Weekly Market Update Monday 22nd May 2023

Weekly Market Update Monday 22nd May 2023

Equities rise as hopes to a resolution over the US debt ceiling rise.

Equities gained this week as investors gambled that the US debt ceiling would be raised, and thus in turn avoiding a default by the US government, with a bill potentially being put to a vote next week. Aside from this, economic data releases were mixed with some early signs of an economic slowdown raising hopes of a pause in the US rate cycle, whilst others pointed to continued strength in the jobs market suggesting the US Federal Reserve may have further tightening ahead. The Japanese stock market benefitted from stronger than expected growth data, whilst Chinese stocks stuttered as data pointed to a weaker post-covid pandemic recovery than investors had hoped.

As of 12pm on Friday, London time, US equities rose 1.8% over the week, with the US technology sector rising by 3.3%. The European market increased by 0.8% and UK equities were up by 0.3%. The Japanese market was particularly strong, rising by 3.1% as the economy grew by an annualised 1.6%, twice that of economists’ estimates. Australian stocks increased by 0.3%. Emerging markets rose by 0.5%, with South Korea rising by as much as 2.5%, but Chinese offshore stocks, listed in Hong Kong, fell 0.9%.

Haven assets fall as worries over a US government default recede.

Government bonds sold off this week, with the yield on 10-year US Treasuries, which moves inversely to price, rising to 3.65%. German bunds and UK gilts followed suit, with yields rising to 2.48% and 4.02% respectively.

European natural gas prices tumble further, close to their long run average price.

The gold price fell as optimism over the US debt ceiling being resolved rose, with the precious metal now trading at $1,985 an ounce, a fall of 2.6% over the week. For industrial commodities the picture was mixed. Copper fell by just over 1%, now priced at $8,128 a tonne, whilst iron ore rose by 6.2%. European natural gas prices continued their downward spiral as the premium built up since the invasion of Ukraine by Russia evaporates. Dutch natural gas futures fell by over 8%, priced at €30.22 per megawatt hour (MWh), which compares to a peak price of over €300 MWh, and very close to the longer-term average. Crude oil, having fallen in recent weeks, staged a rally as Brent crude rose by 3.5%, now trading at $76.7 a barrel.

Mixed economic data provides little clues as to the next rate move by central banks.

Data released this week painted a mixed picture as to the strength of economic growth and therefore the likelihood of further interest rate rises. The Empire Manufacturing index, a manufacturing activity index for the state of New York, plummeted to minus 31.8, down from the previous reading of plus 10.8, and far lower than forecasts of minus 3.9. Eurozone industrial production fell by 1.4% for the year to March, versus expectations of a small rise of 0.1%. Whilst the German gauge of economic sentiment, the Zew index, dropped from 4.1 in April to minus 10.7. Retail sales growth in the US fell short of expectations, rising by 0.4% in April, half that of forecasts.

However, US new residential construction rose by 2.2% in April, a key driver of economic growth. New unemployment claims also fell in the US, coming in at 242,000 versus 264,000 in the week before. Walmart, the world’s largest retail also released strong results, in direct contrast to Home Depot, a DIY store, and Target, a discount retailer, whilst also raising their full year sales growth forecast.