Global Market Weekly Recap: August 21 – 25, 2023

Throughout the week, the market sentiment underwent fluctuations, leading to a mostly turbulent market as traders steered through worries about a potential widespread recession and major economic and central bank announcements.

At the start, focus was on developments concerning Chinese stimulus strategies, but this focus later pivoted to the unveiling of global PMI survey results in the midweek.

Adding to the dynamics, the spotlight was seized by the U.S. 10-year bond yields as they reached unparalleled heights. These movements were accompanied by brief bursts of enthusiasm in the equity market, which, however, swiftly lost their steam.

Without further ado, let's now highlight the most significant headlines.

Notable News & Economic Updates

Broad Market Risk-on Arguments

Over the weekend, discussions between the People's Bank of China (PBOC) and financial regulators and bank executives emphasized the need to increase lending to support the recovery.

Despite the rise in Treasury yields midweek, driven by optimistic projections for robust Nvidia earnings, U.S. stock market indices managed to hold onto their gains.

In July, the Bank of Japan's (BOJ) core Consumer Price Index (CPI) rose from 3.0% to 3.3% year-over-year, exceeding the estimated 2.9%.

Subsequently, Nvidia shares saw a 3.2% surge during the trading session and a further 9% increase after hours. This was propelled by the company's Q2 revenue of $16 billion, surpassing the projected $12.5 billion, and a more positive outlook for Q3 revenue issuance.

Broad Market Risk-off Arguments

The People's Bank of China (PBOC) announced a reduction in its 1-year prime loan rate, though the decrease was smaller than expected, going from 3.55% to 3.45%, falling short of the projected 3.40% cut. At the same time, the 5-year rate remained steady at 4.20%, rather than being lowered to the consensus level of 4.05%.

S&P downgraded several U.S. banks due to rising concerns about liquidity issues. This follows a previous downgrade by Moody's for several regional banks due to their high exposure to commercial real estate.

The U.S. 10-year bond yields surged to levels not seen since 2007 midweek, driven by expectations of a hawkish stance from the Federal Reserve during the Jackson Hole Symposium.

In the economic data sphere, New Zealand's headline retail sales in Q2 dropped by 1.0% quarter-on-quarter, surpassing the anticipated 0.4% decline. Additionally, core retail sales experienced a more significant decline of 1.8% q/q compared to the estimated 0.2% decrease.

Global PMI figures fell well below expectations, leading to increased risk aversion across the board and prompting a retreat in global bond yields.

Specifically:

Australia’s flash manufacturing PMI for August fell from 49.6 to 49.4, while services PMI decreased from 47.9 to 46.7, indicating a sharper pace of contraction.Japanese flash manufacturing PMI ticked slightly higher from 49.6 to 49.7 in August, signalling a somewhat slower pace of contraction.French flash manufacturing PMI rose from a revised 45.1 reading to 46.4 in August, but services PMI dropped from 47.1 to 46.7, compared to a forecast of 47.5.German flash manufacturing PMI increased from 38.8 to 39.1 in August, while services PMI plummeted from 52.3 to 47.3, reflecting a significant shift toward industry contraction.U.K. Manufacturing PMI for August was at 42.5 vs. 45.3; Services PMI stood at 48.7 vs. 51.5.U.S. Flash Manufacturing PMI for August came in at 47.0 vs. 49.0 previously; Services PMI was at 51.0 vs. 52.3 previously.European bond yields declined as the market factored in an increased likelihood of the ECB pausing in September and the potential peak of tightening by the BOE.

It's estimated that U.S. payrolls were adjusted downward by approximately 306,000 from previous calculations due to the Bureau of Labor Statistics making modifications related to warehousing and transportation.

Federal Reserve officials expressed differing views. Boston Fed President Susan Collins suggested that further interest rate hikes might be necessary, whereas Philadelphia Fed President Harker viewed current interest rates as already being at restrictive levels.

On Friday, Fed Chair Powell reiterated that the Federal Reserve intends to maintain policy at restrictive levels until they are confident that inflation will consistently fall below 2%. Nevertheless, the possibility of raising interest rates remains open if deemed appropriate.

Global Market Weekly Recap

 Source: Finlogix

Over the weekend, reports emerged that Chinese regulators were encouraging increased lending, initially sparking a positive market sentiment. However, these gains were short-lived when the People's Bank of China (PBOC) implemented prime loan rate cuts on Monday, which were seen as underwhelming.

Concerns grew among market participants about the effectiveness of Chinese policymakers' actions, as doubts arose about the impact of weak policy stimulus in boosting credit demand and supporting property developers facing defaults.

Despite this, commodity-based currencies such as the Australian and New Zealand dollars benefited from rising Dalian iron ore prices, as investors anticipated improved trade outcomes for export-dependent economies.

During Monday's New York session, U.S. bond yields climbed, reaching their highest levels since 2007. Surprisingly, the U.S. dollar didn't make significant gains from this yield rise, while U.S. equities advanced due to expectations of strong earnings from chipmaker Nvidia.

In the following days, both Treasury and European yields continued to rise. However, equity market rallies stumbled as traders prepared for global PMI readings.

Australia's PMI numbers were released, and though New Zealand reported a decline in business activity and disappointing quarterly retail sales, risk appetite persisted.

It wasn't until the Eurozone reported poor service sector readings in France and Germany that risk-off sentiment returned. German bund yields dropped, with the 10-year yield falling by 13 basis points to 2.52%, amid expectations that the European Central Bank (ECB) might halt its tightening measures in September.

The U.K. added to PMI disappointments with subdued figures for both manufacturing and services sectors. This led 10-year gilt yields to drop by 17 basis points to 4.46%, marking the steepest one-day decline since March.

The U.S. also experienced a downturn in PMI figures, resulting in a drop in 10-year yields to 4.19% and 2-year yields to 4.97%.

While Nvidia's strong earnings initially boosted U.S. equity indices, the market struggled to maintain these gains as focus shifted to apprehension ahead of the Jackson Hole Symposium.

Despite mixed views on interest rates from FOMC officials, many expected Federal Reserve Chair Powell to emphasize a hawkish stance and suggest a possible rate hike in September.

Consequently, the U.S. dollar gained ground, driven by expectations of higher U.S. borrowing costs and risk-off sentiment stemming from recession concerns linked to rising borrowing costs.

On Friday, traders took a cautious approach in Asia and London sessions, awaiting Fed Chair Powell's speech at the Jackson Hole Symposium. The event sparked increased volatility as Fed members hinted at potential future rate hikes due to elevated inflation rates and a surprisingly robust job market.

While these remarks temporarily pushed the market into risk-off mode and boosted the U.S. dollar, the risk-off movement was somewhat constrained, likely due to the comments aligning with expectations based on recent economic data updates.

In summary, the U.S. dollar and gold had a positive week, while bond yields remained mostly steady or negative, and oil faced declines, reflecting growing recession concerns.

Despite the dominant influence, equities managed to hold onto gains, potentially finding support from the idea of nearing the peak of the interest rate hike cycle, with an anticipated pause in September and possibly just one more Fed hike in November.

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