US equities decline on inflation and recession worries
US equities suffered the biggest weekly decline in two years as investors grapple with the growing likelihood of a recession while global central banks tried to stamp out inflation.
For the week, the S&P 500 lost 5.79% while the Nasdaq slid 4.78%.
High inflation has worried investors as the U.S. Federal Reserve has begun to pivot from easy monetary policies to tightening measures which could potentially dent corporate earnings, slow the economy and possibly cause a recession.
The Fed hiked rates by 75 bps and expects the funds rate to end 2022 below 3.50%
The US Federal Reserve (Fed) hiked the target range for the federal funds rate by 75 bps to 1.50%-1.75% at its June meeting last Wednesday.
Fed Chair Jerome Powell attributed the upside surprises to May’s CPI inflation print and consumer inflation expectations as key factors for the rate hike of 75 bps.
He also suggested that a further 50-bp or 75-bp hike is most likely at the next meeting with the funds rate expected to end the year around 3.00%- 3.50%
U.S. manufacturing output unexpectedly falls in May
US economic data on Friday saw the production at U.S. factories unexpectedly falling in May, the latest sign of cooling economic activity. Manufacturing output dipped 0.1% last month, the first decline since January, after increasing 0.8% in April, the Fed said.
Other data this week showed a drop in retail sales last month as well as steep declines in homebuilding and permits. Weakness in manufacturing output also reflects a shift in spending from goods to services.
STOXX 600 falls 4.6% this week
European equities posted a third straight week of losses as a slew of interest rate hikes from major central banks fuelled worries about a sharp economic slowdown. The European STOXX 600 index ended the week 4.6% lower.
Eurozone inflation shifts central bankers' focus toward tightening
Adding to investors' concerns was Eurozone inflation which rose to a record high 8.1% last month, which was in line with a preliminary estimate, and more than four times, underscoring the European Central Bank's plans to raise interest rates next month.
After last week's Fed’s introduction of the 75- basis-point interest rate increase, (its first hike of that size since 1994); European counterparts have begun to shift focus towards tightening.
The European Central Bank has scrambled towards new emergency plans to control government bond spreads, the Swiss National Bank was surprised with its decision to raise rates by 0.5%; while the Bank of England hiked the Bank Rate by 25 bps to 1.25% at its June meeting.
Asian equities mostly sold off amid concerns Fed tightening
Asian equity markets mostly sold off last week, amid concerns that aggressive monetary tightening by the Fed and other major global central banks to fight inflation would lead to a global recession. The MSCI Asia ex Japan index declined -4.55% for the week.
Onshore Chinese equities represented by the Shanghai composite index posting a weekly advance of 0.97%, supported by better-than-expected May activity indicators and the nation’s pro-growth macro policy stance.
Heightened growth and rate worries weighed on the housing and technology sector in Hong Kong. The Hang Seng Index was down -3.35% for the week. Overall the MSCI China Index was down -2.84% for the week
Onshore Chinese stocks supported by better-than-expected May activity indicators
China’s May activity indicators came in better than expected.
Industrial production rose unexpectedly by 0.7% YoY, following April’s 2.9% decline, with a notable recovery in auto production as production restrictions and supply-chain disruptions (especially in Shanghai) started to ease marginally in the month.
Bank of Japan maintains ultra-easy monetary stance
The BoJ’s decision to keep its ultra-loose monetary policy settings provided limited support to Japanese equities. Japanese equities represented by the Nikkei 225 were down 6.69% for the week as Governor Haruhiko Kuroda continued to signal a dovish stance.
The yen weakened on Friday after the Bank of Japan maintained its ultra-easy monetary stance, continuing its policy divergence with its global peers.
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Disclaimer: Market update provided by iFast