The week was marked by volatility in U.S. regional banks after California-based First Republic Bank failed and was taken over by regulators. The subsector of regional banks in the S&P 500 experienced significant volatility amid concerns about potential bank failures and the credit pressures that could arise if the economy slows and unemployment increases. Despite a rally on Friday, the S&P 500 Index ended the week lower, as a result of comments from Federal Reserve Chair Jerome Powell that implied a potential delay in the pivot towards rate cuts, which had been expected by the market.
Additionally, concerns regarding the U.S. debt ceiling may have contributed to the uneasiness, with Treasury Secretary Janet Yellen warning that the agency may not be able to meet its debt obligations as early as June 1. Within the S&P 500, the information technology sector performed well and closed higher, while energy shares pulled back in correlation with the price of crude oil. Brent crude oil closed the week lower at $75,27 bbl., a -6.21% price reduction.
The U.S. Federal Reserve’s Federal Open Market Committee (FOMC) implemented the widely anticipated 25 bps hike this week, aligning with market expectations. However, the FOMC also signalled a probable pause in June, which could potentially mark the end of the current rate hiking cycle. Chairman Powell emphasized that he does not foresee the banking stress to result in a recession, and he also mentioned the possibility of a soft landing for the economy.
In April, the U.S. economy added 253,000 jobs, surpassing expectations of a monthly gain of 185,000. However, downward revisions to the data for the prior two months subtracted 149,000 jobs. The unemployment rate dropped to 3.4%, reaching its lowest level since the 1960s. Following the release of this data, 10-year U.S. Treasury yields experienced a significant increase after having initially declined earlier in the week due to concerns surrounding the banking sector stress.
According to recent data, the UK housing market is showing signs of stabilisation, as mortgage approvals for home purchases increased for the second consecutive month in March. The number of approved mortgages rose sharply to 52,011, up from 44,126 in February, representing the largest number since October 2022. Despite this improvement, it is worth noting that mortgage loan approvals remain below their monthly average of around 70,000 prior to the economic turmoil caused by the mini-budget proposal under former Prime Minister Liz Truss in September 2022, which caused a spike in long-term interest rates and led to a withdrawal of funds from the market by lenders.
In the Eurozone, major stock indexes were mixed, as recession fears and banking tremors continued to weigh on sentiment. Germany’s DAX ticked slightly higher 0.24%, while France’s CAC 40 index weakened by 0.78%. The Euro STOXX 50 also ended the week slightly lower, down 0.43%.
The Eurozone inflation data released recently was in line with expectations, with core inflation declining to 5.6% year-on-year, while headline inflation increased to 7% year-on-year, slightly surpassing consensus estimates. As anticipated, the European Central Bank (ECB) decided to moderate the pace of interest rate hikes, implementing a 25-bps adjustment. The ECB noted that previous rate increases were now exerting a notable impact on financial conditions. President Lagarde emphasized that risks to the inflation outlook remain biased towards higher levels and that the ECB still has progress to make in addressing these concerns. Forecasts suggest an additional 25-bps increase in interest rates in both June and July, aiming to reach a terminal rate of 3.75%.
At the geopolitical front, tensions between the West and Russia remain elevated. Russia has accused Ukraine of utilizing drones in an attack on the Kremlin, allegedly targeting Russian President Vladimir Putin for assassination. Kyiv has denied these allegations. On Thursday, the Kremlin asserted that the United States was the mastermind behind these attacks.
Japan’s stock markets experienced a positive start during the first two days of the week but remained closed for the remainder of the period due to the Golden Week national holidays. The Nikkei 225 Index returned 1.0%, while the broader TOPIX Index gained 0.9%. On Monday, the markets rallied significantly due to a sell-off in the yen, which helped improve the outlook for Japan’s exporters. This followed the Bank of Japan’s decision, during its April 27-28 meeting, to maintain its ultra-easy monetary policy stance for the time being.
Chinese equities ended the week on a mixed note, following a shortened week due to the holidays, as unexpectedly weak manufacturing data affected market sentiment. China’s manufacturing sector displayed signs of weakness in April, with the official Purchasing Managers’ Index (PMI) falling from March’s reading of 51.9 to 49.2, indicating a return to contraction for the first time since December 2022. Despite this, the five-day holiday saw a strong rebound in domestic tourism, with around 274 million trips taken from Saturday through Wednesday, which is an increase of approximately 71% compared to the prior year. Furthermore, spending activity surged by 129% over the holiday period compared to the same period last year, raising hopes that a sustainable recovery in the service sector could potentially offset the weakness in manufacturing and the fragile property market.
US stocks ended the week mixed, with the S&P 500 down (-0.80%), the Dow Jones Industrial Average down (-1.24%), and the tech heavy Nasdaq Composite rising slightly 0.07%. The Euro Stoxx 50 ended the weak lower (-0.43%) and FTSE 100, (-1.17%) also closed the week in the red. Asian equity markets fared better, all closing the week higher, Japan’s Nikkei 225 index gaining 1.40%, and Hong Kong’s Hang Seng index rose 0.41%. While China’s Shanghai Composite index posted a modest gain of 0.34% for the week.
Market Moves of the Week:
On the local front, there was no material economic data releases or news flow this week. From a corporate action perspective, Heineken’s completed acquisition of local brewer Distell, has paved the way for the Dutch giant to begin utilising its new South African entity as a launchpad into the African market. The three-way merger between Namibia Breweries, Distell and Heineken SA will establish a new business called “Heineken Beverages.” The new entity will hold a major stake in the South African cider market, and will go head-to-head with global competitor Anheuser-Busch InBev, which houses SA Breweries.
Global uncertainty filtered through to the local market, JSE ALSI posting a modest decline for the week (-0.11%), the only positive sector contributor was Resources up 2.76%. Both Industrials (-0.77%) and Financial (-1.93%) were down for the week. A reversal in the Rand saw the currency come under pressure this week, trading at R18.41/$ by Friday close, depreciating 0.70%. The SA listed property sector remains volatile due to interest rate uncertainty and economic growth prospects, the sector closed the week lower -1.03%.
Chart of the Week:
Following the recent FOMC (Federal Open Market Committee) announcement, the market swiftly started factoring in the likelihood of upcoming rate cuts, potentially as early as June. The accompanying chart illustrates the disparity between the current expectations for the fed funds rate over the next year and the expectations held exactly eight weeks prior. This stark contrast reflects a significant shift in the outlook for the future interest rate environment.