After a strong July for global markets, the first week of August saw more moderate returns amongst equities as investors keenly anticipate today’s US labour market data. With the US already in a technical recession (two consecutive quarters of negative growth), extra focus is being paid to other economic indicators for the largest economy in the world. Economists have forecast US non-farm payrolls to have added 275,000 jobs, down from 372,000 last month. Meanwhile, on Monday, the US Manufacturing Purchasing Managers’ index (PMI), a survey of economic activity, slipped to 52.8. Although the reading is above 50 indicating economic expansion, the PMI figure is the lowest since June 2020.
US House of Representatives Speaker, Nancy Pelosi, began her tour of Asia with a controversial visit to Taiwan. Taiwan is self-ruled, but the Chinese government strongly views the country as a breakaway province which should ultimately belong to China. Upon landing, Pelosi reiterated US support for Taiwan, but this prompted a furious response from Beijing. The Chinese government called the visit a “provocative move” and has since held military exercises around the island in a furious response. The inflamed tensions and fear of escalation within the region briefly prompted a demand for haven government bonds and stock markets faltered on the day.
Despite this, most equity markets did however finish the week in positive territory. As of 12pm London time, the broader US index rose by 0.52% whilst the main US technology index had a strong week, up 2.66%. This was helped by better than expected earnings results from PayPal and Moderna. Returns were more muted in the UK, up by just 0.18% whilst continental European equities traded marginally lower by 0.07%. In Asia, as alluded to, the tensions around Taiwan weighed on equity returns within the region. The Japanese market finished higher by only 0.35%, whilst the Hong Kong Index returned just 0.19% for the week. The Shanghai composite traded negatively ending the week by -0.80%.
After last week’s suggestion from the US Federal Reserve (Fed) Chair that the pace of interest rate increases could be slowed down, this week saw much more hawkish comments from Fed officials. For example, San Francisco Fed president Mary Daly remarked the bank was “nowhere near” done with its fight against inflation, whilst other members of the Fed in separate interviews were open to larger interest rate rises.
Shorter dated government bonds, which are more sensitive to interest rate expectations, sold off on the remarks with the 2 year US treasury yield (which moves inversely to its bond price) rising 22 basis points to breach 3%. Longer dated US government bond yields also rose, with the 10-year benchmark yield finishing the week trading at 2.69%. 10-year German bunds traded flat, with its yield only higher by 3 basis points at 0.84%.
Although UK gilt yields ended higher for the week, there was brief demand for UK haven bonds when the Bank of England forecasted the UK economy would fall into recession by this year. The 10 year gilt yield trades at 1.92% as of 12pm London time. Following the 0.75% hike by the US Fed and a bigger-than-expected 50% increase by the European Central Bank, this week saw the Bank of England also raise rates by 0.5% to 1.75%. The central bank cited the large move given fears that inflation will become “embedded” in the economy. They forecast inflation could peak at more than 13% and stay at “very elevated levels” throughout much of next year, before eventually returning to the Bank’s 2% target in 2024.
With so much attention and continued concern over the health of the global economy, oil prices fell significantly from their peaks. Brent crude oil fell sharply by -14% to trade below the $100 mark at $93.69 per barrel. WTI crude prices also fell significantly, trading lower by -10% to $88.34 per barrel.
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