Global equity markets fell this week, whilst US Treasuries rallied against a background of continued stress amongst US regional banks. The US Federal Reserve (Fed) raised rates by 0.25%, its tenth increase since early 2022. However, comments from the Fed governor gave hope as to a pause in the hiking cycle, stressing that further increases would be dependent on economic developments. The European Central Bank also raised rates by 0.25% but, despite their robust statement that the fight against inflation is not over yet, this represented a moderation versus recent hikes. Later today the latest US employment figures are due for release, with the non-farm Imagepayrolls forecast to have added 180,000 new jobs in April, down from 236,000 in March.
As of 12pm on Friday, London time, US equities have fallen 2.6%, with the US technology sector having dropped by 2.1%. European markets are down 0.9%, whilst UK stocks have lost 1.5%. The Australian market fell by 1.2%, whilst Japanese equities rallied by 0.9%. Emerging markets fell by 0.1%, with much of the pain being experienced in Latin America, where Brazilian stocks fell by 2.2% as crude oil weakened sharply following weak demand from the US and China. Chinese onshore Imageand Hong Kong stocks rose by 0.3% and 0.8% respectively.
10-year US Treasury yields, which move inversely to price, fell to 3.40% and 2-year yields also dropped, now trading at 3.82%. It was a similar story for German bund yields, with the 10-year currently priced at a yield of 2.26%. However, UK gilt yields rose slightly, now trading at 3.75%, as the market expects further tightening from the Bank of England to combat inflation. This was matched by an appreciation of Sterling against both the US dollar and the Euro, now trading at $1.26 and €1.10, whilst the Euro/US dollar exchange rate remained unchanged at $1.10.
Gold rose on expectations that the rate hiking cycle is nearing its peak in the US, increasing by 2.3% to trade at $2,045 an ounce. Whilst industrial commodities had a tougher week, with copper falling by 1.2% to trade at $8,474 a tonne, Brent crude losing 6.4%, now priced at $74.4 a barrel, and iron falling by just over 3%. On the bright side for Europeans, there was a further fall in natural gas prices which fell by 4.6% to trade at €36.25 per megawatt hour.
Ripples continue to travel through US regional banks despite depositors having been protected following the collapse of Silicon Valley Bank and Signature Bank, as well as the recently arranged takeover of First Republic Bank by JP Morgan, which resulted in First Republic’s shareholders being wiped out. However, rather than solve the issue, further banks are being pressured, with PacWest, Western Alliance and Trust Bank, amongst others, suffering further sharp falls in their share prices and deposit withdrawals. These banks share in common a weakness, be it an over reliance on an industry, particular securities or loans losses. Whatever it might be, the market one by one is feeding off these weaknesses. This is an environment that very much suits the larger, better capitalised, more tightly regulated banks that are able to pick up the pieces at favourable prices.
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