Market Activity


The third successive weekly decline for the FTSE 100

Market Activity

The third successive weekly decline for the FTSE 100

June 12, 2023

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The FTSE100 spent all of last week trading either side of the 7,600 level, albeit with a slightly negative bias and ended up posting its third successive weekly decline.

The pan-European STOXX Europe 600 Index ended 0.46% lower amid caution ahead of central bank meetings in Europe and the U.S. Major stock indexes were mixed. Germany’s DAX eased 0.63% and France’s CAC 40 Index fell 0.79%, while Italy’s FTSE MIB gained 0.35%. The UK’s FTSE 100 Index lost 0.59%.

ECB officials acknowledge ease in inflation but indicate rates still need to rise.

European Central Bank (ECB) officials signalled that borrowing costs are likely to rise again in June, although there appeared to be less unanimity on implementing rate increases in subsequent months.

ECB President Christine Lagarde and Bundesbank chief Joachim Nagel reiterated their hawkish stance for more rate increases, pointing out that there were few signs of easing in underlying price pressures.

However, Dutch central bank Governor Klaas Knot appeared to have joined the less hawkish policymakers. While acknowledging that rates would still have to rise, Knot dropped his previous insistence on increases in June and July. He said rate decisions must be taken step by step as there was more evidence that tighter monetary policy was working.

According to an ECB survey, median consumer expectations for eurozone inflation in the year ahead fell in April to 4.1% from 5.0% in March.

Eurozone falls into mild recession; retail sales falter; German industry worsens.

Revised data showed that the eurozone economy shrank by 0.1% sequentially in both the first quarter of this year and the final three months of 2022, meeting the technical definition of a recession.

Meanwhile, flat eurozone retail sales in April indicated that consumption remained weak. Germany’s industrial sector also continued to deteriorate. Factory orders unexpectedly fell 0.4% compared with March, while industrial output grew 0.3% sequentially—less than the 0.5% uptick expected by economists polled by FactSet.

UK housing market weakens:

The UK’s two largest mortgage lenders, Halifax and Nationwide Building Society, reported that house prices fell significantly in April, a sign that the market recovery may be faltering. Even so, the Royal Institution of Chartered Surveyors said its May housing market survey showed that the main measures for house prices, new inquiries, and sales agreements improved monthly but remained in negative territory.

S&P 500 enters bull market:

US stocks closed modestly higher in a week of relatively subdued trading ahead of the Federal Reserve’s policy meeting and rate announcement next Wednesday.

The week was notable for the S&P 500 Index moving into bull market territory.

It was also notable for broadening market gains, with small-caps outperforming large-caps, and value shares outperforming growth stocks. An equally weighted S&P 500 Index also rose more than its capitalization-weighted counterpart for the first time in eight weeks and by the largest margin since late March.

Apple’s annual developer’s conference also made headlines as the world’s most valuable public company unveiled its first major new product in several years, a virtual reality headset. Investors seemed to react negatively to the USD 3,500 price of the device, but the stock recovered some of its losses later in the week.

Oil prices rose Monday morning after Saudi Arabia announced a unilateral production cut over the previous weekend but fell back to end the week lower.

Longer-term Treasury yields rose modestly over the week, although some speculation mounted about how the market would accompany a flood of issuance of short-term bills now that the federal debt ceiling has been raised.

The investment-grade corporate bond market had a front-loaded supply of issuance, followed by a steady influx throughout the week. Total weekly issuance more than doubled expectations but was met with adequate demand.

Japan’s stock markets rose over the week, reaching fresh 33-year highs, with the Nikkei 225 Index gaining 2.4% and the broader TOPIX Index up 1.9%. Sentiment was supported by an upward revision to Japan’s first-quarter economic growth, on account of stronger corporate investment, as well as hopes that the services sector—which could benefit from rebounding foreign inbound tourism—will drive further expansion.

The yen remained close to a six-month low against the U.S. dollar, trading in the higher JPY 139 range, as the ongoing monetary policy divergence between the dovish Bank of Japan (BoJ) and the other major central banks, which largely remain in tightening mode, weighed on the Japanese currency.

The yield on the 10-year Japanese government bond rose to 0.43% from 0.41% at the end of the previous week. The yield was broadly range-bound ahead of the BoJ’s June 15–16 monetary policy meeting. Expectations that the central bank will again tweak its yield curve control framework have fallen to some degree as BoJ Governor Kazuo Ueda has repeatedly stated that the central bank will patiently continue with monetary easing until it achieves its 2% price stability target in a sustainable and stable manner, accompanied by wage increases. He said during the week that there is still some distance to achieving that target and that there is uncertainty surrounding the inflation outlook.

Chinese equities were mixed after the latest inflation data increased concerns about the country’s faltering post-pandemic recovery. The Shanghai Stock Exchange Index rose 0.04% while the blue-chip CSI 300 declined 0.65% in local currency terms. In Hong Kong, the benchmark Hang Seng Index gained 2.32%, extending the previous week’s gains.

May inflation figures pointed to rising deflation risks weighing on China’s economy, which is dealing with weak domestic and overseas demand, a sluggish property market, and high youth unemployment. China’s consumer price index rose 0.2% in May from a year earlier, compared with April’s 0.1% expansion, a 26-month low. Core inflation, which excludes volatile food and energy prices, slowed to 0.6% from the previous month’s 0.7%. The producer price index fell a worse-than-expected 4.6%, accelerating from a 3.6% decline in April, and marked the weakest reading since May 2020.

The oil market also reacted to reports that the U.S. and Iran had resumed talks on nuclear enrichment and oil exports, which briefly sent prices lower, although the White House later denied the story. Despite the headlines, oil prices on Friday looked to be little changed from the previous week’s close.

This week all eyes turn to inflation data and the Fed meeting:

Fresh Inflation Reports:

On Tuesday, we’ll get the Labour Department’s latest Consumer Price Index (CPI) for May. The CPI is expected to have risen 0.2% in May, slowing slightly from a 0.4% rise in April. It’s projected to come in at an annual rate of 4.1%, down from 4.9% the month before. The core CPI, which excludes more volatile food and energy prices, is projected to have increased 0.4% last month and 5.3% year-over-year, slowing from 5.5% in April.

The May Producer Price Index (PPI), which tracks wholesale inflation, will follow on Wednesday. Producer prices are expected to have fallen 0.1% in May after a 0.2% gain in April, while the annual rate is projected to slow to 1.5% from 2.3% the month before.

Fed’s Interest Rate Decision:

On Wednesday, the Federal Reserve’s Federal Open Market Committee (FOMC) will issue its decision on interest rates. The Fed has raised rates for the last ten meetings in an effort to cool inflation, which has come down from 2022 highs but remains elevated. The central bank is widely expected to pause interest rate hikes at next week’s meeting and keep the fed funds rate steady at its 5-5.25% range, with the CME Group’s FedWatch Tool projecting a 74.8% probability of a rate hike pause.

Update on Retail Sales:

This week will also bring an update on U.S. retail sales from the Census Bureau on Thursday, giving us insight on consumer shopping trends and how they have been affected by inflation. U.S. retail sales likely rose 0.5% in May after a 0.4% rise in April following two months of declines as inflation-weary shoppers pulled back. Online shopping and food were among the categories that saw an increase in sales in April, while home furnishings and electronics dropped.

In the UK we’ll get fresh GDP figures as well as an update on unemployment which still remains below 4%.

Here is what else we’ll be watching this week:

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