Market Updates

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.

Financial authorities step in to stem fears of contagion in the banking sector

Whilst it has been another volatile week in markets, swift action by financial authorities following the collapse of the US bank, Silicon Valley Bank (SVB), last Friday, calmed nerves sufficiently to prevent a deeper loss of confidence in the banking sector. Authorities pledged to protect both insured and uninsured depositors (deposits over $250,000 are uninsured by the US Federal Deposit Insurance Corporation). During the week further banks came under pressure, including First Republic Bank, a US regional bank, and Credit Suisse in Europe. As a show of confidence, several large US banks deposited $30bn of cash into First Republic Bank, providing a large liquidity cushion. Whilst, following a plea from Credit Suisse, the Swiss National Bank said it would step in and offer liquidity support.

SVB has shone a light on the bond portfolios of banks which have suffered sharp losses as rates have increased. However, SVB’s case was somewhat unique in that as a bank to technology start-up company, it had grown very quickly in recent years and had invested a large proportion of its assets in very low yielding and long maturity bonds during the low inflation years. This came back to bite it hard as uninsured depositors lost confidence and began to withdraw their money, forcing SVB to realise its mark to market losses on its bond portfolio.

ECB raises rates by 0.5%, whilst expectations for future US hikes moderate

Despite the turmoil in the banking sector, the ECB still raised rates by 0.5%, citing inflation remaining at levels that are too high and expected to remain so for too long. However, expectations as to the next rate hike in the US moderated, with markets now pricing in either a rate hike of 0.25% or a pause. US inflation data for February was released this week coming in line with estimates, as inflation for the month of February came in at 0.4%, versus 0.5% in January. However, excluding food and energy, it rose by 0.1% to 0.5%. For the year, inflation now stands at 6.0%, versus 6.4% last month, still substantially higher than the Fed’s target of 2.0%.

As of 12pm on Friday, London time, US equities rallied by 2.6% over the week, whilst technology stocks jumped up by 5.2%. However, in Europe, where the banking sector suffered rolling contagion throughout the week, equities fell by 2.8%. The UK market, with a high weighting to financials fell by 4.2%. Similarly, Japanese stocks dropped by 3.6% and the Australian market lost 2.1%. Emerging markets fell by a relatively modest 1.5%, with Chinese stocks rising by 0.6%.

Haven government bonds rallied, with the yield, which moves inversely to price, falling to 3.5% on 10-year US Treasuries, 2.2% on German bunds and 3.3% on UK gilts.

Gold, a haven asset duration periods of distress, rallied by 3.9%, now trading at $1,958 an ounce. Whilst industrial commodities sold off on heightened concerns for global growth. Copper fell by 3.8%, now trading at $8,508, whilst Brent crude fell by 9.7%, now priced at $74.8 a barrel, and US WTI (West Texas Intermediate) falling 10.4% to $68.7.

Issues under discussion

Memories of the 2008 financial crisis

Whilst the stresses in the banking sector bring back memories of the 2008 financial crisis, this time around we believe that the recent bank failures are far less likely to trigger a global banking crisis. In 2008, much of the excesses built up in financial markets had their roots in property markets, funded by large amounts of cheap debt financing flowing into property securities. This time around, the excesses have been concentrated in niche equity segments and alternative asset markets funded by venture capital. As venture capital tends to be equity funded, when these companies fail, the loss typically ends with the investor, rather than being transmitted through to the financial system as a bad debt. Additionally, bank balance sheets as a result of the financial crisis, are much stronger today. Therefore, although the sharp rise in rates has caused some short-term losses for the banking industry, banks are in a much better position to weather the storm. This has been further reinforced by a decisive and rapid response from regulators to provide confidence to both insured and uninsured depositors.

The Fed threatens to reaccelerate rate increases if inflation persists, sending markets southwards

Last week was volatile for equities and bonds ahead of the latest employment data which released on Friday.  Earlier last week Jerome Powell, chair of the US Federal Reserve (Fed) said they would be prepared to reaccelerate the pace of interest rate increases if the economy and inflation failed to cool. US Treasuries sold off with the yield on the 10-year US Treasury touching 4.01%, having been as low as 3.34% earlier in February, whilst 2-year Treasury yields exceeded 5% for the first time since 2007. The inversion of treasury yields, whereby shorter dated Treasury yields exceed those of longer dated bonds, and considered a harbinger to an impending recession, increased to over 1%. Banks, which hold large reserves of bonds on their balance sheets, were hit particularly badly, as rising bond yields reduce the value of those bonds.  The canary in the coal mine appeared as a small US bank, Silicon Valley Bank, announcing a share sale to reinforce its capital base. The US non-farm payrolls employment data released, forecasting 225,000 new jobs to have been created in February.  However, January’s forecast of 189,000 new jobs was blown wide apart with 517,000 new jobs having been created, making investors particularly jittery ahead of figures being released.

As of 12pm on Friday, London time, US equities fell 3.2% over the week, with US technology stocks falling by 3.0%. European stocks were down by 2.0% and UK equities dropped by 2.6%. Despite falling sharply at the end of the week, the Japanese market managed to hold onto gains of 0.6%, whilst Australian stocks fell by 1.9%. Emerging markets dropped by 2.0% with China being a large contributor, with domestic ‘A’ shares falling by 3.0% and offshore Hong Kong stocks dropping by 6.1%. Bullishness in the Chinese equity market has cooled in recent weeks as the rhetoric between itself and the US has escalated, whilst following the relaxation of covid restrictions, China has also not attempted to boost their economic recovery through monetary loosening, instead relying on Chinese consumers to do the heavy lifting.

German and UK government bond yields followed those of the US, rising earlier in the week before bonds rallied towards the end of the week as a wave of risk aversion swept over markets. 10-year German bunds are currently trading at a yield of 2.53% and gilts at 3.70%.

Gold dropped by 0.8%, now trading at $1,840 an ounce, whilst the risk of rising bond yields reducing global demand led to crude oil falling by over 5%, with Brent crude now trading at $80.9 a barrel and US WTI (West Texas Intermediate) $75.0.

Issues under discussion

US Treasuries inverted

US Treasuries inverted by the most in forty-two years, whereby shorter dated bond yields trade at higher levels than longer dated bonds, considered an indicator of an impending recession. Two-year Treasury yields, which move inversely to price, rose to 4.88%, versus the 10-year trading close to 4.00%. It was a similar story for European bonds, where 10-year yields rose to 2.74%, with two-year bond yields rising by a similar amount, to a yield of 3.22%. However, in the UK, whilst 10-year bond yields rose to 3.9%, 2-year bonds rallied, with the yield falling to trade beneath 10-year yields at 3.72%. The switch from yield inversion to yield steepening is normally a signal by bond markets that a recession is going to hit sooner rather than later, as markets start to price in rate cuts. However, on this occasion, this reaction to gilt prices may have been triggered by comments from Andrew Bailey, the Bank of England’s governor, who suggested on Wednesday that investors were wrong to assume many more rate rises were needed to tame inflation.

Investors weigh up the prospect of further interest rate rises

Both equities and bonds declined over the week as investors assessed the potential for further monetary policy tightening from the US Federal Reserve (Fed). Jay Powell, Fed Reserve Chair, warned of further rate rises in a Q&A at the Economic Club of Washington; his remarks were in fact interpreted as less hawkish than investors anticipated. However, it was comments from other Fed officials throughout the week that weighed on markets. Raphael Bostic, president of the Fed’s Atlanta branch, remarked that January’s strong jobs report could lead to a higher peak in interest rates, whilst Minneapolis Fed president Neel Kashkari said that ballooning jobs growth was proof that the Fed needed to “raise rates aggressively”.

These comments contributed to the US equity market finishing lower by -1.33% as of 11am London time, with the technology index dropping -1.81% over the week. In Europe, market falls were less pronounced with the UK index down -0.69% and the European index falling -0.81%. Losses in Europe were limited after new German inflation figures reassured investors that the European Central Bank may not have to raise rates more than expected to combat rising inflation. German inflation slowed to 9.2% in January year on year, below economists’ expectations.

Japan was one of the bright spots, finishing higher by 0.85%, after robust earnings outlooks from domestic firms. Whilst in China, stocks also ended the period lower due to heightened US-China tensions as Beijing condemned Washington’s decision to shoot down a Chinese balloon that traversed American airspace. The Hong Kong index was down -2.17% and the Shanghai composite finished lower by just -0.08%.

UK narrowly avoids recession

In economic news, the UK economy just managed to avoid a technical recession, defined as two consecutive quarters of negative growth. Despite negative growth in Q3, GDP growth for Q4 2022 was reported as flat according to the Office for National Statistics. This met analyst expectations, but the reading was weaker than the Bank of England’s own forecast. Despite better October and November growth, it was the month of December that wiped out gains due to widespread strikes and the cost-of-living crisis hitting households and business activity.

Government Bonds also sell off

After hawkish statements from Fed officials, as well as the stronger jobs report from last Friday, US treasury yields (which move inversely to the bond price) rose sharply. As of 11am London time, 2-year Treasury yields which are more sensitive to potential interest rate changes, rose 22bps to 4.51% whilst the 10-year benchmark yield rose 18bps to 3.70%. Equivalent 10-year German bunds and UK Gilts also suffered with their yields rising by 17bps and 32bps to trade at 2.36% and 3.37% respectively.

Oil price rises after Russia cuts production output

Moderating US rate expectations and an improving outlook for China helps to drive equities higher

Equity markets headed higher this week, supported by expectations that the Federal Reserve (Fed) will continue to temper future rate rises, whilst business survey data released in the Eurozone raised hopes that the region might be able to avoid a protracted downturn. Company results released this week for the fourth quarter of last year were mixed, with companies such as Microsoft guiding down earnings expectations for the current quarter after sales started to weaken in December.

As of 12pm on Friday, London time, US equities rose 2.2% over the week, with the US technology sector climbing by 3.3%. European stocks were up by 0.5%, with markets still pricing in a further 1.4% increase in rates for the Eurozone. UK equities increased by 0.2%, however, more domestically focused mid cap stocks increased by 1.0%. The Japanese market rose by 2.9%, whilst Australian equities increased by 0.6%. Emerging markets continued to benefit from a fall in the strength of the US dollar and hopes of an economic boost from the relaxation of Chinese covid restrictions, rising by 1.6% in aggregate, with Latin American markets increasing by 3.6%. Whilst Indian stocks, which are trading at a valuation premium, fell by 2.1%.

However, bond markets continue to signal an impending recession in the West

Yields on government bonds rose a little (prices move inversely to yields), with the 10-year US Treasury increasing to 3.56% and German bunds to 2.28%. 10-year UK gilt yields were broadly flat at 3.36%. The yield premium between longer dated 10-year government bonds and shorter dated 3-month bonds remains in negative territory for the US, Eurozone and the UK. This is considered by many as a reliable indicator as to a future recession, although time lags can vary tremendously.

Gold ticked up over the week, now trading at $1,947 an ounce, whilst copper was flat at $9,307 a tonne and Brent crude oil rose by 1.5% to $88.9 a barrel.

Fourth quarter US GDP exceeds expectations despite the sharp rise in rates

US GDP data for the final quarter came in at 2.9%, higher than the forecast increase of 2.6%, a more moderate decline versus the previous quarter’s increase of 3.2%. However, whilst monetary policy is known to act with a lag, weakening consumer expenditure data helped to lower expectations for the next Fed rate rise to 0.25%. However, Tesla, the electric car manufacturer whose share price has more than halved since their peak, rose by 11% after its fourth quarter earnings beat expectations, rising by 37% to $24.3bbn.

European natural gas prices continue to fall sharply

Preliminary figures from January’s Eurozone composite purchasing managers survey indices, which seek to measure the economic conditions faced by businesses, were released this week, rising above fifty, which represents the dividing line between expansion and contraction. This helped to provide some hope that the Eurozone may be able to avoid a more protracted downturn as natural gas prices continue to fall sharply. The one-month forward contract on Dutch natural gas futures fell a further 21% this week, taking prices down to €53 per Mega Watt hour from a peak in excess of €300 in August of last year.

The Fed’s preferred measure of inflation due for release this afternoon

The Fed’s preferred measure of US inflation is due for release today, with expectations that core inflation, i.e., excluding food and energy, will have increased by 0.3% in December, although expectations are still for a fall in inflationary pressures versus one year ago. Economists are looking for an increase of 4.4% for the year, down from 4.7% for the year to November.

US inflationary pressures ease, setting equity and bond markets up for a rally

Year-on-year US inflation data weakened in the month of December, falling to 6.5%, down from 7.1% recorded the month before. This, combined with softer average hourly earnings data released last Friday, which came in at 4.6% for the year to December versus 4.8% in the previous month, set markets up for a rally. Expectations rose for a smaller, quarter of a point rate rise at the Federal Reserve’s January meeting, with the expected peak in rates falling beneath 5%. European industrial production for the month of November exceeded forecasts, rising by 1.0%, easing fears over the severity of any impending recession. Whilst UK GDP growth for November eked out an increase of 0.1%, beating estimates of a fall of 0.2%. A sharp fall in European energy costs, helped by a mild winter, has no doubt been a significant contributing factor.

Hong Kong stocks close to a 50% rise since their 2022 low

As of 12pm on Friday, London time, the US market rose by 2.3% over the week, whilst the US technology sector recorded an increase of 4.1%. European and UK stocks rose by 1.6% and 1.8% respectively, whilst Japanese equities rose by 1.5%. The Australian market increased by 3.1%, supported by rising metal prices, a result of the relaxation of Covid restrictions in China. Emerging markets were up 3.0%, with the Latin American component increasing by 4.8%, also benefitting from the rebound in commodity prices. Hong Kong and Chinese stocks continued their recent recovery, rising 3.6% and 1.2% respectively, with the former having risen by 48% since their 2022 low point hit at the end of October.

On the back of the decline in inflation, government bond markets also rallied, with 10-year US Treasury yields, which move inversely to price, falling to 3.47%. German bund and UK gilts also rallied, with 10-yields falling to 2.13% and 3.33% respectively.

Easing Covid restrictions in China supports rising commodity prices

Gold continued its steady ascent, rising 2.0%, now trading at $1,907 an ounce, having risen over 15% since its low in November. Whilst copper prices leapt up to $9,169 a tonne, an increase of 7.0%. Iron ore increased by 5.7%, and crude oil rose by 7.8%, with Brent crude now trading above $80 a barrel at $84.7. All beneficiaries of the relaxation of Covid rules in China and a weakening in the US dollar as US interest rate expectations are dialled down.

US dollar weakens as rate expectations abate, boosting liquidity in financial markets

The US dollar index, which is a measure of the US dollar against a basket of internationally traded currencies, fell by 1.4% over the week, with the Euro worth $1.08, and Sterling close to $1.22. However, the biggest move amongst the more actively traded currencies was reserved for the Japanese Yen, which strengthened by 2.6% versus the Dollar, 1.9% versus Sterling and 1.0% versus the Euro as markets applied pressure to the Bank of Japan to further relax their yield control measures on the 10-year JGB (Japanese Government Bond). Japanese inflationary pressures have gradually increased in recent months, with core inflation, that is, excluding food and energy, hitting 3.7% in November, a high number by Japan’s standards!

The new year starts where it left off – inflation, inflation, inflation

Markets have picked up in the new year from where they left off last year, looking for evidence of a slowdown in economic activity, and therefore inflationary pressures. Investors are trying to judge when the tightening monetary policy cycle will come to an end, and the likelihood and depth of any impending recession. Headline inflation data (including food and energy) released by Germany, France and Spain, has come in weaker than forecast for December and lower than the prior month, helping to spur an early rally in European equity markets. Whilst US equities have had a harder start to the year, as despite leading indicators pointing towards a slowdown, the jobs market remains tight, and markets continue to worry about the effects of wage pressures on the inflationary outlook. Later today, the latest employment data in the form of the non-farm payrolls will be released, however, earlier this week, the ADP private payrolls came in stronger than forecast and higher than the figure for November, with 235,000 new jobs having been created.

Against this backdrop, as of 12pm on Friday, European equities rose 3.6% over the week, with the UK market climbing by 2.7%. Whilst the US market fell 0.8% and the US technology sector dropped 1.5%. Both onshore and offshore Chinese stocks have started the year on a strong footing, benefitting from an easing in Covid restrictions, despite an explosion in the spread of the virus. Chinese ‘A’ shares rose by 2.2%, whilst offshore Hong Kong stocks are up 6.1%. This has helped to propel emerging markets up by 2.9%. However, this hides a wide dispersion in returns in the emerging world, with Latin America down by 1.0%, suffering from falling oil prices. Australian equities rose by 1.0%, whilst Japanese stocks fell by 0.8% following the Bank of Japan relaxing its zero-yield policy control before Christmas. Yields on 10-year government bonds can now trade in a range of plus or minus 0.5% around zero, versus the previous range of plus or minus 0.25%.

Government bonds strengthened

Government bonds strengthened in price, as the continued strength in the US labour market raised concerns that US interest rates will continue to rise, increasing the risk of a recession. 10-year US Treasury yields, which move inversely to price, fell to 3.72%, whilst shorter-dated 2-year yields, which are more sensitive to interest rates, rose to 4.47%. 10-year German bund and UK gilt yields fell to 2.29% and 3.56% respectively.

Commodities

Gold rose by 0.8% over the week to trade at $1,840 an ounce, having risen close to 12% since its lowest point in 2022, recorded in November. Copper was little changed over the week, trading at $8,361 a tonne, whilst iron ore continued its recent recovery, rising by 1.5%, benefitting from the relaxation of Covid controls in China. Crude oil traded down, with Brent crude falling almost 9% over the week, now priced at $78.5 a barrel. European natural gas rose by 2% over the week but has fallen to levels last seen in 2021. On the back of a warm winter, prices have fallen by over 50% since the highest level for December, and by over 70% since its peak reached in August of last year. It is a similar story in the US despite prices never having reached the stratospheric levels witnessed in Europe. US Henry Hub gas prices have declined by over 45% since the peak for December, and over 60% since the highs of August.

Issues under discussion

No imminent let-up in future tightening

The dominant narrative of 2022 continues into the new year: inflation, the response from central banks, and the probability and depth of a recession.

Headline inflation, that is, including food and energy, looks to have peaked, with recent inflation prints coming down faster than estimates. However, core inflation, excluding food and energy, remains stubbornly high. The US Federal Reserve has moderated its rate increases, although comments from the chair, Jerome Powell, and minutes released from the last meeting suggest no imminent let up in future tightening whilst inflation remains significantly above its target of 2%.

Monetary policy acts with a lag of somewhere between twelve to eighteen months, therefore the danger is that the Fed over-interprets the need to continue tightening, leading to a sharper downturn than required some time in 2023.

The flip side of this, is that some investors look to history and suggest that when periods of inflation have come about before it has taken much longer periods of tightening to tame it. Therefore, bond yields have further to rise from today’s levels before inflation is brought under control.

The truth is, there is very little consensus on what the root causes of inflation are, and therefore similarly, the remedies.

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.

Strength in the US Service Sector raises concerns over further rate rises

Data released this week surprised economists by pointing to continued strength in the US service sector, despite the sharp increase in interest rates. The Institute for Supply Management Service Sector index was released on Monday, which provides an insight into the business conditions faced by service sector companies. The index came in at 56.5 for the month of November, up from 54.4 in the previous month (any number above 50 equals expansion, and below 50 contraction), and higher than the decline forecast. This unsettled markets trying to gauge when the Federal Reserve may pause their interest rate hiking cycle, designed to crush the sharp increase in inflation, but risking triggering a recession as a result.

Chinese equities continue to rally, despite weak import and export data

However, despite some very weak import and export data for the past twelve months, both domestic ‘A’ shares and offshore Hong Kong stocks in China made further gains this week, on a gradual relaxation of zero Covid rules. China has increasingly been seen to target economic growth over the virus for the first time since the pandemic began, accelerated by the wave of protests witnessed across China at lockdown rules.

As of 12pm on Friday, London time, US equities fell 2.7% over the week, with technology stocks dropping 3.3%. European markets fell 1.4% and UK equities slumped by 1.4%, with more domestic orientated mid cap stocks falling by 3.1%. Australian stocks fell by 1.2%, whilst Japanese equities bucked the trend in developed markets, rising 0.4%. Although for overseas investors this was all but lost through Yen weakness, which fell by 0.9% versus Sterling and 1.3% versus the Dollar. Emerging markets lost 0.5% despite Chinese and Hong Kong stocks rising by 1.6% and 6.6% respectively. The weakness came predominantly from Latin America, where markets fell by 3.0%, not helped by a sharp fall in the price of crude oil.

Government bond yields were broadly stable over the week, with the yield on 10-year US Treasuries now trading at 3.49%, German Bunds 1.88% and UK Gilts 3.12%.

Crude oil prices fall sharply, despite the European ban on Russian seaborne oil deliveries

Crude oil prices fell sharply in a week that Europe banned all seaborne Russian oil imports and the G7 countries imposed a $60 price cap. Although many thought this would have sent oil prices higher, a number of factors conspired to send crude oil around 10% lower. OPEC, the Organisation of Petroleum Exporting Countries, chose not to alter their production targets, having been expected to make cuts in response to the price cap. Future demand fears trumped supply constraints. This was exacerbated by the strong service sector data out of the US, raising concerns of the Federal Reserve sending the US into recession through further rate rises. And finally, the more limited supply destinations available to the Russians has meant Asian refiners have been able to negotiate lower prices. Brent crude is now trading at $76.3 a barrel and US WTI (West Texas Intermediate) $72.

Industrial metals rise as China relaxes Covid restrictions

Industrial metals made gains, helped by the gradual relaxation of covid restrictions in China. Copper rose by just over 1%, trading at $8,525 a tonne, and iron ore rose by almost 5%. Gold prices are up slightly, now priced at $1,813 an ounce.

Issues under discussion

China’s switch to prioritising growth over health

Chinese ‘A’ shares have risen by over 10% since hopes have grown as to an end to the zero Covid policy, and offshore Hong Kong stocks have gone up by a massive 35% from very cheap, oversold levels. Whilst this continues to look like a gift to investors, especially against a difficult backdrop of western countries tightening monetary policy to combat inflation, there remain a number of headwinds for China’s switch to prioritising growth over health.

The efficacy of the Chinese vaccine is lower than those used in the developed world; the capacity of hospitals to deal with any sharp increase in Covid infections that comes with opening up is limited; and there remains a sizeable proportion of the population who are unvaccinated. All of this together means that although the opportunity in China looks attractive, as always, there remain plenty of risks.