Most of the developed stock markets kept registering small gains yesterday while yields on sovereign bonds picked up. In the U.S., the yield on the 10-year Treasury increased by 7 basis points and reached 2.55% for the first time in more than 9 months.
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In yesterday’s session, US debt ceiling negotiations continued to center the stage in financial markets as President Joe Biden and Republican speaker of the House Kevin McCarthy keep pushing for a deal to avoid a default on sovereign bonds. Biden specified that negotiations are on the fiscal budget, not on whether the US will pay or not its debt.
Investors continued to err on the side of caution on Wednesday, taking position ahead of the release of the Q1 GDP flash estimates for the US today and across the eurozone tomorrow.
In the first trading session of the year, stock markets rose in the U.S. and they were mixed in Europe, declining in core countries and advancing in the Euro Area periphery.
Another session with mixed results across financial markets. The key themes were signs that inflationary pressures are abating coupled with data suggesting an economic slowdown. In the UK, the BoE raised policy rates by 25 pb to 4.5%, in line with expectations, while signalling that additional rate hikes are likely.
In the last session of the week, investors’ expectations on additional interest rate hikes by the US Federal Reserve were seen as more probable. That, together with debt ceiling concerns and an increase of inflation expectations seen in the University of Michigan survey, pushed US Treasury yields higher.
Financial markets started the week with a risk-off session, fueled by the escalation in tensions involving Ukraine. The rising geopolitical risk is adding to investors’ concerns about the persistence of inflationary pressures and the prospect of a more aggressive withdrawal of monetary policy stimuli by major central banks.
Investors started the week on a positive mood, favoring risky assets amid supportive economic releases. Volatility declined, stock markets rallied across advanced and emerging economies, most currencies strengthened against the USD and commodity prices rebounded on the back of positive market sentiment.
Treasury yields fell as Federal Reserve Chairman Powell testified before Congress that rising inflation is likely to be transitory and that the central bank would continue to support the economy. The Bank of Japan left its 10-year bond yield target unchanged at about 0% after concluding its meeting and also kept the policy-balance rate at -0.1%.
A week-long losing streak in global stock markets ceased on Friday as better than expected earnings results outweighed a worsening of coronavirus cases in the US and Europe. In Europe, the Eurostoxx50 ended the session 1.7% higher despite new coronavirus retrictions in some cities, while the S&P 500 edged up very slightly.
Investors extended their risk apetite amid positive global manufacturing PMI releases. In August, factory activity remained strong in most economies, but several surveys continued to signal disrupted supply chains and labour shortages as the main risks. In the U.S., the input price index fell from 85.7 points towards 79.4.
Improved sentiment during yesterday's session was driven by optimism on trade talks between the EU and the US, and macroeconomic developments. US consumer confidence strongly rebounded, with the Conference Board index jumping to 98.0 in May from 85.7, and in France, inflation rose 0.6% yoy in May vs. 0.9% expected, and down from 0.9% in April.
Financial markets had a mixed session following Sunday's German national election, in which results were as expected: the conservative CDU/CSU won and a "grand coalition" with the socialdemocrats is likely. However, AfD and the Left won enough seats to block changes to the debt break.
On Friday, the Japanese yen strengthened sharply after the Bank of Japan left its policy rate at 0.75% and signaled a hawkish stance. Speculation around potential currency intervention intensified after New York Fed officials reportedly sought information on the yen’s exchange rate, and Prime Minister Takaichi warned of action against “abnormal” market moves.
Investors' mood worsened yesterday amid increasing COVID-19 cases around the globe and worse-than-expected employment data in the US. In particular, initial jobless claims increased last week by 898k (+53k compared with the previous week), the highest level since August.
Yesterday's session was mixed across asset classes and regions. In the Eurozone, sovereign yields rose and peripheral spreads widened as countries grapple with the need for higher military spending. Separately, ECB's Schnabel argued the 2.75% rate is not undoubtedly restrictive, while ECB's Panetta argued that the consumer-led recovery is not materialising.
US headline inflation rose to 2.7% (2.4% in May) and core inflation rose 0.1pp to 2.9%. A detailed breakdown showed prices have begun to rise in some goods categories, suggesting tariffs are beginning to impact. Investors pushed expectations of the first rate cut from September to October, and Treasury yields rose along the curve. The dollar slightly strengthened.
Markets ended the week in a mixed mood as investors pondered over the Fed's plans for stimuli withdrawal, risks from China's Evergrande and the announcement that Chinese authorities will ban all transactions and mining related to cryptocurrencies. Global stocks declined or closed flat while the USD rose against most AE and EM currencies.
Stocks rose across the board as Biden's $1.9tn fiscal package won final approval in the U.S. Congress and CPI data calmed inflation worries. In particular, U.S. CPI inflation rose to 1.7% yoy in February but core inflation nudged down to 1.3% (see our take and why we expect inflation to be under the spotlight in the coming months here).
Investors traded more cautiously in yesterday's session -in spite of the meeting between U.S. and Chinese trade officials, in which they reaffirmed the implementation of the phase-one trade deal which had been signed in January. In this context, U.S. and EM stocks advanced moderately, while European stock market indices were mixed.