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 S&P 500 Index closed lower despite a rally on Friday. Federal Reserve Chair Jerome Powell indicated that rate cuts may not happen as quickly as the market had hoped, which may have contributed to this decline. Additionally, concerns about raising the U.S. debt ceiling weighed on sentiment. However, the information technology sector fared well, ending higher, while energy shares fell. Yields on 10-year U.S. Treasuries fell early in the week but moderated during Friday's trading session.
First Republic Bank, a California-based bank that had been struggling with large deposit outflows, was taken over by regulators. The regional banks subsector in the S&P 500 experienced significant volatility during the week, reflecting concerns about the potential for additional bank failures and the credit pressures that could arise if the economy slows and unemployment increases.
On May 3, the Fed increased interest rates by 25 basis points, taking the benchmark fed funds rate to a target range of 5.00% to 5.25%. The statement from the Federal Open Market Committee (FOMC) omitted previous language about anticipating “that some additional policy firming may be appropriate” and emphasized that future actions would hinge on incoming data and economic developments.
Although data from the U.S. Department of Labor showed that the number of job openings shrank for a third consecutive month in March, the labor market remains tight with 1.6 job openings for every unemployed person. The nonfarm payrolls report that came out May 5 likewise showed strength in the labor market, with the economy adding 253,000 new jobs in April—higher than the consensus estimate of 179,000 and the 165,000 job gains recorded in March.
European stocks had a mixed week with Germany's DAX slightly increasing by 0.24%, while France's CAC 40 weakened by 0.78% and the UK's FTSE 100 slid by 1.17%. The pan-European STOXX Europe 600 Index ended 0.28% lower, as recession fears and banking tremors continued to weigh on sentiment. However, European government bond yields declined after the European Central Bank (ECB) raised interest rates by a quarter of a percentage point, scaling back from previous half-point increases.
The UK housing market showed signs of stabilizing in March as mortgage approvals for home purchases rose for a second consecutive month. Lenders approved 52,011 mortgages, up sharply from 44,126 in February and the largest number since October. However, home loans are still below their average of around 70,000 before last September's mini-budget proposal under former Prime Minister Liz Truss. Yields in the UK were broadly unchanged, holding near one-month peaks at around 3.8% as investors braced for more policy tightening from the Bank of England.
Japanese stock markets had a positive start to the week with the Nikkei 225 Index returning 1.0% and the broader TOPIX Index gaining 0.9%. The markets rose due to a sell-off in the yen, which boosted the outlook for Japan's exporters, and the Bank of Japan's decision to maintain its ultra-easy monetary policy stance for the time being. Although the yen strengthened over the full week due to safe-haven demand, the yield on the 10-year Japanese government bond was broadly unchanged at 0.42%. Economy Minister Shigeyuki Goto stated that Japan's financial system would not be impacted for now despite concerns over banking sector problems in the US and Europe. Furthermore, Japan's government has announced that COVID will be reclassified to a level on par with seasonal influenza from May 8, paving the way for the full normalization of social and economic activities.
Meanwhile, Chinese equities ended mixed due to surprisingly weak manufacturing data. The Shanghai Stock Exchange Index gained 0.34%, while the blue chip CSI 300 fell 0.3% in local currency terms. The official manufacturing purchasing managers’ index fell to 49.2 in April, marking a return to contraction for the first time since December, raising concerns that China’s post-COVID recovery is losing momentum. However, domestic tourism during the five-day holiday rebounded to pre-pandemic levels, fueling optimism that a sustained recovery in the services sector could help offset manufacturing sector weakness and a fragile property market recovery.
Looking ahead, investors will likely be closely monitoring developments related to the U.S. debt ceiling, which must be raised before October to avoid a potential default. The ongoing COVID-19 pandemic and vaccine rollout will also remain a key focus, particularly as some countries continue to face rising cases and new variants. In addition, the economic recovery and potential inflationary pressures will be closely watched, as central banks around the world continue to assess their monetary policy stance.
In terms of corporate earnings, several major companies are scheduled to report in the coming week, including Walt Disney, Airbnb, and Coinbase. These earnings reports will provide insights into how different sectors of the economy are performing and could potentially impact investor sentiment.
Overall, global markets continue to face a range of uncertainties and challenges, but investors are cautiously optimistic as the world navigates the ongoing pandemic and economic recovery.