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The Week in Global Markets
Financial markets summary:
– EUROPE: This week we saw European stocks basically being carried by what happened in America, as NVidia jumped after impressive quarterly earnings and revenue beat and pumped up technology stocks around the world. STOXX 600 reached an all-time high and was up 1.15% on the week, surpassing its previous peak from January 2022 with the tech sector up 3%. Semiconductor companies and tech industry leaders (SAP, ASML, BESI) are benefitting from the AI trade, pushing the tech index (STXE 600 TECH) to 23-year highs. Positive sentiment is also being supported by ECB comments about inflation coming under control and previously contracting industries likely bottoming out as business activity shows some signs of recovery. Benchmark equity indices advanced in Germany, France, Italy and Switzerland, while the UK FTSE 100 slipped a bit weakness in energy and mining stocks. Purchasing Managers’ Indices (PMI) showed stronger-than-expected performance in the eurozone (except in Germany and France), which prompted markets to reduce bets on the number of expected interest rate cuts. In the UK, the PMI is in expansionary territory and kept rising, indicating an improvement in consumer demand. The BoE governor commented that the rate cuts the market is pricing could be reasonable (without endorsing the market curve).
– UNITED STATES: The S&P 500 closed on Friday at a new all-time high of 5088.8, up 1.66% on the week. The Dow also closed at a fresh high of 39,131.53, up 1.3% WoW, while the Nasdaq had a weekly gain of 1.4%. The strong momentum seems very hard to stop at this point, as the AI frenzy keeps pushing investor expectations higher and higher. As NVidia beat EPS, revenue, operating, gross profit and EBITDA expectations, shares roared, pushing the company’s market cap briefly to $2tn for the first time. However, analysts note that concentration on Big Tech and NVidia specifically might be taking concerning proportions. The majority of the S&P sectors finished the week in positive territory. At the same time, the small-cap Russell 2000 index declined WoW, as it continues to lag other major US indices. Fed’s Christopher Waller stated this week that progress on disinflation still needs to be verified and that the central bank should not rush with rate cuts. Flash PMI estimates showed that manufacturing activity has improved supported by an increase in export orders, while service sector activity eased a bit, but overall business activity remains in expansion mode.
– ASIA-PACIFIC: Japan’s stock market also reached new all-time highs, with the Nikkei 225 Index finally breaking the previous peak from December 1989, driven by persistently improving investor confidence in Japan’s growth prospects and corporate profitability. Machine orders and exports data came in strong, with increases in December and January, however, the manufacturing PMI is still in contraction. The TOPIX index reached its highest level since February 1999. 10-year Japanese government bond yields finished the week at 0.711%, slightly lower than last Friday. In China, data revealed that foreign direct investment (FDI) in the country has fallen to the lowest levels in 30 years amid geopolitical uncertainty and a weak recovery. However, the government is unleashing significant support measures, which managed to pump stocks this week, as the Shanghai Composite Index rose 4.85%, while the blue-chip CSI 300 advanced 3.71%. Bloomberg reported that foreigners have managed to snap up nearly $2bn of mainland shares. The Hang Seng index is also close to erasing the 2024 losses. However, some of the measures that were implemented seemed too stringent, for instance, the ban on institutional investors from selling in the first and last 30 minutes of the day when over 80% of share trading occurs. The People’s Bank of China (PBoC) injected RMB 500bn into the banking system via its medium-term lending facility and left the lending rate unchanged as expected, while the 5-year loan prime rate was lowered by a bigger-than-expected 25 basis points to 3.95% (the biggest cut since 2019) in an effort to reduce mortgage rates for homebuyers and help shore up demand in the troubled property sector.
– BITCOIN: Traders and analysts alike are all looking forward to the halving in April, with expectations that it could send the price of the biggest cryptocurrency soaring. However, realistically, this is not guaranteed to happen immediately after the halving – for example, last time, the halving was in May 2020, but Bitcoin did not reach a new ATH until November 2021. Hence it could take up to 12-18 months after the event. This week, the ECB published a post criticizing the approval of BTC ETFs, referring to it as “the naked emperor’s new clothes”. It argues that Bitcoin has failed on the promise to be a global decentralized digital currency and is still hardly used for legitimate transfers” while in their view the new ETFs do not make the cryptocurrency neither suitable as a means of payment nor as an investment. There are very direct accusations about the strength of the “Bitcoin lobby” in promoting a risky instrument whose use is for “financing evil” and crime, and that its eventual collapse could bring large-scale social damage.
policy rate overview
The People’s Bank of China kept its 1-year loan prime rate (which is the peg for most household and corporate loans in the country) unchanged at 3.45%, while its benchmark 5-year loan rate (which is the peg for most mortgages) was cut by 25 basis points to 3.95%, as noted earlier. This was a larger-than-expected cut and highlights the effort of the PBoC for a targeted easing, as the central bank aims to ramp up support for the struggling property sector. The real estate problem is of course not tied to mortgages and shows that authorities are scrambling to stem the slump.
After a series of hikes aimed at curbing the stubbornly high rate of inflation in the country, Türkiye’s central bank kept the policy rate unchanged this week at 45%. The bank suggested the current rate would be maintained until “there is a significant and sustained decline in the underlying trend of monthly inflation.” In January, inflation was still at a mind-blowing rate of 64.9% YoY, and the Turkish lira has now reached a level of 30.82 per dollar and 33.66 per euro.
The Bank of Korea kept its key rate steady at 3.5% for a 9th consecutive session, in line with expectations, with an inflation projection maintained at 2.6% and a real growth projection of 2.1% for 2024. It highlighted stubbornly high inflation and household debt as ongoing problems for the country’s economy, as well as risks still present in terms of high real estate prices.
Next week, the National Bank of Hungary is expected to continue with rate cuts, likely slashing its benchmark rate down to 9%, in the context of further weakening economic growth and decelerating inflation. The Deputy governor of the central bank has signaled that options for either a 75bp or a 100bp rate cut would be on the table next week.
highlights from Germany
More bad news for German growth
The final GDP growth numbers were confirmed this week by the German Statistical Office – a real growth rate of -0.3% QoQ and -0.4% YoY. For the whole year 2023, the economy shrank 0.3% in real terms. Capital formation and household consumption fell. Manufacturing declined markedly, while service performance improved slightly.
In addition to that, with the Flash PMI release this week, it became clear that there is no recovery taking place at the moment and the situation remains dire. In February, composite and manufacturing indices declined further, only services improved slightly. Still in contraction led by a sharp and accelerated reduction in manufacturing output. Demand for goods and services continued to weaken, although employment held broadly steady as firms expressed slightly more optimism toward the year-ahead outlook. This month saw the fastest increase in business costs in 10 months, partly due to strong wage pressures in the service sector. Prices continued falling in manufacturing, however, where weaker demand more than offset higher transport costs. There was limited impact on supply chains from the Red Sea shipping disruption, with average delivery times improving. New orders kept falling across both manufacturing and services, at a faster rate than the previous month, leading to a sustained decline in backlogs of work across the private sector. The service sector drove an improvement in overall business expectations, which is masking the deterioration in manufacturing sentiment which is more pessimistic.
All this was accompanied by the monthly report of the Deutsche Bundesbank which stated that the German economy is now most likely in a technical recession, as it is expected to contract again in Q1. Despite that, the central bank does not anticipate a more severe downturn. It highlighted weak external demand, cautious consumers, and weak domestic investment as the main culprits. The government lowered its expectation for the full 2024 growth of the German economy down to 0.2% (from the previous projection of 1.3%), and so did the European Commission – to 0.3%, down from 0.8% previously. The Economic Advisory Council confirmed this week they will go in the same direction: the spring forecast will likely reflect the same dismal expectation, maybe even a contraction for a second year in a row, as the expectation for Q1 is that there will likely be negative growth as well.
Some improvement in expectations but a negative assessment of the current situation across economic sectors
The picture presented by the ifo Institute survey for January indicated some slight improvements, but not sufficiently to be a good reason for optimism ahead. The Business Climate index showed slightly less pessimistic expectations in February, but an unchanged assessment of the current economic situation. The Business Cycle Indicator edged up a bit but is still clearly in contractionary territory. Sentiment continued to drop in Manufacturing and Trade: with the current business situation deteriorating, order backlogs declining and cuts in production being announced. A somewhat better assessment of the current situation was recorded in services and construction. Expectations are still negative across the board, with skepticism prevailing in manufacturing and trade, and reaching the lowest level in construction since 1991. Slight improvement in services compared to January, but still pessimistic there as well.
highlights from EUROPE
Flash PMIs show signs of bottoming out
Business activity is still contracting in February in the euro area, but the decline has slowed. The manufacturing downturn continued but it is now being offset to some extent by a more stable output from the service sector. Business confidence about the year ahead is improving, reaching a 10-month high and encouraging companies to raise staffing levels at a pace not seen since last July. New orders in manufacturing are still falling but at a lower rate, and export orders fell in both manufacturing and services. The drop was especially sharp in Germany, the fastest pace since October in manufacturing, which was only partially offset by a moderation in the contraction in services. France also recorded another contraction in output, but it was relatively smaller. Outside of the two biggest euro area economies, the rest of the countries collectively reported growth of output for a 2nd month running, contrasting with the declines seen over the prior five months, enjoying the largest monthly improvement since last May. Faster service sector growth was accompanied by a near stabilization of manufacturing output. A steepening rate of job losses in the manufacturing sector contrasted with net hiring reaching an 8th-month high in the service sector. Price pressures lifted higher during February, with the growth of average input costs across producers of goods and providers of services accelerating again, and selling price inflation likewise accelerating. Business optimism about the coming 12 months improved for the 5th successive month, however, sentiment in manufacturing slipped slightly.
Construction recovery but not everywhere
Estimates for December show that seasonally adjusted production in construction increased by 0.8% MoM / 1.9% YoY in the euro area and by 1.3% MoM / 2.4% YoY in the EU. The annual average production in construction for the year 2023, compared with 2022, increased by 0.2% in the euro area and by 0.1% in the EU. Building construction was higher, while civil engineering declined MoM. The largest drops vs. Nov-23 were in Slovakia, Germany and Austria, while the biggest increases in construction output were recorded in Romania, Poland and Hungary.
Consumer Expectations present a mixed picture
The ECB CES survey from January 2024 shows that 12-month inflation expectations were at 3.3% (up 0.1pp vs. the previous month), while 3-year expectations are at 2.5% (unchanged). Expectations are somewhat higher for lower-income groups and for respondents aged 35-54 and 55-70. Consumer expectations for nominal income growth remained unchanged at 1.2%. Expectations for nominal spending growth over the next 12 months increased marginally to 3.7% from 3.6% in December. Economic growth expectations for the next 12 months were at -1.1%, compared with -1.3% in December. Expectations for the unemployment rate 12 months ahead decreased to 10.9%, from 11.2% in December. Unemployed respondents reported an increase in their expected probability of finding a job over the next 3 months, which rose to 30.5% in January 2024, from 27.6% in October 2023. Employed respondents reported that the expected probability of job loss over the next three months decreased to 8.0% in January, from 9.0% in October. Consumers perceived access to credit as having become slightly easier over the last 12 months and expected to continue to be easier over the next 12 months. For home prices, the expectation is that they would increase by 2.2% over the next 12 months, the same as in December. Expectations for mortgage interest rates 12 months ahead declined further to 5.1%, from 5.3% in December. As in previous months, the lowest-income households expected the highest mortgage interest rates.
highlights from THE UNITED STATES
Flash PMI shows expansion of business activity continues
Slower pace, but still an expansion in February. Manufacturing, in particular, drove the increase in production output with improvement in supply chains after the adverse weather impact in January. Demand continued to strengthen, but the rate of increase in new sales slowed. Service activity also slowed as growth in the sector slipped slightly, with confidence for the next 12 months among service providers declining. There are some subdued price pressures, with input prices rising at the weakest pace since October 2020. However, selling price inflation re-accelerated, driven by service prices.
Six out of 10 components of the LEI show positive signals in January
The Conference Board Leading Economic Index (LEI) for the US fell by 0.4% in January, a smaller drop than the decline in the previous 6 months. It still indicates there are headwinds to the economy, but for the first time in 2 years, the majority of indicators have a positive contribution – hence, the LEI does not signal a recession ahead anymore. However, the CB still stated that the expectation is a slowdown of real GDP growth in Q2 and Q3 to near zero.
highlights from THE UNITED Kingdom
Flash PMIs keep rising
Private sector activity continued to expand in February, driven by a strong performance of the service sectors. Consumer demand improved more significantly and new work increased at the fastest pace in 9 months. This was accompanied by strong optimism about the domestic economy for the next 12 months. Inflationary pressures are still high, with the rate of input inflation rising in February due to higher wages in the service sector. Hence, average cost burdens rose sharply. Manufacturing output is still in decline but at a slower rate. Some goods producers suggested that a lesser degree of customer destocking had helped to stabilize demand. Those reporting a drop in production often commented on unfavorable market conditions and depleted order books. Across the private sector as a whole, new business volumes are on the rise, but in manufacturing export sales are falling sharply, while export demand for services increased.
UK Consumer Confidence Dipped in February
The latest GfK survey showed that sentiment among UK consumers broke the positive trend seen over the last few months and declined, with perceptions about the economic landscape still negative. However, during this month expectations about the future of consumers’ personal finances remained relatively optimistic. This resilience is particularly noteworthy given the context of ongoing real wage increases against a backdrop of declining inflation.
Author: Nikolay
Founder of MoneyCraft
