The digest
Last week equity markets drifted lower as concerns over Chinese growth, hawkish central banks and elevated bond yields weighed on sentiment. It was a subdued first half of the week, thanks to the Independence Day holiday in the United States, with low trading volumes globally. European equities saw the largest declines; the STOXX Europe 600 Index suffered its worst weekly performance since March, down 3.1%, while the S&P 500 Index declined 1.2%, the MSCI Asia Pacific Index declined 1%, and the MSCI World Index declined 1.4%.1
Week in review
Europe
Last week was tough for European equities. The move lower started mid-week, when Chinese Purchasing Managers Index (PMI) data came in weaker than expected, reminding investors of the challenges that European companies exposed to China face. Moving into the end of the week, markets slid further on hawkish minutes from the latest Federal Reserve (Fed) meeting and stronger US private sector employment data from ADP on Thursday.
Looking at country performance, Italian equities held up better than most last week, with the country’s benchmark index hitting 15-year highs at the start of the week, but ultimately ending down 1.6%. Prime Minister Giorgia Meloni’s government has steered a market-friendly path since coming to power last year and the Italian banks have outperformed accordingly. In terms of losers, France’s CAC 40 Index underperformed, down 3.9%, as civil unrest weighed on sentiment in the country. The UK FTSE 100 Index also lagged, down 3.6% (falling to year-to-date lows), as UK terminal interest-rate expectations moved higher.
Although there wasn’t a great deal of new news regarding the Bank of England last week, UK gilt yields continue to move wider, with the 10-year rate reaching as high as 4.7% last week, levels last seen in 2008. Last week, we also had a £4 billion two-year gilt auction selling at the highest yield since 2007, reaching c. 5.67%. All this noise certainly weighed on equity market sentiment.
In Germany, attention returned to the falling Rhine water level as the dry summer season returns. The water marker at Kaub fell to its lowest level (for this time of the year) in at least three decades, which could impact the transport of goods and negatively impact economic activity overall.
United States
The S&P 500 Index declined 1.2% in a holiday-shortened week, with similar declines across other major US indices.
In terms of catalysts, Thursday’s strong ADP employment data seem to spook investors, with 497,000 jobs added in June, much higher than anticipated. Markets sold off sharply after the release of the data, as it seemed to support the recent more hawkish narrative from the Fed.
The minutes from the Fed’s June meeting gave the message that further interest-rate hikes are to come, with the minutes stating “almost all” officials said “additional increases” in rates would be appropriate. Fed officials reiterated that no rate cuts were expected until 2024, with core inflation still a long way from the central bank’s 2% target.
With that backdrop, attention was on Friday’s June Employment Report. The data showed 209,000 jobs added, which was lower than anticipated. However, the ongoing strength in average hourly earnings (+4.4%, steady with the prior month) reinforced the notion that the labour market remains robust. With that, equity market moves on Friday were fairly benign, with the S&P 500 Index only down 0.3%.
US Treasury yields were also in focus. On Thursday, the 10-year yield exceeded 4% again for the first time since March amidst the surprisingly strong employment data.
This week US earnings season starts, with several banks reporting. Focus will be on loan default data, given the rising cost of debt. Recent data shows filings for bankruptcies rising, so something to keep an eye on.
Bloomberg highlighted that Wall Street strategists have the most bearish second-half outlook ever on the S&P 500. The average of the strategists’ outlook over the next six months is for an 8% decline.2
Asia
Asian markets followed global markets and trended lower last week, with the MSCI Asia Pacific Index down 1%. In a departure from recent form, the Shanghai Index outperformed, down just 0.2%, while Hong Kong’s benchmark index declined 2.9%, and Japan’s Nikkei was down 2.4%.
In China, the focus was on the visit from US Treasury Secretary Janet Yellen. She held two days of talks with Chinese counterparts, where she aims to stress the United States is looking to secure its national security with recent curbs around sharing of tech information, but not to secure “economic advantage” over China. She stated: “No one visit will solve our challenges overnight. But I expect that this trip will help build a resilient and productive channel of communication with China’s new economic team.”3
Chinese macro data were uninspiring, with the Caixin PMI Services Index declining to 53.9 from 57.1 in May, marking its weakest reading since January and missing consensus forecast of 56.2. This morning, China Consumer Price Index (CPI) Inflation data came in at 0%.
It was a notable week for Asian technology stocks, as Chinese authorities announced large fines on two Chinese tech giants. Markets are hoping this action signals an end to a lengthy government probe.
Japanese equities saw some profit taking last week with the Nikkei down 2.4%. With the index up 23% year-to-date, it isn’t too surprising to see some gains fade with global markets also pulling back last week.
The week ahead
There are some interesting data points to focus on this week. The US CPI data, released on Wednesday, stands out as a potential market-moving event. In addition, second-quarter earnings season kicks off in the United States with a number of US banks reporting on Friday.
In the United Kingdom, Chancellor Jeremy Hunt makes his Mansion House speech, where he will outline plans on new capital market rules. Within this, there is an expectation he will take measures to encourage UK pensions to deploy more funds to UK capital markets.
Monday, 10 July
- US New York Fed Consumer Expectations
- US Consumer Credit
Tuesday, 11 July
- Germany CPI
- UK ILO Unemployment Rate and Claimant Count
- Italy Industrial Production
- Japan PPI
Wednesday, 12 July
- Spain CPI
- US CPI
- US Beige Book
- Interest-rate decisions in Canada and New Zealand
Thursday, 13 July
- UK Manufacturing & Industrial Production Monthly gross domestic product (GDP)
- France CPI
- Eurozone Industrial Production
- US Jobless Claims and Core Producer Price Index (PPI)
- European Central Bank meeting minutes
- Chinese trade data
Friday, 14 July
- G20 finance ministers and central bank governors meeting
- Japanese Industrial Production
- Eurozone Trade Balance
- US import prices
- US University of Michigan sentiment survey
- US earnings season begins: Wells/JPM/Citi/Blackrock second quarter due out
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1. Indices are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
2. Source: Bloomberg. “Wall Street Soothsayers are Bewildered about What’s Next,” 8 July 2023. There is no assurance that any estimate, forecast or projection will be realised.
3. Source: CNN. “The World is Big Enough for US and China, Yellen Says as She Concludes Beijing Trip,” 10 July 2023.