As we start a new week, let's take a look at the significant events in the global economy over the past week with our weekly financial update, presented by Bas Kooijman, the CEO and Asset Manager of DHF Capital SA.
Last week, the U.S. financial markets experienced significant volatility, largely driven by fresh inflation data and geopolitical tensions. The major equity indices, including the Dow Jones and S&P 500, retreated as investors grappled with persistent inflationary pressures and concerns over potential conflicts in the Middle East. Notably, long-term Treasury yields rose, reflecting heightened investor caution.
A critical development was the release of the U.S. Labor Department’s Consumer Price Index (CPI) for March, which indicated a 0.36% increase, matching the rise in February and contrary to expectations of a decrease. This uptick was influenced by rising medical and transportation service costs, pushing the annual inflation rate to 3.5%, the highest since September. Further complicating the landscape, 'supercore' inflation, which excludes volatile items like energy and housing, surged by 4.8% over the past year, signaling robust underlying inflationary trends.
In response to these figures, futures markets adjusted their expectations for Federal Reserve policy, with the likelihood of a rate cut in June diminishing. This cautious sentiment was echoed in the equity markets, where growth stocks outperformed value stocks, particularly impacted by rate-sensitive sectors such as real estate and utilities.
In Europe, the market dynamics were similarly challenging, with the STOXX Europe 600 index closing the week slightly lower. Key national indices such as Germany’s DAX and France’s CAC 40 also faced declines, while the UK’s FTSE 100 proved to be an exception, recording gains largely due to a weak British pound boosting multinational revenues.
The bond markets in Europe reacted sharply to the U.S. inflation data, with yields on French, German, and Italian government bonds initially spiking. However, the European Central Bank (ECB) maintained its key deposit rate, suggesting potential rate reductions if inflation converges sustainably towards its target. This stance reflects a delicate balance the ECB is trying to maintain, not swayed by U.S. policy but driven by its own inflation metrics.
The UK’s economic outlook showed signs of resilience, with consecutive months of GDP growth, supported by a rebound in manufacturing output. Investor confidence across the Eurozone improved, hitting a two-year high, buoyed by positive economic expectations despite ongoing geopolitical concerns.
Turning to Asia, Japan’s markets witnessed gains, with the Nikkei 225 and TOPIX indices rising amidst a weakening yen. Despite the yen’s decline to a near 34-year low, Japanese authorities held back from intervening, focusing instead on maintaining accommodative monetary policies. The Bank of Japan remains cautious, opting not to respond to currency weakness with rate hikes, suggesting a continued supportive stance for the economy.
Conversely, China's markets did not fare as well, with the Shanghai Composite and CSI 300 indices declining. The Chinese economy showed signs of cooling, evidenced by weaker-than-expected trade and inflation data. March saw a particularly sharp contraction in exports and a slowdown in import growth, highlighting challenges in domestic and external demand. This economic backdrop may prompt Beijing to consider more aggressive stimulus measures to achieve its annual growth targets.
In summary, last week’s market movements underscore the ongoing global economic uncertainties, with inflation and geopolitical risks at the forefront. As central banks and governments navigate these challenges, the implications for markets and investors remain significant, requiring continued vigilance and strategic adjustments.
