Weekly Commentary: 27 June 2023 – 02 July 2023
Last week’s financial highlights saw Federal Reserve Chair Jerome Powell emphasizing potential additional rate hikes due to persistent inflation and a tight job market, with May’s consumer prices rising to 4%, twice the Fed’s target. Meanwhile, the Bank of England’s unexpected steep hike in borrowing costs stoked UK recession fears, as the main interest rate hit a 15-year high. Foreign stock markets also experienced a decline following an initial report suggesting that Europe’s economy is underperforming expectations. The disheartening figures have contributed to this week’s market uncertainty. As a result, Treasury yields dropped as investors pursued more secure investment options. Monday saw oil prices relinquish their initial advances, reflecting the general stability in financial markets. Investors are vigilantly monitoring the situation for any additional consequences arising from an attempted rebellion in Russia by Yevgeny Prigozhin’s Wagner Group, a situation that has the potential to interrupt energy supplies from one of the globe’s leading oil-producing countries.
Stock returns were negative over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-1.67%), S&P 500 Index (-1.37%), and NASDAQ Composite Index (-1.43%). Other notable key market indices that generated negative returns consist of Hang Seng Index (-5.62%), MSCI World (-2.01%) & Strait Times Index (-2.10%). All S&P 500 sectors registered negative returns last week with notable sectors – Real Estate (-3.96%), Utilities (-2.59%), and Energy (-3.45%) dropping more than the rest of the sector. For 2022 as a whole, index returns were negative for the Dow Jones Industrial Average (-8.78%), S&P 500 (-19.44%), and the NASDAQ Composite (-33.10%).
The yield-curve remains inverted as the 10Y-2Y US Treasury spread widened to -1.01%. driven by U.S 2-year and 10-year Treasury yields rising 2 bps to 4.73% and falling 4bps to 3.72% respectively. Market sentiment also became more risk-off as the U.S. High Yield (HY) – Investment Grade (IG) credit spread widened 24 bps to 2.94% while the CBOE Volatility Index (VIX) fell 10 bps to 13.44%.
For important events coming up later this week, The Bureau of Economic Analysis (BEA) is set to publish the Personal Consumption Expenditures (PCE) Price Index, which is the inflation measure favoured by the Federal Reserve. Additionally, consumer sentiment indicators from the Conference Board and the University of Michigan will be available, along with the final calculation for the first-quarter gross domestic product (GDP). Data on inflation and unemployment rates in the eurozone will also be released. Also take note that this week will be the last trading week of the month, quarter, and first half of the year.The global REIT market’s returns were mostly in the red across the numerous benchmarks. FTSE EPRA Nareit Germany REITs Index (-6.54%), FTSE EPRA Nareit UK REITs Index (-7.76%), and Hang Seng REIT Index (-3.91%) were the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (-3.24%) and most of its subsectors generated negative weekly returns with Retail REITs (-4.20%), the notable sector that underperformed the rest last week. REITs generally have been affected by decreasing yield spread as interest rates surged and investors price in the possibility of reduced distributions stemming from higher financing costs. However, we do expect inflows to return to the sector given the existing attractive valuations on offer and resilience offered by the REIT asset class in light of the waning global growth outlook.
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