US equities climbed to their highest level since August of last year, whilst the rally in the US technology sector since its December low now exceeds 19% as the Federal Reserve (Fed) slowed the pace of rate increases to 0.25%, taking rates to an upper range of 4.75%. Perhaps most notably, in a week when the European Central Bank and the Bank of England raised rates by 0.5%, the overly cautious tone evident in previous speeches was increasingly absent.
As of 12pm on Friday, London time, US equities rose by 2.7% over the week, with the US technology sector increasing by 5.0%. European markets were up by 0.8%, with UK stocks climbing by 1.1%, with mid and small cap stocks strongly outperforming large cap companies. Australian stocks also rose by 0.9%, whilst the Japanese market fell by 0.6%. Emerging markets also fell by 0.5% having risen strongly over January. Hong Kong stocks, which had risen over 50% since their October 2022 low, fell 4.5%, whilst Indian stocks, which have been a laggard since the beginning of the year, increased by 2.6%.
Government bonds also rallied, with yields (which move inversely to price) falling, the 10-year US Treasury yield now stands at 3.38%. German bunds and UK gilts also rallied, with 10-yields now trading at 2.15% and 3.02% respectively.
The growing market confidence in inflation having peaked pushed gold prices lower over the week, falling by 0.9%, now priced at $1,928 an ounce. However, perhaps counterintuitively given the reopening of the Chinese economy, crude oil prices fell over the week, with Brent crude falling by over 5% and a barrel of oil now trading at $82.1.
Markets have been buoyed by downward signs in the trajectory of inflation and a sense that a peak in the interest rate cycle is near. So far unemployment has not risen, providing optimism that perhaps central banks can navigate a soft economic landing.
However, monetary policy acts with a lag, and having seen a massive increase in stimulus during the Covid pandemic, the major developed economies are now experiencing a massive fall in stimulus as interest rate rises are combined with quantitative tightening. Only time will tell whether we are out of the woods or whether we are due a recession and potentially another leg down in markets.
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