Global stock markets rose modestly last week despite a vicious sell-off to get the week started. Better data out of the US combined with soothing words from the Bank of Japan helped rescue the sell-off, with Thursday seeing the best day for US stocks since November 2022. Although markets are calmer, we expect choppiness to persist as the data calendar remains fairly light. US inflation (out on Wednesday) will be a key watchpoint this week along with the US weekly jobless claims numbers on Thursday. UK inflation is also released on Wednesday as well as UK employment data on Tuesday.
Last week
- Global stock markets rose modestly last week in what was a highly eventful week.
- Worries about a US recession and a sharp sell-off in Japan caused concern for markets in the early part of the week.
- Better US economic data, better corporate earnings and soothing words from the Bank of Japan helped to settle markets.
This week
- US inflation data (CPI) on Wednesday as well as Japanese GDP data (Thursday) are likely to be the key watchpoints this week given recent events in markets.
- In the UK, we have employment data due out tomorrow, inflation data out on Wednesday and our Q2 preliminary GDP number on Thursday.
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
More detail:
- Global stocks rose by 0.3% last week. That modest rise belies a volatile and highly eventful week which saw Japanese stocks complete their biggest 3 day fall ever (or at least since Bloomberg compiled data going back to 1959) and the VIX (commonly referred to as the “fear gauge”) witness its biggest intra-day rise on record. Having reached an intraday high of 65.73 on Monday, the VIX closed out the week at a more normal level of 20.37. There have been many reasons ascribed to the sell-off (some of which are discussed below), but the reality is that equity markets do experience sharp sell-offs from time-to-time. In fact, there have been 29 sell offs of 5% or greater in the US stock market since the lows of March 2009 (i.e. roughly 2 per year).
- Having a diversified portfolio helps weather such sell-offs. This means a portfolio which is not crowded in a particular cohort of stocks (e.g. US tech stocks or Japanese equities in this case) and one that has diversifying assets that can cushion a sell-off; e.g. government bonds. Although Government bonds finished down for the week, they rose strongly in the first few days of August – when the sell-off started. Furthermore, defensive equity sectors (such as consumer staples and utilities) can also benefit in such circumstances and it’s worth noting that these are the 2 best performing equity sectors so far this month.
- The sell-off appeared to be driven by fears of the US heading into recession combined with a shift in interest rate policy from the Bank of Japan which prompted certain positions being unwound. Whilst we believe that the US economy is slowing (from its fantastic rates of growth last year), we do still believe it is growing. This is something we’ve blogged about click here to read . Concerns around the US economy were principally focused on a poor manufacturing print as well as a poor monthly jobs number. The manufacturing sector has been in contraction for some time (in fact, 20 out of the last 21 ISM Manufacturing prints have been in “contractionary” territory) and manufacturing is a relatively small part of US GDP (c10%). The jobs market matters much more, since the US consumer drives US growth, but we’d note that that whilst last month’s was a poor number, it is just one data point and that the monthly trend for this year (214k jobs / month on average) remains solid.
- US economic data last week was more positive. This, combined with some soothing words from the Japanese Central Bank, helped to calm markets. In terms of US data, we had the ISM US Services reading (which moved back into “expansionary” territory) and a stronger than expected jobless claims reading (i.e. there were less folks filing for jobless benefits than expected). Thursday’s jobs reading, combined with Eli Lilly’s blowout earnings numbers, helped set the stage for the US equity market to have its best day since November 2022 which helped the market clock a gain for the week. Eli Lilly is one of the biggest 10 stocks in the US stock market (hence moves the dial) and they posted earnings numbers that were 50% higher than expected, with the stock rising by 11% on the week (in GBP terms).
- The US consumer has also taken relief from the lower mortgage rates which have come as a result of the fall in long-term bond yields over the past couple of weeks. The Mortgage Bankers Association’s refinance index rose by 16% last week to its highest level in 2 years. This helps free up cash for US consumers that have recently got on the property ladder.
- The Japanese Central Bank helped cool the market on the back of some comments from BoJ (Bank of Japan) Deputy Governor Uchida who said that they would not raise rates whilst markets were unstable. This caused a rapid re-pricing of Japanese interest rates and a big drop in Japanese 10-year bond yields – from 1.05% to 0.84%. This helped calm the market and stemmed the tide of trades being unwound which had benefitted from borrowing cheap Yen and investing it in other, higher yielding assets (known as the “carry trade”).
- US Corporate earnings have somewhat gone under the radar (given other events going on!) but have actually been pretty strong. We are now 91% of the way through US corporate earnings season and are tracking at an aggregate earnings growth rate of 10.8% (as per Factset data). Whilst the picture hasn’t been uniformly strong, a 10.8% growth rate would mark the highest year-over-year earnings growth rate since Q4 2021 and would also mark the 4th consecutive quarter of positive earnings growth. Positive earnings growth has historically been the key driver for positive equity market returns.
- Japanese stocks finished the week down 2.1% in GBP terms and were (unsurprisingly) the worst performing of the major equity markets. This 2.1% decline included a 10.5% fall (in GBP terms) on Monday.
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 is not intended to be or does not constitute investment research as defined by the Financial Conduct Authority. The content should also 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 specific investment objectives, financial situation or needs of any specific client, person, or entity.
