World markets reacted to this week’s monetary policy decision out of the world’s largest economy where the U.S. Federal Reserve indicated that it would increase rates earlier than previously expected. The announcement naturally made investors cautious and led to speculation that the central bank will soon start tapering its asset purchases. Put simply, we are clearly getting closer to the moment when the the “easy-money punchbowl” will be taken take away.
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In another mixed week on US markets where volatility persisted, the Dow Jones and S&P 500 posted sharp weekly losses and the Nasdaq erased its advance for the week. Fears that the Fed will remove its accommodative policies and raise rates sooner than markets had anticipated – policymakers now expect two rate hikes by the end of 2023 – kept traders on edge about stocks losing a key layer of support.
The central bank also increased its inflation projection for the year, putting pressure on stock prices.
However, inflationary pressures are expected to be “transitory”. The Fed’s post-meeting statement and Chair Jerome Powell’s press conference were widely viewed as surprisingly hawkish. Economic data was also mixed. Production prices rose 6.6% YoY in May while retail sales dipped 1.3% MoM, or more than expected.
In Brazil, the Senate approved Eletrobras privatization bill. The country’s trade confidence rose 12.2% in June to reach 1st high of the year, according to the National Confederation of Commerce of Goods, Services and Tourism’s (CNC) index of business confidence (Icec). Meanwhile, steel producers worked at full speed last month. In May, crude steel production grew by 40.1% compared to the same period last year, according to Aço Brazil. In Colombia, assets were mixed as investors remained uncertain about the country’s fiscal and political outlook.
Asian markets were choppy in the wake of the U.S. monetary policy decision. In Japan, equities generated mixed returns. The Bank of Japan (BoJ) left its key short-term interest rate unchanged at -0.1% as widely expected. The bank also extended by six months the September deadline for its special coronavirus financing support programme.
Accompanying the BoJ’s decision, Japan reported that its core consumer price inflation unexpectedly ticked higher for May. In other economic news, Japan’s exports jumped 49.6% yoy to JPY 6,261 billion in May, the highest growth since 1980.
In China, stocks recorded their third weekly loss. Weaker-than-expected economic data led some China economists to conclude that the country’s growth momentum has peaked. Retail trade growth slowed to 12.4 percent year-on-year in May from 17.7 percent in the previous month and below market expectations of 13.6 percent. Industrial production advanced 8.8% in May, slower than the 9.8% surge in April.
China’s market regulator began an antitrust probe into Didi Chuxing, just as the ride-hailing giant sets forth for its New York IPO. In Taiwan, the central bank left its benchmark lending rate unchanged and hiked its 2021 economic growth forecast from 4.53% to 5.08%. In Australia, the ASX 200 added 0.8 per cent for the week- a fifth weekly rise on the trot.
European equities fell this week after Wednesday’s incremental shift by the Fed to a slightly more hawkish tone but the European Central Bank (ECB) continues to sound dovish and plans to continue its monthly bond-buying program. A day earlier, the ECB raised €142bn to fund its stimulus package.
The European Commission signed off on the first two national recovery plans—those of Spain and Portugal—supported by the EUR 800 billion Next Generation EU fund. In Norway, Norges Bank signaled that they are going to hike rates in September. In the UK, inflation accelerated to 2.1% while retail sales came in below forecasts for May.
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