Although news around Banks remained front and centre for equity markets last week, most markets posted gains, with Emerging market shares faring best. This welcome stability also fed through to the credit markets, with both investment grade and high yield bonds also posting positive numbers on the week as government bonds sold off a touch. This week the focus is likely to remain on the banking sector and also on commentary from Central Bankers around how they are viewing the balance of promoting financial stability vs hiking rates to combat inflation; there’s some inflation numbers towards the end of the week in the US, Japan and the Eurozone to look forward to in that regard.
Last week
- Last week saw stabilisation and rebound from equity markets
- European and Emerging markets did best (getting a boost from China)
- Banks continued to be the key focus for markets
- Government bond markets were very choppy but finished the week largely unchanged, with credit markets posting positive gains
- Both the UK and US Central Banks hiked interest rates by 0.25%
- UK inflation came in stronger than expected (at 10.4%)
This week
- Scheduled data is quite light this week. We’d expect the market to remain focussed on any developments around the banking sector
- The end of the week sees some key inflation data, with Eurozone and Japanese CPI out on Friday and Thursday respectively, and US PCE (the Fed’s preferred inflation measure) out on Friday
- Thursday sees the release of business survey data (PMI) for China
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
Last week in more detail
- Last week saw some stabilisation – and decent rebound – from equity markets although there was much divergence across sector and size. Global stocks rose by 1.1% on the week, with the UK FTSE All Share up by 0.9%. European and Emerging market equities enjoyed the best bounces, up circa 1.5% and 1.7% respectively. Both of these markets got a boost from their exposure to the Chinese market which rose strongly as the People’s Bank of China (PBOC) maintained its accommodative stance by leaving its benchmark 1-year and 5-year loan prime rates unchanged. This followed an announced cut to the reserve requirement ration (RRR) by 0.25% for all banks the prior week; further indication that China is easing credit conditions.
- The key focus for markets is on the health of the banking sector and despite the high-profile coverage of Deutsche Bank’s struggles (down by 8% on the week), it is worth noting that both the KBW regional banking index in the US and the Euro Stoxx 600 banking index (as a proxy for Euro Banks) both posted modest gains last week. Uncertainty still lingers here (and we’d expect these areas to remain choppy) amidst strong recent underperformance, but these represent early signs of stability amongst the recent turmoil.
- Government Bond markets continued to be very choppy, but ultimately finished the week fairly flat. UK Gilts were down by 0.09% on the week whilst credit markets rose. UK investment grade bonds were about 0.5% higher on the week, with global high yield bonds about 0.3% higher. In a similar vein to equity markets, this showed some signs of stability for the first time since the news of SVB broke. Despite their stabilising last week, credit spreads are significantly wider than they were 2 weeks ago (and at the start of the year); this represents financial tightening across the economy.
- Global credit spreads are now about 1.65% (they were about 1.3% in early February), and US High Yield spreads are about 5.15% (they were sub 4% in early February). This evidences the higher borrowing costs that are being demanded to lend to all companies now and makes for slower credit growth and financial tightening. Given this tightening in financial conditions, there was much speculation on the Central Bank meetings that we had last week in both the US and the UK, with the market looking for clues as to when the mandate would change from fighting inflation to boosting stability.
- The Central Bank meetings in both the US and the UK saw 0.25% interest rate rises. This was largely expected. The US Federal Reserve went first and raised rates to 5% on Wednesday. Fed Chair Powell noted that it was “too soon to tell how monetary policy should respond” and downplayed the possibility of rate cuts (US inflation is still 6% and the jobs market is very strong). However, the bond markets don’t seem to agree this view and are pricing in rate cuts later this year. Bond markets (as measured by bond futures) are pricing in a yearend target rate of about 4%; i.e., 1% of interest rate cuts.
- The Bank of England hiked interest rates to 4.25%, their 11thconsecutive increase. This followed an inflation number on Wednesday which surprised to the upside, with CPI coming in at 10.4% (expectations were for a 9.9% increase). UK inflation is likely to drop down from May onwards as some of the bigger numbers in the rolling 12-month series fall out of the equation which will help take pressure off the BoE to hike interest rates. This view is reflected by the Bond markets which are pricing one further interest rate hike (of 0.25%) this year by the BoE and then interest rate cuts coming in early next year.
The Bank of England hiked rates last week taking base rates to 4.25%
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article should not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the particular investment objectives, financial situation or needs of any specific client, person, or entity.
