Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
All eyes were on last week’s Federal Open Market Committee (FOMC) meeting, which concluded with Federal Reserve (Fed) policymakers announcing a widely expected rate increase of 75 basis points (bp) on Wednesday. The FOMC statement noted some softening of spending and manufacturing, and many market participants seemed to interpret Fed Chair Jerome Powell’s post-meeting press conference as surprisingly dovish. Combined with the stronger-than-expected quarterly earnings reports from Alphabet and Amazon.com, this led to a one-day gain of over 4% for the Nasdaq Composite Index and sharp gains for other indexes.
On Thursday, the Commerce Department reported that GDP contracted by an annual rate of 0.9% in the second quarter. Consensus expectations were for an increase of 0.5%. The second-quarter GDP number marked the second consecutive quarter of contraction, which is one common definition for a technical recession. However, EXM Capital US Economist Blerina Yebba is focusing on job growth, which remains strong, as a primary indicator for the turning point in the current business cycle.
The market seized on this downbeat news about the economy as a sign that the Fed could slow or stop its rate hikes sooner than expected, extending the stock rally through the end of the week
An early estimate of euro area inflation came in above expectations, hitting 8.9% in July – up from the 8.6% registered in June. The rise in headline inflation was driven by food and energy prices.
European natural gas prices rose after Russia reduced gas supplies from the Nord Stream pipeline to 20% of capacity, citing the need for maintenance on another turbine. EU energy ministers agreed that member states would cut their natural gas use by 15% over the winter. Only Hungary, which is heavily dependent on Russian energy exports, voted against the proposal.
The Economic Sentiment Indicator for the EU fell below its long-term average, with confidence declining the most in the industry, services, retail trade and consumer categories. Confidence decreased more mildly in the construction industry. Consumer confidence has largely been impacted by the deteriorating outlook for personal finances.
The German Ifo Business Climate Index also fell in July, reaching its lowest reading in two years.
The International Monetary Fund (IMF) reduced its outlook for euro area economic growth in 2022 to 2.6% from its previous projection of 2.8% in April and lowered its projection for 2023 to 1.2% from 2.3%. The downward revision reflects the impacts of the war in Ukraine, particularly rising energy prices, as well as the potential for tighter financial conditions as the European Central Bank (ECB) tightens monetary policy.
The UK will have the slowest growth among major industrialised nations next year as double-digit inflation and rising interest rates squeeze household spending, the IMF said. The UK was downgraded sharply for both 2022 and 2023, reflecting an increase in the forecast for peak inflation from 7.8% to 10.5% at the end of this year, the institution’s World Economic Outlook update showed. In 2022, the UK will expand 3.2% – the second fastest in the Group of Seven advanced economies after Canada. In 2023, Britain drops to the bottom of the pack with just 0.5% growth.
The Summary of Opinions at the July monetary policy meeting of the Bank of Japan (BoJ) showed that the central bank considers the prospect of the US economy falling into recession and global financial markets experiencing a negative shock as risks that could affect Japan’s economy. On the domestic front, the recent resurgence of COVID-19 has been extremely rapid, and the BoJ will examine how it will affect the financial positions of small and medium-sized firms.
According to the central bank, Japan’s economy has picked up, mainly led by private consumption, which is expected to continue to recover. Inflation has trended upward recently due to higher import prices, but these pressures are expected to subside for a while in the next fiscal year – under these circumstances, the BoJ considers it necessary to persistently continue with current monetary easing under the price stability target of 2%. Data released during the week showed that Tokyo core consumer prices, a leading indicator of nationwide trends, rose 2.3% year on year in July. However, inflation in Japan remains low compared with other developed economies.
At an inaugural meeting for green transformation, or GX – a critical component of Prime Minister Fumio Kishida’s new capitalism policy agenda – the government and business leader debated Japan’s transition to a greener economy. Topics included how Japan can achieve carbon neutrality by 2050 and the ways in which to ensure a stable energy supply, with a focus on the restart of nuclear plants. The government is aiming to restart nine nuclear reactors that have passed stringent safety standards implemented after the 2011 Fukushima nuclear disaster
The tech sector was weak after The Wall Street Journal reported that Jack Ma, founder of e-commerce giant Alibaba Group, was planning to cede control over Ant Group, the financial technology group spun off from Alibaba in 2011. Ant operates the world’s largest mobile payment app Alipay, which has more than one billion users and is indirectly controlled by Ma. On Monday, Alibaba announced plans for a primary listing in Hong Kong while keeping its US listing.
The property sector received a boost after Reuters reported that Beijing plans to set up a real estate fund worth CNY 200 billion to CNY 300 billion to support distressed developers. The government used a similar programme to buy between 5 million and 6 million units per year from 2016 to 2018 at its peak, according to EXM Capital analysts, who noted that the latest programme appeared modest by comparison as policymakers remain concerned about delivering too much stimulus to the sector.
US-China tensions prevailed amid reports that the US public company accounting regulator would not accept any restrictions on its access to the audit papers of US-listed Chinese companies, the latest development in a long-running auditing dispute between both countries. On Wednesday, US Securities and Exchange Commission Chair Gary Gensler said that US and Chinese officials must reach an agreement “very soon” over access to audit work papers for Chinese companies to avoid being delisted from US stock exchanges, which could happen as soon as 2024.
In the second quarter of 2022, the Consumer Price Index (CPI) rose 1.8% quarter on quarter (QoQ) and 6.1% year on year, slightly lower than the market expectation of 1.9% QoQ. Subsequently, market pricing for the August decision of the Reserve Bank of Australia (RBA) moved lower from 57bp to little under 50bp. On the other hand, the Australian Treasurer modestly reduced the global and domestic GDP growth and materially revised up CPI forecast to peak at 7.75% in the December quarter, reflecting higher recession risk.
Last week, the MSCI All Country World Index (MSCI ACWI) returned 3.3% (7.0% in July, -14.4% YTD). July was the strongest month for the index since November 2020.
In the US, the S&P 500 posted a solid gain of 4.3% (9.2% in July, -12.6% YTD) despite another outsized 75bp rate hike from the Fed and news that the economy contracted at a 0.9% annual rate in the second quarter. A “bad news is good news” dynamic appeared to have taken hold, with investors seemingly pencilling in a lower terminal federal funds rate after the second-quarter economic contraction. Growth stocks outperformed value stocks on weakness in the retail sector, while small-caps finished broadly in line with their large-cap counterparts. Russell 1000 Growth returned 5.0% (9.9% in July, -19.4% YTD), Russell 1000 Value 3.4% (5.7% in July, -7.1% YTD) and Russell 2000 4.3% (9.7% in July, -15.5% YTD).
Early-week trading was subdued on very low volumes, although a downbeat second-quarter earnings pre-announcement from Wal-Mart weighed on broad sentiment. The retail bellwether said that food inflation was cutting into consumers’ discretionary spending, causing it to lower its earnings guidance.
With 50% of the companies in the S&P 500 Index expected to report earnings during the week, investors focused on quarterly numbers from technology giants such as Amazon.com, Apple and Google parent Alphabet. Amazon.com and Alphabet jumped on Wednesday after posting better-than-feared earnings results after the market closed on Tuesday. The Nasdaq Composite Index rallied 12.4% in July, its best July ever.
In Europe, the Euro STOXX 50 Index advanced 3.1% (7.5% in July, -11.2% YTD), boosted by data showing that the eurozone economy expanded at a higher-than-expected rate of 0.7% in the second quarter. Markets largely shrugged off concerns about rising natural gas prices due to reduced Russian supply. Germany’s DAX Index gained 1.7% (-15.1% YTD), France’s CAC 40 rose 3.7% (-7.4% YTD) and Italy’s FTSE MIB increased 5.6% (-15.1% YTD). Switzerland’s SMI returned 0.4% (-11.1% YTD). The euro finished the week little changed at 1.02 USD per EUR.
In the UK, the FTSE 100 firmed by 2.1% (3.7% in July, 2.6% YTD) and the FTSE 250 moved higher 1.8% (8.3% in July, -12.7% YTD). The British pound appreciated against the US dollar to 1.22 USD per GBP, up from 1.20.
Japan’s stock markets finished the week slightly lower. The Nikkei 225 Index lost -0.4% (5.3% in July, -2.4% YTD), the broader TOPIX Index retreated -0.8% (3.7% in July, -1.3% YTD) and the TOPIX Small gave up -0.4% (3.6% in July, -1.2% YTD), weighed down by a stronger yen, mixed domestic earnings releases, and the government downgrading its estimates for Japan’s economic growth. Global risk appetite over the week was boosted by tentative expectations that the US Fed may need to slow down the pace of its interest rate hikes, given the US economy contracted for the second straight quarter in the three months ended 30 June.
Against this backdrop, the yen recovered from 24-year lows, strengthening to six-week highs of JPY 133.3 against the US dollar, from JPY 136.1 at the end of the previous week. While the Deputy Governor of the BoJ, Masayoshi Amamiya, reiterated the view that that the BoJ must maintain massive stimulus for the time being, he added that the central bank must always be thinking about what means are available to exit easy policy. Amid some fears of a global recession, the yield on the 10-year Japanese government bond fell to 0.18% from the prior week’s 0.21%.
In Australia, the S&P ASX 200 rose 2.3% (5.8% in July, -4.1% YTD) on the back of lower-than-expected domestic second quarter CPI, China’s USD 148 billion bailout funds for property developers, and the “bad news is good news” mentality surrounding the negative US GDP growth. The Australian dollar appreciated by 0.76%, testing resistance at the psychologically important 0.70 level. Australian government bond yields moved lower after the second quarter CPI release.
Emerging Markets and Other Markets
MSCI Emerging Markets Index was up 0.4% last week (-0.2% in July, -17.7% YTD), with a positive contribution to performance from the stock markets of Taiwan, South Korea, India and Brazil and a negative contribution from those of China.
China’s stock markets eased after a high-level meeting of the ruling Communist Party dropped calls that it will strive to meet its 2022 growth target and gave no indication of new stimulus. The broad, capitalisation-weighted Shanghai Composite Index was down -0.4% (-3.1% in July, -8.6% YTD) and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, moved lower -1.5% (-6.3% in July, -14.1% YTD).
“The meeting urged efforts to consolidate the upward trend of economic recovery, keep employment and prices stable, keep the economy running within an appropriate range, and strive for the best possible outcome,” state media reported. EXM Capital analysts said that the statement signalled that the government was implicitly giving up on its annual growth target of about 5.5% without setting a new number. On Thursday, the IMF lowered its full-year growth forecast for China to 3.3% from its April forecast of 4.4% and reduced its 2023 forecast by 0.5% to 4.6%.
The 10-year Chinese government bond yield eased to 2.77% from last week’s 2.79%. EXM Capital analysts expect that China’s government will ensure that fiscal and monetary policies continue to support the economy and make up for weak private demand while maintaining ample liquidity in the financial system. The yuan was flat against the US dollar in a week when most currencies gained against the greenback.
In Hungary, on Tuesday the National Bank of Hungary, as expected, decided to raise its base rate by 100bp, from 9.75% to 10.75%. The central bank also raised other key interest rates by the same amount.
According to the post-meeting statement, policymakers acknowledged that “real-time data suggest a considerable slowdown in growth,” reflecting factors such as “restrained government investment and companies’ rising costs in addition to the deterioration in external economic activity.” As for inflation, central bank officials determined that the “upside risks” to inflation, which was measured at a year-over-year rate of 11.7% in June, “have strengthened further” and that “the risk of second-round inflationary effects has increased.”
Policymakers concluded that it will be necessary to maintain “tighter monetary conditions for a longer period” and that they intend to “continue the cycle of interest rate hikes until the outlook for inflation stabilises” around the central bank’s 3% target “in a sustainable manner.” As a result, additional interest rate increases in Hungary seem likely.
In Chile, the S&P IPSA Index returned 0.7% (22.1% YTD). On Thursday, the central bank published the minutes from its 13 July policy meeting, at which policymakers unanimously decided to raise the key interest rate by 75bp, from 9.00% to 9.75%. According to EXM Capital analysts, the minutes leaned hawkish, as did the statement issued immediately after the policy meeting.
Our Analysts notes three important reasons for the central bank to be more cautious: high and persistent inflation with risks to the upside given recent currency weakness, growth that has remained resilient on the back of private consumption, and Chile’s large current account deficit. On the other hand, policymakers highlighted that weak private investment, a deterioration in financial conditions, and greater macro uncertainty were weighing on the growth outlook.
Overall, central bank officials believe that more rate hikes in the near term are required in order to return inflation – recently measured at a 12.5% year-over-year rate – to the 3% target over the central bank’s two-year policy horizon. EXM Capital notes that the Board considered rate increases of 50, 75 and 100bp but opted for the middle option to signal greater urgency while still giving themselves some flexibility as the tightening cycle is well advanced and new macro projections will be released when the quarterly Monetary Policy Report is issued in September.
Fixed Income Markets
Last week, the Bloomberg Global Aggregate Index (hedged to USD) returned 0.9% (2.5% in July, -6.7% YTD), Bloomberg Global High Yield Index (hedged to USD) 1.9% (4.5% in July, -11.4% YTD) and Bloomberg Emerging Markets Hard Currency Index 1.9% (2.1% in July, -15.4% YTD).
Sparked by Powell’s dovish post-FOMC meeting comments, the US Treasury yield curve steepened, with intermediate- and short-term yields decreasing and long-maturity rates holding generally steady. Confirmation that GDP contracted over the first two quarters of the year also fuelled demand for short- and intermediate-term Treasuries. The closely watched 2-year/10-year segment of the Treasury yield curve remained inverted – a common, if imperfect, signal of a coming recession. The US 10-year Treasury yield fell by 10bp over the week from 2.75% to 2.65% (up 114bp YTD).
Core eurozone bond yields fell as concerns about global growth increased after Russia reduced its gas supplies into Europe. The IMF downgraded its global growth forecast while the US entered a technical recession. Over the week, the German 10-year bund yield decreased by 21bp to 0.81% from 1.03% (up 100bp YTD). Peripheral government bond yields broadly tracked core markets.
UK gilt yields also largely followed core markets but ended the week broadly level. The 10-year gilt yield decreased 8bp, down from 1.94% to 1.86% (89bp higher YTD).
Heavy new issuance, predominantly in the financials and banking sectors, created a difficult technical environment for US investment-grade corporate bonds at the start of the week. However, investment-grade corporates began to rally after the dovish Fed press conference and as primary calendar activity slowed.
Similarly, US high yield bond market sentiment improved after the Fed meeting. However, Wal-Mart’s earnings outlook weighed on the retail sector and the broader high yield market amid fears of a less healthy consumer. The bank loans market was somewhat mixed throughout the week, as earnings season progressed and investors focused on the FOMC meeting and quarterly GDP figure.