Market Update Monday 30th January 2023

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.