Global Markets Recap - Week of Feb 27, 2023
1. What Moved the Markets?
Europe
European stock markets saw gains as concerns over interest rates were overshadowed by signs of improving economic conditions. The pan-European STOXX Europe 600 Index rose 1.43%, while major indexes such as Germany’s DAX Index climbed 2.42%, France’s CAC 40 Index gained 2.24%, Italy’s FTSE MIB Index increased 3.11%, and the UK’s FTSE 100 advanced 0.87%. However, European government bond yields rose due to elevated inflation data, raising concerns of aggressive monetary policy tightening by the European Central Bank (ECB).
While inflation in the eurozone eased slightly in February, core inflation, which excludes volatile food and energy costs, increased to 5.6% from 5.3%. ECB President Christine Lagarde signaled a likely further half-point interest rate increase at the March 16 meeting. Meanwhile, Bank of England Governor Andrew Bailey warned that policymakers may still have to raise interest rates above 4%, although a decision would be data-dependent.
In the UK, the number of loans for house purchases approved by British lenders in January fell to the lowest level since 2009, excluding a big drop at the start of the coronavirus pandemic, and house prices declined in February by the most in 10 years, adding to signs of a slowing housing market.
US
After experiencing its worst weekly decline in two months, the stock market rebounded and closed higher. Energy and materials shares were the strongest performers, while utilities stocks lagged behind. Despite a heavy economic calendar that included mixed reports, such as the decline in overall durable goods orders and the rise in non-defense capital goods orders, the market remained relatively calm with low volumes. The manufacturing sector appeared to be contracting at a slower rate, as indicated by the uptick in the Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) in February. In addition, pending home sales saw a surprise 8.1% jump in January, marking the second month of gains. Atlanta Federal Reserve President Raphael Bostic’s comments about a potential pause in rate hikes this summer also helped the market rally on Thursday afternoon.
Investment-grade corporate bonds declined for the week, while high yield bonds remained well bid with compressed credit spreads.
Japan
Japan’s stock markets gained ground over the week, driven by investor optimism around China's economic recovery, easing of entry requirements for arrivals from mainland China, and BoJ governor nominee Kazuo Ueda’s commitment to maintaining accommodative monetary policy. The Nikkei 225 Index rose 1.73%, and the TOPIX Index was up 1.57%. However, concerns about the likely peak in US interest rates tempered market gains. The BoJ’s yield ceiling of 0.50% was breached as US Treasury yields rose on strong data, and the yen traded at about JPY 136 against the US dollar. Meanwhile, as the BoJ prepares to pivot further away from its ultra-loose stance, core consumer price inflation in the Tokyo area exceeded the BoJ’s 2% target for the ninth consecutive month. To address the rising cost of living and support Japan’s post-COVID recovery, the government plans to draft additional measures to counter price hikes.
China
Chinese stocks rose for the second week as positive economic data increased the likelihood of a strong recovery, ahead of the National People's Congress (NPC) meeting. The Shanghai Stock Exchange Index gained 1.87%, and the blue chip CSI 300 added 1.71%, while Hong Kong's Hang Seng Index rebounded after four weeks of losses, rising by 2.79%. The NPC meeting, which occurs every five years, started on March 5 and is closely watched for potential shifts in economic policies and senior leadership changes.
China's official manufacturing PMI data rose to 52.6 in February, marking the highest reading since April 2012, and the nonmanufacturing PMI rose to 56.3, both exceeding economists' forecasts. The People's Bank of China (PBOC) Governor Yi Gang indicated that the central bank could cut the reserve requirement ratio for banks to support the economy, and reiterated the PBOC's commitment to financial risk management and market-oriented foreign exchange policy.
In addition, new home sales at China's top 100 developers rose by 14.9%, indicating the first year-on-year growth in the real estate sector since July 2021. Finally, Hong Kong lifted all major coronavirus restrictions after almost three years, and Macau followed suit, scrapping its mask mandate as all cities in China returned to normalcy.
2. Week Ahead
The U.S. payrolls report will provide insight into the state of the country's labor market, following the unemployment rate hitting a low not seen in 50 years. If the labor market remains tight, it could lead to continued high levels of core inflation and potentially prompt the Federal Reserve to maintain higher interest rates for an extended period. Additionally, China's trade data are worth monitoring to assess the level of pressure on exports.
