Equity markets rose this week on the back of company results that were not as bad as feared, most notably the US media streaming giant Netflix, whilst further evidence of a weakening business environment, through the purchasing managers indices (PMI), helped to alleviate fears as to the extent of interest rate tightening. The US dollar also took a breather from its relentless strengthening, in part helped by the European Central Bank (ECB) raising rates by half a percent, the first rate rise since 2011, closing the chapter on eight years of negative interest rates.
As of 12pm on Friday, London time, US equities rallied by 3.5%, with the US technology sector climbing 5.3%. European stocks rose by 3.1%, whilst the UK stock market increased by 2.5%, although the more domestically focused mid cap stocks which have borne most of the selling pressure this year, were up 6.1% versus 1.9% for more internationally exposed large cap stocks. Japanese equities rose by 3.4%, with the Australian market up 2.8%. Emerging markets, enjoying the softening in the dollar, rallied by 3.0%.
Government bond yields, which move inversely to price, fell over the week, reinforced by weak data from the PMIs, which are compiled from company surveys on activity levels. The German and French PMI data for the manufacturing sector came in below 50, indicating contraction, as companies reported weaker than expected sales, leading to a sharp rise in unsold stock. 10-year US Treasuries fell to a yield of 2.81%, with German bunds falling to 1.04% and UK gilts 1.93%.
Commodity prices were somewhat more stable, following the sharp losses in recent weeks. Gold traded up 1.0%, now priced at $1,740 an ounce. Crude oil also rose, with Brent crude rising by 1.3%, currently trading at $102 a barrel. Copper increased by 1.8%, to $7,304 a tonne. European natural gas remains at very elevated levels despite Gazprom, the Russian state backed supplier, resuming supply after ten days planned maintenance to the Nord Stream 1 pipeline. Supply levels remain at 40% of total capacity, insufficient for Germany to rebuild their reserves ahead of winter, as Russia punishes Europe for supporting Ukraine in the war.
Technology stocks, having nursed losses greater than 30% since their peak in November of last year, were rewarded with a little positivity this week as Netflix announced that it had only lost one million subscribers in the second quarter, versus forecasts of losing two million. The shares rallied by over 7% on the news. News sources reported that a number of technology companies are reviewing their spending plans in light of high levels of inflation and the tightening rate environment, including Apple, Alphabet (parent company of Google) and Microsoft. The US social media group Snap, posted a $422m loss for the second quarter, blaming a slump in advertising demand, with the shares falling by more than a quarter in after hours trading.
Many of the large technology companies are due to report earnings this coming week, with investors looking for clues to the outlook. Whatever the news, many of these companies are in a very different position today versus over a decade ago in the 2008/09 financial crisis. The five largest technology companies, Apple, Microsoft, Alphabet, Amazon and Facebook, are sitting on a combined cash pile of $542bn, versus $51bn during 2008.
Mario Draghi resigned as prime minister of Italy, despite winning a no confidence vote this week, having lost support of members of his governing coalition party. Italy is now embarking on a snap general election on 25th September. As a result of the political instability in Italy, and their 150% debt to GDP ratio, the cost of servicing Italian 10-year government debt stands 2.3% higher versus Germany, at a yield of 3.34%. The ECB has introduced a tool to prevent the cost of debt for indebted nations soaring. However, for Italy, it will likely need yields to rise further before the ECB is willing to intervene. Even then, the central bank requires “sound” macroeconomic policies, for which it is not clear whether Italy will meet the threshold.
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