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2005 2024

Market Insights

Market Insights Week 21

Bas Kooijman

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.

The U.S. stock market experienced a significant surge last week, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all reaching record highs. The Dow surpassed the 40,000 mark for the first time, buoyed by easing concerns over inflation and interest rates.

Growth stocks outperformed, likely benefiting from the lower implied discount on future earnings.

Investor sentiment was bolstered by the Labor Department's April consumer price index (CPI) report, which met or slightly undershot expectations. The headline CPI rose by 0.3%, while core prices, excluding food and energy, also increased by 0.3%. This was a marked improvement from the previous three months of hotter-than-expected inflation data. Notably, inflation remained concentrated in services, particularly in transportation, which saw a monthly increase of 0.9% and an annual rise of 11.2%.

The Commerce Department's retail sales figures for April also played a role in shaping market dynamics. Retail sales were flat, missing the expected 0.4% gain, and March's figures were revised slightly lower. This data indicated a pullback in consumer discretionary spending, particularly in non-store retail and dining establishments. Concurrently, long-term U.S. Treasury yields fell, driven by the lower inflation and growth projections, with the 10-year Treasury yield hitting its lowest point in over a month.

In the bond market, municipal bonds saw strong demand despite heavy new issuance, while investment-grade bond spreads widened initially but later tightened. High yield bonds benefited from the rate movements, showing increased trading volumes following the favorable inflation data. The leveraged loan market remained stable, with most primary market activities focused on refinancing or repricing.

European markets presented a mixed picture. The STOXX Europe 600 Index rose by 0.42% but fell short of maintaining its record high. Cautious comments from European Central Bank (ECB) members dampened optimism about potential monetary policy easing. Germany’s DAX and France’s CAC 40 Indexes saw slight declines, while Italy’s FTSE MIB gained significantly. The UK's FTSE 100 ended modestly lower.

In the UK, wage growth remained robust at 6% over the three months to March, slightly exceeding forecasts. Despite this, the labor market showed signs of weakening, with rising unemployment and declining job openings. Economist Tomasz Wieladek from T. Rowe Price suggested that this data might support a potential interest rate cut in June, though further data would be necessary for a definitive decision.

ECB policymakers expressed varied views on the future rate path. While some hinted at a likely rate cut in June, others, like Executive Board member Isabel Schnabel, advised caution, citing a slowed disinflation process. Belgian central bank Governor Pierre Wunsch also highlighted uncertainties, suggesting that slower policy easing by the Federal Reserve could influence the ECB’s decisions.

Japanese equities rose last week, with the Nikkei 225 up 1.5% and the TOPIX Index up 0.6%. This increase came despite economic weaknesses and a stable yen, as investors speculated on potential U.S. interest rate cuts and a tentative hawkish stance from the Bank of Japan (BoJ), which also pushed Japanese government bond (JGB) yields higher.

Japan’s economy contracted by an annualized 2.0% in Q1, impacted by the January earthquake and disruptions in auto production. However, public demand and private inventories provided some support, mitigating the negative effects. Investors seemed to overlook this contraction, focusing instead on broader market trends.

The yen remained range-bound against the USD, reflecting expectations of U.S. Federal Reserve rate cuts and potential BoJ policy normalization. This anticipated narrowing of the interest rate differential could strengthen the yen, which has been historically low despite recent interventions by Japanese authorities.

Chinese equities remained largely unchanged, with the Shanghai Composite stable and the CSI 300 up slightly. The Hang Seng Index in Hong Kong saw a notable gain of 3.11%. The central government announced a historic rescue package to stabilize the property sector, lowering minimum down payment ratios and providing RMB 300 billion in low-cost funds for property purchases. Despite the rescue package, China’s property market showed no signs of recovery, with home prices continuing to fall.

The U.S. stock market reached record highs, driven by easing inflation concerns, while European markets saw mixed results amid cautious comments from the ECB. In Asia, Japanese equities rose despite economic contraction, and China introduced a major rescue package to stabilize its struggling property sector.

Bas Kooijman

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