Markets last Week
Summary
- Headlines were dominated by earnings, specifically Nvidia, which injected much needed positivity into equity markets, and the S&P 500 reached all-time highs during the week
- The US Federal Reserve (Fed) released minutes from their January meeting, which confirmed statements around ‘peak rates’, albeit this was countered as officials continued to warn about the risks of easing rates too early. Likewise, the European Central Bank (ECB) minutes were carefully constructed to provide a balanced narrative
- Global economic data was generally weaker, contrasting recent resilience in February’s flash Purchasing Managers Index (PMI), with a jump in US commercial property foreclosures, a sharp decrease in UK consumer confidence and a continued property slowdown in China, with growing pressure on the People’s Bank of China to unveil meaningful stimulus
- Geopolitics also took centre stage, as the US ramped up sanctions against Russia and the war in the Middle East escalated
- The US Government funding has entered the spotlight, with some agencies set to shut down on 1 March, and the rest thereafter on 8 March
- The oil price remained volatile, as concerns around demand offset geopolitical tensions
- The US 10-year yield and gold both ended the week marginally higher against the macro backdrop.
Analysis
Equity markets around the world began the week on the back foot, until Nvidia posted strong earnings and raised guidance on Wednesday after the bell. This prompted the stock to produce a record single day market-cap increase of $277bn. The S&P 500 rallied to all-time highs as investors piled into technology stocks, leading to further scrutiny on index concentration. There have been pockets of weakness amongst other global sectors, as staples bellwether Nestle reported that pricing had affected volume growth and Glencore underwhelmed on earnings, citing weaker commodity prices, which added more evidence around the current cyclical slowdown.
The Fed and other central banks pushed back against near term rate cuts, with the ECB going as far as saying they will unlikely cut before the Fed. The Federal Open Market Committee January minutes revealed a key change in the post meeting statement, to indicate that the Committee required ‘greater confidence’ that inflation was receding before cuts would be considered. Markets are now pricing in the first full cut for June.
The outlier was China, who this week cut the 5-year Loan Prime Rate (LPR) by 25 basis points, the largest cut since the rate was introduced in 2019. China has continued to face calls for stimulus as its economy remains weak. Last week we saw that property foreclosures surged (rising 48% year-on-year according to Bloomberg), and the two-thirty yield curve almost inverted. However, Beijing has been keen to emphasise ‘high quality growth’, as the historic preference for cheap liquidity led to inflated property prices and overcapacity in industrial sectors. Investors are looking to the parliament meeting on 5 March, where the economy is expected to take centre stage.
Elsewhere, US commercial property foreclosures were also in the firing line, as the data company Attom reported a 17% increase in January, and a 97% increase year-on-year. This marks the highest level in 10 years. Analysis suggests that the property market is evolving beyond COVID-19 moratoriums and financial aid as lenders seek to readjust the landscape. The US composite PMI indicator also eased slightly to 51.4 points, albeit still firmly in expansion territory, with the data showing that the slowdown in services was offset by growth in manufacturing.
The US government two step funding plan agreed in January will see a host of departments shutdown on the 1 March, and the remaining departments thereafter on 8 March if measures are not passed. House Republicans reportedly remain divided on the best way forward and this could cause near-term market stress.
UK consumer confidence fell sharply after three months of improvement, as the public grew concerned around persistent inflation. The change in trajectory was driven by consumers’ assessment of their personal financial situation and their views on the general economic situation over the past 12 months.
Geopolitical tensions continued, as the US unveiled a list of 500 new sanctions against Russia, partly spurred on by the death of activist Alexei Navalny. Meanwhile the Israel-Hamas war escalated during the week, which is now impacting vessels in the red sea and causing shipping costs to rise.
The oil price fought for direction, ending at $81, slightly down on last week, as potential supply constraints were outweighed by forecasted lower demand.
The US 10-year yield ended the week flat at 4.25%, while gold reached $2,034 dollars.
The week ahead
This week sees a high number of inflation, Gross Domestic Product (GDP) and PMI figures from around the world.
Wednesday: US GDP, Q4 revision
Our thoughts: The Bureau of Economic Analysis is set to unveil revised Q4 figures, alongside personal income and spending data. The market is hoping for signs of resilient growth based on the indications released in PMI flash reports for February, and we would agree with these assumptions.
Thursday: US core Personal Consumption Expenditure (PCE) inflation
Our thoughts: The market is looking for a 0.4% month-on-month rise according to Factset. Whilst this is the Fed’s preferred measure of inflation and will draw much attention, we believe that the market has already been primed given the hotter than expected Consumer Price Index figures recently.
Friday: Global manufacturing PMI
Our thoughts: The forthcoming release of global manufacturing PMI data on 1 March will provide valuable insights into the state of the goods-producing sector. Preliminary PMI surveys for February indicated ongoing growth in the US, UK, and India, with a moderation in the downturn observed in the eurozone. This suggests a positive backdrop and trajectory for manufacturing activity.
