies, fell by 0.7%, with Sterling now trading at $1.238 and the Euro $1.087. The Yen weakened by over 3% versus both Sterling and the Euro.

Market Update Monday 27th March 2023

Banking sector turmoil continues

Uncertainty amongst investors continued following the fallout of SVB last week. The most pressing news came from Switzerland, where on Sunday, Swiss authorities approved the takeover of Credit Suisse by UBS for $2bn. However, as part of the deal, $17bn worth of Credit Suisse additional tier 1 (AT1) bonds, a type of higher-risk bank debt designed to take losses during a crisis, was wiped out by the Swiss financial regulator FINMA. That triggered a sell-off in AT1 bonds at other financial institutions on Monday, as investors began to worry that bondholders would have to take on bigger losses than shareholders.

Other market regulators distanced themselves from the decision, fearful that it would endanger banks’ ability to raise capital in the future. In addition, broader statements of support for the financial sector were made from European Central Bank president, Christine Lagarde, to US Treasury secretary Janet Yellen who signaled the government would back all deposits at smaller US banks if needed.

The slight improvement in sentiment meant that overall, as of 12pm London time, the US market finished higher by 0.82% with the technology index up 1.35%. European gains were minimal as markets have begun to fall again on Friday, led by Deutsche Bank which at time of writing has fallen 13.5% after a surge in the cost of its debt insurance. The UK and European index returned just 0.21% and 0.44% over the week respectively. The Hong Kong index finished up 2.03% whilst the Australian market was one of the few outliers, falling 0.57%, weighed by its real estate sector. Japan also finished lower by 0.21%.

All eyes on the Federal Reserve

Investors’ attention was also firmly focused on monetary policy decisions made on Wednesday as there was heightened speculation over whether the banking sector problems would be enough to cause the Federal Reserve (Fed) to pause. Ultimately the central bank decided to lift rates by 0.25% to a range of 4.75% to 5%. Despite the rate rise, markets were briefly lifted by the accompanying committee statement which removed references for the need of “ongoing” rate rises.

As a result, interest rate-sensitive 2-year Treasuries rallied on the day. As of 12pm London time, its yield which moves inversely to price fell 26 basis points over the week to trade at 3.57%. The 10-year US Treasury also rallied over the week, with its yield falling 14bps to 3.29%. Equivalent 10-year German bunds and UK Gilts also rallied, trading at 2.02% and 3.15% respectively.

UK inflation unexpectedly rises

UK inflation came in higher than expected with the annual rate of consumer price inflation rising 10.4% in February, up from 10.1% in January and higher than the 9.9% forecast by economists. According to the Office of National Statistics, the rise was driven by food and non-alcoholic drink, citing shortages in vegetable items given the high energy costs and bad weather across parts of Europe. As widely expected by market participants, the day after the release of the inflation data, the Bank of England Monetary Policy Committee voted to raise interest rates again, by 0.25% to 4.25%. The committee however kept its options open on whether further rate rises would be required.

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