Week 19 in Brief
How did the US market perform?
- The Dow, Nasdaq, and SPX all closed lower in the last trading sessions by 0.03%, 0.35%, and 0.16% respectively.
- The Washington standoff over raising the U.S. government’s $31.4 trillion borrowing limit is causing global economic concerns due to the possibility of a historic default within the first two weeks of June.
- A non-partisan congressional report from the U.S. Congressional Budget Office (CBO) confirms Treasury Secretary Janet Yellen’s previous warnings that a default could occur as early as June 1.
- The uncertainty surrounding the federal government’s debt payments will persist throughout May, even if the Treasury ultimately runs out of funds in early June.
- President Joe Biden and the Democratic colleagues in Congress have been urging prompt action to raise the statutory limit on government borrowing without conditions since the beginning of the year.
- Republicans, who have a narrow control of the House of Representatives, are seeking new limits on future spending before approving further payments to cover previously enacted spending.
- The risk of a default, which would be the first in U.S. history, is adding to the challenges faced by the slowing global economy, as expressed by World Bank President David Malpass at a meeting of Group of Seven (G7) finance officials in Japan.
- The potential default is seen as catastrophic, as U.S. bonds are crucial to the global financial system, and a default could have a widespread impact on global markets and potentially trigger a recession.
How did the European markets perform?
- Despite a somewhat negative week, European stock markets ended on a positive note as investors evaluated first-quarter earnings and economic data.
- DAX and FTSE closed higher on Friday by 0.5%, and 0.31% respectively.
- The pan-European Stoxx 600 index closed 0.4% higher, with banks gaining 0.8% and oil and gas stocks rising by 1.5%. However, auto stocks experienced a decline of 0.7%.
- Societe Générale, a French bank, exceeded expectations for first-quarter earnings, leading to a 2% increase in its share price. On the other hand, Germany’s Allianz reported earnings below expectations but saw a 329% profit increase compared to the previous year when fines and settlements impacted its results. Allianz shares closed 0.5% higher.
- Luxury goods group Richemont, based in Switzerland, achieved better-than-expected sales and earnings, causing its shares to rise by 7.5% and reach an all-time high. By the end of the session, Richemont shares were up 3.5%.
- In the UK, gross domestic product (GDP) figures for the first quarter showed growth of 0.1%, meeting forecasts. However, there was an unexpected 0.3% contraction in March due to a decline in the services sector.
- The Bank of England implemented a 25-basis point interest rate hike to 4.5%, as anticipated, to address inflation that remains above 10%. The central bank also revised its previous prediction of a recession in the UK this year, stating that it no longer expects it to occur.
How did the Asian markets perform?
- Asia-Pacific markets are trading mixed after the U.S. posted more data that showed inflation was easing.
- Japan’s Nikkei 225 bucked the regional trend and rose 0.9%, closing at 29,388.3.
- The Topix also climbed 0.64% and ended at 2,096.39, led by health care and utilities stocks.
- Conversely, Hong Kong’s Hang Seng fell by 0.59% in the last trading session ahead of its first-quarter GDP figures.
- In mainland China, the Shanghai Composite fell 1.12% and closed at 3,272.36, dragged lower by in academic and educational services stocks.
- The Shenzhen Component lost 1.23% and led losses in the region, ending at 11,005.64.
- In other news, the Securities and Exchange Board of India (SEBI) has put forth a proposal to regulate online platforms that offer fractional ownership of real estate assets.
- China’s Commerce Minister, Wang Wentao, highlighted the complementary nature of the Chinese and Australian economies. He emphasized the need for both countries to focus on the long-term development of their economic and trade relations.
- The overall objective is to create a more stable and prosperous trade environment between Australia and China. The dialogue and efforts made during this visit are crucial in achieving that goal.
- This week, U.S. Treasury yields remained relatively stable as investors analyzed the implications of recent inflation data and its impact on the economy and Federal Reserve policy.
- The yield on the 10-year Treasury increased by 6.6 basis points, reaching 3.463%.
- Comerica Bank’s chief economist, Bill Adams, highlighted the potential risks associated with the ongoing debt ceiling debate. He linked the drop in consumer sentiment to Americans’ concerns and compared it to the period when small business sentiment hit a ten-year low during the fiscal cliff in 2013. Adams emphasized the significance of Treasury bonds in the financial system and warned of the consequences if the impasse continues and leads to a government default.
- Nymex Crude Oil dropped by 1.10%
- Gold Futures - Jun 23 (GCM3) decreased by 0.23%.
- Spot Gold against USD closed lower by 0.22% on Friday and dropped by 0.3% for the week.
- The London Metal Exchange (LME) will be implementing additional checks on warranted nickel stocks in response to previous irregularities that occurred earlier this year.
- These measures aim to enhance the integrity and reliability of nickel stocks within the LME system, ensuring a more transparent and trustworthy trading environment for market participants.
- EUR USD fell by 0.61% on Friday and dropped by 1.41% for the week.
- USD JPY up by 0.89% on Friday and closed up 0.47% for the week.
- GBP JPY gained 0.36% on Friday. However, dropped by 0.89% for the week.
- The dollar index, which measures the performance of the greenback against six other major currencies, saw a 0.63% increase on Friday, while oil prices declined for the fourth consecutive week.
- The US dollar experienced a strengthening trend against the euro, yen, and other currencies, resulting in a 1.4% increase for the week, marking its most significant weekly gain since September. This surge was driven by concerns surrounding the government’s borrowing cap and the monetary policy of the Federal Reserve, prompting investors to seek safe-haven assets.
- According to Bank of Japan Governor Kazuo Ueda, several central bank governors from the G7 countries believe that the full impact of previous interest rate hikes on their economies and inflation has yet to be realized, influencing their approach to future monetary policy.
- The upcoming week is anticipated to be the final significant week of the earnings season, with prominent retailers such as Walmart, Target, Home Depot, and Alibaba scheduled to release their reports.
- Next Tuesday, the U.S. Census Bureau will publish the April retail sales report, which will provide crucial insights into consumer spending and its impact on the economy.
- Key updates on the housing market are also expected, including data on building permits, housing starts, existing home sales, and the NAHB’s Housing Market Index for May.
- Additionally, economic indicators such as gross domestic product (GDP) readings from Japan and the eurozone will be released, offering insights into the health of these economies. Canada will also provide an inflation reading.
- Furthermore, the 2023 Group of Seven (G7) summit is scheduled to take place in Hiroshima, Japan, starting on Friday. This summit will bring together leaders from influential nations to discuss and address global economic challenges and policy matters.
- As we enter a new week, investors will closely monitor economic indicators and any developments in the debt ceiling negotiations, as these factors will likely continue to shape market sentiment.