With the United States observing a holiday, trading in Asia was notably subdued, providing an opportunity for stocks to consolidate after a series of significant gains. The Nikkei, having hit 33-year highs following a ten-week surge of 22%, fell slightly. Meanwhile, S&P 500 futures were flat, even after five consecutive weeks of gains, mirroring the NASDAQ’s eight-week rally. Yet, these rallies are far from broad-based, with just nine large-cap stocks contributing 30% of the S&P 500 index, questioning its diversified nature.
Blinken’s Beijing Visit and Currency Market Moves
U.S. Secretary of State Antony Blinken’s trip to Beijing has drawn market attention, although expectations remain low, as signaled by the significance attached to a Chinese diplomat shaking his hand. The currency market continues to observe the yen’s downtrend, while the euro and the dollar record new highs, albeit marginally. The yen could see further losses unless the Bank of Japan decides to tighten its policy, a move anticipated by many Western analysts in July.
Central Banks Gear Up for Decisions
Central bank action is on the cards this week, headlined by China’s decision on Tuesday, where prime loan rates are projected to be cut by 10 basis points. This comes amid declining mortgage rates and increasing pressure on household savings. Markets are eyeing more fiscal stimulus to resuscitate growth, a strategy that has proven effective in the past. Meanwhile, Federal Reserve Chair Jerome Powell will appear before lawmakers on Wednesday and Thursday, likely reiterating the possibility of two more quarter-point rate hikes.
Rate Hikes on the Horizon
- In contrast to the U.S. market’s cautious stance, the Bank of England is facing demands for a rate hike, with markets speculating whether the increase will be by 25 or 50 basis points.
- Norway and Switzerland are also expected to increase rates this week.
- The most significant change may come from Turkey’s central bank, where analysts anticipate rates could surge from the current 8% to as much as 25%.
European Market Starts Week on Negative Note
The Stoxx 600 index slipped 1% on Monday, with chemicals stocks leading the downturn, losing 2.8%. Meanwhile, construction and material stocks slid 2.5% amidst an impending U.K. mortgage crunch. The average rate for a two-year fixed-rate deal crossed the 6% threshold, the first since December. The Bank of England and the Swiss National Bank are set to announce their interest rate decisions on Thursday.
Corporate Forecast Woes and Stock Movements
Shares of British fashion retailer Next soared 5% after raising its sales and profit guidance for the year, attributing the success to warm weather and increased consumer wages. On the flip side, shares of Swedish medical technology company Getinge tumbled by 15% due to supply chain challenges that have prompted the firm to issue a profit warning. Similarly, Germany-based pharmaceutical equipment supplier Sartorius saw its shares plunge by 15.7% after lowering its 2023 earnings forecast, attributing the downturn to weakened demand in the aftermath of the Covid-19 pandemic.
Outlook on Inflation and Interest Rates
The Bank of England, facing stubborn inflation and surging wages, is expected to lift interest rates to a 15-year high of 4.75%. Futures are leaning towards a smaller rate increase but anticipate rates rising to at least 5.75%. UK gilt yields have reached 15-year highs, influencing the UK mortgage market and the government’s borrowing costs.
Market Anticipation and Impact
Market anticipation of the Bank of England’s potential move has caused yields on two-year gilts, which are sensitive to interest rate changes, to rise 0.14 percentage points to 5.08%, hitting their highest level since 2008. The yield on the benchmark 10-year rose 0.08 percentage points to 4.49%. Bond yields rise as prices fall.
US Market Developments and Dollar Strength
Despite US markets being closed for the Juneteenth holiday, recent developments influenced the global economic landscape. US indices recorded their biggest weekly gains since late March, fueling hopes that the Federal Reserve might conclude its historic tightening campaign to control inflation. Concurrently, the dollar, which strengthens when investors anticipate higher rates, gained 0.2% against a basket of six peer currencies following the Federal Reserve’s policy announcement.
Investor Sentiment and Upcoming Data
Investor sentiment is affected by upcoming economic data, particularly in the UK. Data expected to be released on Wednesday might show that the annual rate of consumer price inflation in Britain dropped slightly to 8.5% in May from 8.7% in April. Even with the slight drop, inflation remains significantly above the central bank’s target, complicating the Bank of England’s task of achieving a soft landing for the economy. Resilient activity and stubborn inflation pose significant challenges.
