World markets proved resilient this week which saw testimonies from the U.S. Federal Reserve Chairman Jerome Powell, European Central Bank president Christine Lagarde and the Bank of England releasing its monthly Monetary Policy Summary. The U.S. central bank spent the week trying to calm market fears of an end to easy money policies but the debate over how long inflation could last is still wide open. In Europe, record PMI data show the recovery in the Old Continent is still accelerating but interest rates will continue to dictate investment style trends.
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U.S. equities rebounded from the previous week’s declines, bringing the S&P 500 to a new high the 33rd this year (an impressive 26% of all trading days in 2021). The technology-heavy Nasdaq hit an all-time high too, recording its best weekly gains since early April. The positive momentum can be attributed to various factors:
All 23 major US banks comfortably passed their twice-yearly Fed stress tests, clearing the way for lifting the coronavirus-related restrictions on dividends and share buybacks. In other words: some $200bn could be paid out to shareholders this year.
Federal Reserve Chair Jerome Powell largely downplayed inflation concerns in his testimony to Congress on Tuesday (June 26). Powell also said the central bank would be extremely cautious in normalising interest rates. His words were backed up by New York Fed chair John Williams who said any discussion of rate hikes was still some way off.
Equities were buoyed by news of an agreement on a plan for roughly $1 trillion spending over the next five years to improve the nation’s physical infrastructure.
After months of negotiations, U.S. President Joe Biden and a bipartisan group of 10 senators announced an agreement on an infrastructure deal that carves out $579 billion from the $2.25 trillion American Jobs Plan that was unveiled in March. The bill has yet to be drafted, however, and many expect it to face resistance from both ends of the political spectrum.
Assets also got a boost from hopes that the new US budgetary stimulus package could soon get Congressional approval.
In Mexico, Banxico, the country’s central bank, surprised market observers by increasing interest rates by 25bp to 4.25%, who expected it unchanged at 4%. It was the bank’s first interest rate hike since 2018. Regarding inflation, expectations of headline and core inflation in 2021 rose again, while medium and long-term inflation remained relatively stable at levels above the goal of 3%.
Brazil attracted a combined US$7.2 billion of foreign direct investment and portfolio inflows into its domestic stock and bond markets in May, central bank figures showed on Friday. Of note,
in the past two weeks, UBS, JPMorgan, and Bank of America (BofA) have raised exposure to Brazil in their Latin American portfolios to above the average in relation to other economies in the region.
Meanwhile, Latin America’s largest economy’s current account deficit shrunk to smallest in over 13 years. The narrowing current account deficit and consistent capital inflows helped propel the real to a one-year high against the US dollar.
In Japan, the market post some wild swings this week, as the state of emergency was lifted in major cities. The au Jibun Bank Japan Manufacturing PMI fell to 51.5 in June from a final 53.0 a in May, preliminary data showed. This was the weakest reading since February.
Meanwhile, activity at Japanese private sector businesses remained in contraction territory this month: The au Jibun Bank Flash Japan Composite PMI dropped to 47.8 from May’s 48.8.
Sentiment for the yen weakened amid disappointing domestic economic data. The currency’s depreciation caused markets to focus on exports.
Minutes of the April meeting of the Bank of Japan’s (BoJ’s) monetary policy committee released on Wednesday (June 23) highlighted agreement among policymakers that the massive stimulus deployed by nations will quicken Japan’s economic recovery.
In China, the CSI-300 Index and the Shanghai Composite Index ended a three-week losing streak. Financial stocks led the rally after the People’s Bank of China (PBoC) increased its injection of short-term cash into the financial system for the first time since March amid increasing demand for liquidity.
Analysts see little chance that the PBoC will increase official interest rates in the near term.
In Australia, the ASX 200 closed up 0.5% on Friday, assisted by the major banks and miners, and a strong lead from Wall Street. Despite ending the see-sawing week with a win, the Australian sharemarket still recorded a weekly loss with the benchmark index registering its worst week in six.
European stocks posted solid gains for the week. Eurozone business activity grew at the fastest rate for 15 years in June as countries lift restrictions. The headline IHS Markit Eurozone Composite PMI increased from 57.1 in May to 59.2 in June, its highest since June 2006, according to the preliminary ‘flash’ reading.
European Central Bank (ECB) President Christine Lagarde told the European parliament on Monday (June 21) that the outlook for the eurozone economy was “brightening” and “underlying price pressures are expected to increase somewhat this year.”
She added that it was important “not to withdraw support too early.” Lagarde also predicted there will be only “moderate” and “limited” spillover from rising US inflation to the European economy. Of note, US consumer prices rose at the highest rate for 13 years in May.
Although central banks in Hungary and the Czech Republic raised benchmark rates, The ECB is not expected to surprise markets pending the conclusions of its strategic monetary policy review in September.
In the UK, Bank of England policymakers voted unanimously to keep the key interest rate at 0.1% and by a majority of 8-1 to leave its bond-buying programme unchanged as widely expected. The central bank said inflation could reach as high as 3% and the economy would experience a temporary period of strong GDP growth.
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