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Weekly Market Update Monday 31st July 2023

Weekly Market Update Monday 31st July 2023

US stocks continued their positive momentum helped by cooling inflation, strong GDP growth, and resilient tech earnings. The S&P 500 posted its third positive weekly result in a row, gaining 1% whereas the Nasdaq added about 2%. The Dow Jones climbed for the 13th trading day in a row, marking the index’s longest positive streak since 1987. The streak ended on Thursday, and the Dow finished up nearly 1% for the week.

Data from the US was positive at the end of the week as the U.S. Federal Reserve’s preferred gauge for tracking inflation showed that consumer prices increased in June at the slowest monthly pace in more than two years. The Personal Consumption Expenditures (PCE) Price Index rose at a 3.0% annual rate, down from 3.8% in May. Excluding volatile food and energy prices, core inflation climbed 4.1% in June versus 4.6% in May.

More positive news as second-quarter U.S. GDP growth surprised to the upside, indicating an economy that remains at above-trend speed. The annualized growth figure came in at 2.4%, well above estimates of 1.8%, and accelerated from last quarter’s 2% growth rate. This data gives support to a US economy that is absorbing the impact of monetary tightening, prompting another quarter percent hike at the Fed’s July FOMC meeting, bringing the fed funds rate to a range of 5.25% to 5.5%. Going forward, the hope is that the economy may have cooled enough for the Fed to back off its aggressive interest rate-hiking campaign with markets pricing a pause on rate hikes from here on out followed by rate cuts in 2024.

On the earnings front, of the 254 companies in the S&P 500 that have reported earnings for Q2 2023, 78.7% have reported earnings above analyst estimates. This compares quite favourably to a long-term average of 66.4% and prior four quarter average of 73.4%. Strong earnings reports from chip companies Intel and KLA corp triggered a broad rally in some of the big-name tech companies that have contributed so much to the market’s healthy performance this year. Alphabet was up 2.7%, Amazon gained more than 3%, Meta Platforms jumped more than 4%, Microsoft was up nearly 2.5%, and Tesla rose more than 4%. While a large chunk of the market’s performance can be attributed to these mega cap growth names, if these stocks were to level off or drop, the market will have trouble finding substitutes to keep the index pushing higher, simply because of the size of the hole that will need to be filled.

European markets were up 0.4%, with UK stocks climbing by 0.5%. Asian stocks recorded a week that was on par with the tech heavy Nasdaq as the MSCI AC Asia Pacific index rose 2.0%. Hang Seng ended Friday up 4.4% on the back of stimulus talks coming from China while gains were softer in Japan with the Nikkei ending Friday 1.4% higher followed by the shock decision of BOJ to allow the 10-year yield to rise by 1%.

On the back of the U.S. Federal Reserve’s latest interest-rate increase, the yield of the 10-year U.S. Treasury bond closed above 4.00% on Thursday for the fourth time this year. The yield pulled back slightly on Friday, when it was trading around 3.97%, well above the previous week’s closing level of 3.85%.

Oil prices rose for the fifth week in a row last week with Brent adding 4.8% over the course of the week to USD 84.99/b while WTI added 4.6% to USD 80.58/b. Oil prices have found some support from evidence of tightening supplies from Saudi Arabia and economic stimulus in China.

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