Week 50 in Brief
Stocks in the US had yet another bad week as Wall Street saw stocks drop for a third straight session on Friday and suffered a second straight week of losses. This was after the US federal reserve’s decision to raise interest rates by 50 basis points as fears continued to mount that the fed’s campaign to arrest inflation would tilt the economy into a recession. The central bank went forward to signal even more policy tightening in 2023 and provided projections that interest rates would top the 5% mark in 2023, a level not seen since 2007.
How did the major indices perform?
- The Dow Jones Industrial Average fell 281.76 points, or 0.85%, to 32,920.46;
- The S&P 500 lost 43.39 points, or 1.11%, to 3,852.36;
- The Nasdaq Composite dropped 105.11 points, or 0.97%, to 10,705.41.
For the week:
- The Dow lost 1.66%,
- The S&P fell 2.09%
- The Nasdaq declined 2.72%.
What drove the U.S. market?
- Perhaps the biggest market mover in the week was the Fed’s 50 basis point interest rate hike on Wednesday — the highest rate in 15 years. The central bank said it would continue hiking rates through 2023 to 5.1%, a larger figure than previously expected.
- Following the policy update, the Dow dropped 142 points on Wednesday, plunged 764 points Thursday, and declined further on Friday. On Friday during session lows, the Dow was down as much as 547.63 points, before paring back some of those losses.
- Friday was also subject to a highly volatile trade as a result of a large number of options expiring. There were $2.6 trillion worth of index options expiring, the highest amount relative to the size of the equity market in nearly two years.
- A report showed U.S. business activity contracted further in December as new orders slumped to their lowest level in just over 2-1/2 years, although easing demand helped cool inflation.
- Each of the 11 major S&P 500 sector indexes was in the red, led lower by a drop of more than 2.96% in real estate stocks
- Meta Platforms Inc advanced 2.82% after J.P. Morgan upgraded the stock to “overweight” from “neutral,” while Adobe Inc gained 2.99% after the Photoshop maker forecasted first-quarter profit above expectations.
- Exact Sciences Corp surged 16.39% after rival Guardant Health Inc’s cancer test missed expectations, while General Motors Co lost 3.91% after its robotaxi unit Cruise faced a safety probe by U.S. auto safety regulators.
- Volume on U.S. exchanges was 17.28 billion shares, compared with the x.xx billion average for the full session over the last 20 trading days.
How did the European markets perform?
- Equities in Europe were also lower on Friday as investors digested the European Central Bank’s decision to move its key interest rate from 1.5% to 2% on Thursday. The ECB also announced it would start to shrink its balance sheet by around 15 billion euros ($15.9 billion) every month from March 2023 to the end of the second quarter of the year. Markets retreated following statements that rate hikes would need to continue significantly at a steady pace.
- The Pan-European Stoxx 600 provisionally closed the day 1.1% lower, with two sessions of sharp losses taking the index to a near-five-week low. All sectors were down except banks, which added 0.7%, with telecoms leading losses with a 2.4% decline.
- The Bank of England and the Swiss National Bank also opted to increase their interest rates by 50 basis points as Europe tries to grapple with high inflation.
- Losses were sharpest in Germany’s DAX and France’s CAC 40, which both shed around 2.5% for the week. Germany’s DAX was down 0.4% in afternoon trade, France’s CAC 40 was down 1%, and the U.K.’s FTSE 100 was down 1.3%.
- The U.K.’s Games Workshop was a bright spot as European markets retreated on recession fears, rising 16% after the Warhammer-maker signed a TV deal with Amazon.
- Swedish med-tech firm Sectra was the worst performer on the Stoxx 600, shedding 13.3% after it reported an uptick in profit but warned its transition to service deliveries would have a short-term dampening effect on sales.
How did Asian markets perform?
- Asian markets tracked Wall Street and Europe lower with hawkish actions from central banks in the US and Europe triggering fears of a recession among global investors. Benchmarks in Japan, China, Australia, New Zealand, and South Korea plunged into the red while the Hang Seng advanced from Thursday’s levels.
- China’s Shanghai Composite Index edged down 0.02% to 3167.86. The Shenzhen Component Index lost 63 points or 0.56% to close at 11,295.03.
- The Japanese benchmark Nikkei 225 shed 525 points or 1.87% to end trading at 27,527.12 amidst disappointment over the fall in the manufacturing performance scorecard.
- The Hang Seng Index of the Hong Kong Stock Exchange added 82 points or 0.42% from the previous close to finish trading at 19,450.67.
- Korean Stock Exchange’s Kospi Index shed 0.04% to close trading at 2,360.02.
- Australia’s S&P/ASX200 closed trading at 7,148.70 after losing 56 points or 0.78%.
Bonds and Commodities
- The selling effect of global equities was felt in the commodities markets as oil prices dropped over $2 per barrel while gold prices faced their biggest weekly loss in four weeks.
- Spot gold prices rose 0.88% on Friday but were poised for their biggest weekly loss in four weeks.
- Gold futures settled up 0.7% at $1,800.20 per ounce. Interest rate hikes increase the opportunity cost of holding non-yielding bullion.
- Brent crude futures settled at $79.04 per barrel, down 2.4% and U.S. crude finished down 2.4% at $74.29 per barrel.
- The yield on the benchmark 10-year Treasury note was last up more than 3 basis points at 3.486%, after climbing back above the 3.5% level earlier in the day. The 2-year Treasury yield last dipped more than 5 basis points at 4.191%.
- The yield on Germany’s rate-sensitive two-year bond rose as high as 2.503% on Friday, its highest since 2008.
- Italy’s 10-year government bond yield was volatile but lasted up 13 bps at 4.29% and the spread between Italian and German 10-year yields rose to 220 bps, its widest since Nov. 4.
- Italian bonds briefly paid a higher risk premium than those of Greece. The yield spread was at 1 bp after falling into negative territory to as low as -15 bps.
- The dollar rose on Friday in choppy trading, extending sharp gains in the previous session. The dollar index edged 0.23% higher
- In afternoon trading, the greenback fell 0.9% against the yen to 136.56, after hitting a two-week high in the previous session.
- The Sterling slipped 0.1% against the dollar to $1.2165, with the euro falling 0.3% to $1.0597.
- The dollar index, which gauges the currency against six major peers, rose 0.2% to 104.69, after rallying more than 0.9% on Thursday.
- The risk-sensitive Australian dollar was 0.2% lower at $0.6690. The Aussie plunged 2.38% in the previous session - its biggest drop since March 2020.
- The New Zealand dollar, however, rose 0.7% to $0.6383.
A bill to fund the government through the end of the current fiscal year is expected to pass Congress next week, after the U.S. Senate passed a record $858 billion annual defense bill and stopgap spending bill to extend current government spending levels by a week, giving negotiators more time to pass a full-year deal.
The U.S. housing market will also be in the spotlight, with the NAHB Housing Market Index due for release on Monday, followed by housing starts and building permits on Tuesday. Data on new and existing home sales for November will be released later in the week. On Friday, the Bureau of Economic Analysis (BEA) will issue the Personal Consumption Expenditures (PCE) Price Index for November—the Federal Reserve’s preferred gauge of inflation. Companies reporting earnings next week will include Carnival Corporation, Nike, General Mills, FedEx, Micron Technology, and CarMax, among others.