European stocks edged down on Friday, while U.S. stocks notched gains despite posting a slight loss on the week as investors faced the reality of a second coronavirus wave in Europe and the uncertainty around further stimulus in the U.S.
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In the last session of the week, investors traded cautiously in Europe amid dramatic economic sentiment data in Germany (Ifo sentiment fell to the lowest recorded level) and the absence of a clear EU-wide proposal to fund the recovery in Thursday’s European Council meeting.
Monday's stock market rally went into reverse in yesterday's session, as investors weighed the prospects for the coronavirus pandemic and the possibility of further fiscal stimulus in the U.S.
Financial markets extended their slide as the World Health Organization declared the coronavirus outbreak a pandemic, while political assurances to cushion its impact failed to raise investors' sentiment (Angela Merkel pledged to do "whatever is necessary" to bolster the economy while the Trump administration promised a "major" stimulus).
The upside surprise in the US CPI figure for May led to a sell-off session on Friday as investors reinforced their bets for additional 50bp interest rate hikes from the Federal Reserve beyond the June and July meetings. Headline inflation accelerated to 8.6% y/y while core inflation ticked down to 6.0%.
Markets ended the month in a mixed session, as European stocks fell and the S&P 500 recovered from the previous day's losses. Safe haven bond yields rose and the dollar appreciated against the euro.
In the last session of the week, renewed concern over the coronavirus overshadowed positive economic data releases and markets retreated, reversing the gains recorded earlier in the week.
Volatility declined and markets favored risk assets in a light economic calendar day. Stocks rose across advanced and emerging economies as investors focused on the prospects of a new fiscal package in the U.S. and the release of the accounts of the ECB's September meeting.
In yesterday's session, the pause in a vaccine trial after a patient fell ill weighed on sentiment. Stock indices declined across the globe (in the US, Q3 earnings season started disappointing investors) and yields on sovereign bonds edged slightly down. In FX markets, the US dollar strengthened against advanced and emerging economies' currencies.
Markets ended last week on a high note on Friday as it became apparent that the US elections were nearing a result. The S&P 500 gained 7.3% over the week and US sovereign yields rose sharply. The election result was finally called on Saturday, in favor of Joe Biden, but Donald Trump announced that he would contest the results.
In yesterday's session, investors traded with a positive tone as the Federal Reserve kept its monetary policy unchanged and vote counting continued in the US. The Democrat candidate, Joe Biden, has taken the lead and potentially winning one more state would be sufficient for him to become the US President.
Markets tilted towards a risk-off mood in a session dominated by U.S. news. U.S., German and other core sovereign yields declined, euro area peripheral spreads widened, safe-haven currencies (such as the CHF and the JPY) appreciated against the USD (while the euro was roughly stable), and stocks exhibited a poor performance globally.
Risk aversion continued to set the tone during a highly volatile session at the end of the week, as investors read the US payrolls report as evidence that the Fed will continue tightening monetary policy.
In the first session of the week, investors' sentiment improved as sovereign interest rates declined in both sides of the Atlantic and amid better-than-expected corporate earnings releases in the US. Equity indices rose substantially across the board.
In yesterday's session, investors' expectations on inflation and the path central banks could follow in the coming months remained the key drivers. The moderation of US inflation in April (headline -0.2pp to 8.3% and core -0.3pp to 6.2%) suggests that the peak may have already been in March.
Investors started the week trading with a cautious approach. On the positive side, sentiment continued to be supported by expectations that the Chinese government could relax some of its COVID zero policy. On the opposite direction, data showed further weakness in China’s economic recovery.
In line with expectations, the Federal Reserve raised its policy rate by 50 bp to the 0.75-1.00% range and confirmed a plan to reduce the size of its balance sheet (with a monthly cap of $95 billion). The Fed chair Powell noted that the recovery could withstand tighter monetary policy but also ruled out more aggressive rate hikes of 75 bp.
A risk-on session was recorded across markets on Thursday after the softer-than-expected inflation data in the US and the uptick in new weekly jobless claims reinforced hopes for a slowdown in the pace of rate hikes by the Fed.
Volatility continued to dominate across financial markets at the start of the week, fueled by mounting concerns about the health of the global economic recovery, after the release of weaker-than-expected monthly economic indicators for April in China on Monday.
European sovereign yields edged lower in yesterday's trading session following a speech by ECB chief Christine Lagarde in which she signalled further monetary easing. In her speech, Lagarde emphasised the importance of the duration, and not only the size, of monetary accomodation, and identified PEPP and TLTROs as the main crisis tools.