Welcome to today's Morning Brief, where we bring you the latest updates on global stocks and key events impacting the financial markets. This week has witnessed a significant decline in global stocks, marking the worst week since March. Central bank rate hikes and rising bond yields have raised concerns about a potential recession. Let's delve into the details of the current market conditions and highlight some possible trades based on the available information.
Key Events Today:
1. Eurozone S&P Global Eurozone Manufacturing PMI, S&P Global Eurozone Services PMI (Friday)
2. US S&P Global Manufacturing PMI (Friday)
3. Fed Bank of St. Louis President James Bullard speaks (Friday)
Global stocks are heading for their most substantial weekly decline in over three months due to recent central bank rate hikes and the subsequent increase in bond yields. In Japan, shares erased initial gains and fell approximately 1.5%, raising concerns about the pace of Tokyo's rally. South Korea's benchmark also experienced a drop after MSCI Inc. once again denied the country an upgrade to developed-market status.
The largest losses in Asia were observed in Hong Kong, where traders played catch-up following a holiday on Thursday. The decline extended the losing streak to four consecutive days, with concerns mounting that additional aid from China may not have a significant impact on the markets.
Bond Yields and Rate Hikes:
Treasury two-year yields hovered around 4.78%, reaching their highest level since March. Federal Reserve Chair Jerome Powell's announcement that the US may require one or two more rate hikes in 2023 contributed to the upward pressure on bond yields. Rate hikes from central banks in England, Norway, and Switzerland further emphasized the trend, resulting in increased yields on Australian and New Zealand 10-year bonds. The rate on Japan's 10-year benchmark remained steady.
Global Central Bank Actions:
Overnight, the central banks of Britain and Norway implemented 50 basis point rate hikes, surprising the markets. The previous week, the US Federal Reserve's unexpectedly hawkish outlook and unexpected hikes by the central banks of Australia and Canada added to the market turbulence. The Bank of England's rate hike to 5% in response to stubborn inflation and strong wages led to a brief jump in sterling, followed by a decline as investors expressed concerns about potential economic pain associated with tightening measures.
Currency Markets and Dollar Strength:
The US dollar has been strengthening, set for its strongest weekly performance in a month. The Australian dollar, sensitive to commodity prices and Chinese growth, fell 0.5% to $0.6724, experiencing a decline of over 2% for the week. A gauge of dollar strength in currency markets rose by 0.2%, impacting commodity currencies such as the Australian dollar and Norwegian krone.
S&P 500 and Market Sentiment:
The S&P 500's rally this year is displaying signs of low conviction, as the index is on track to end its longest weekly winning streak since 2021. Bank of America Corp.'s survey reveals that a net 25% of global money managers remain underweight in US equities, despite recent improvements in allocation. Risk aversion is evident in currency markets as commodity currencies and the Norwegian krone experienced declines.
Verbal Intervention on Yen and Potential Adjustments:
The yen's recent depreciation to around 143 versus the dollar has sparked speculation about possible verbal intervention by authorities in Tokyo. Additionally, stronger-than-expected inflation has raised suggestions that the Bank of Japan may adjust its price forecasts or make changes to its ultra-loose monetary policy.
Commodities and Oil Price Slump:
Oil prices continued to decline, adding to the more than 4% slump experienced on Thursday. Investor worries about high interest rates overshadowed a drop in US crude inventories. Gold is set for its most significant weekly drop since early February.
Upcoming Data and Expectations:
Later today, purchasing managers index surveys will be released for Europe, Britain, and the United States. British retail sales figures are also expected, which may provide insights into economic performance and consumer sentiment.
1. Short position on Japanese shares due to the slowdown in Tokyo's blistering rally.
2. Long position on US bonds to take advantage of rising bond yields.
3. Short position on the Australian dollar and Norwegian krone against the US dollar.
4. Long position on gold, anticipating a potential rebound after its significant weekly drop.
5. Short position on oil futures considering the current slump in prices and concerns about high interest rates.
Global stocks are facing a challenging week, impacted by central bank rate hikes and rising bond yields. Investors are closely monitoring various economic indicators and central bank actions for potential market impacts. Stay informed and exercise caution when making investment decisions in the current market environment. We will continue to provide updates on these developments in our upcoming briefings.
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