Weekly Commentary: 07 Aug 2023 – 13 Aug 2023
Returns were negative last week as measured by several indices. The Bank of England raised interest rates 0.25% to 5.25% and has warned borrowing costs are likely to remain elevated. Compared to other advanced countries, prices in the UK are still rising at a faster pace. They have raised the interest rate for the 14th time and rates are at a 14-year high now. Homeowners who are on variable rate borrowing will feel the brunt of the raising of interest rates as lenders typically pass on increases to customers after the BOE base rate move.
The US also released its non-farm payroll report last week and it added 187,000 jobs in July 2023, below market expectations of 200k and a downwardly revised 185k in June. However, the labour market as a whole is still robust as the unemployment rate dips to 3.5%. If wage growth continues to be strong, the FED may consider raising rates again at the next FED meeting as wages and jobs growth are critical contributors to inflation. Bond markets have rallied on Friday following the release of the non-farm payroll, and markets were pricing in a 17% chance that the FED raise rates at its next meeting.
On the other side, China’s economic woes continue as leading economic indicators of manufacturing and services activity were weak in July, even as the authorities continue to support the economy with stimulus. They are facing a wide range of challenges – youth unemployment, deflationary pressures, and a prolonged housing market slowdown. Its PMI index remained in contraction for a fourth straight month and a measure of services activity fell to its lowest level this year. Economists are suggesting that China’s disappointing economic statistics, and signs of challenges in its economy, may be due to the kind of crisis seen in other economies, including Japan in the 1990s, with aging and declining populations the most obvious similar correlated challenges they both are facing between the 2 countries.
Stock returns were negative over the week as observed across the following 3 indices, with the Dow Jones Industrial Average (-1.11%), S&P 500 Index (-2.26%), and NASDAQ Composite Index (-2.84%). Other notable key market indices that generated negative returns consist of MSCI World (-2.31%) & Strait Times Index (-1.75%). All S&P 500 sectors registered mixed returns last week with notable sectors – Information Technology (-4.14%), Communication Services ( -2.83%), and Utilities ( -4.59%) falling more than the rest of the sector. For 2022, 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 tightened to -0.75%. driven by U.S 2-year and 10-year Treasury yields rising 10 bps to 4.81% and rising 35 bps to 4.06% respectively. Market sentiment also became more risk-on as the U.S. High Yield (HY) – Investment Grade (IG) credit spread tightened 11 bps to 2.72% while the CBOE Volatility Index (VIX) rose 367 bps to 17.10%.
This coming week, China will report July inflation figures on Wednesday, while the US will be reporting one day later. While the US and other economies around the world are battling with inflation, China is at the other extreme end, battling with deflation. UK will also release the 2nd quarter GDP estimate on Friday and expectations around the street are not high for its figure.
The global REITs market’s return was mostly in the mix across the numerous benchmarks. FTSE EPRA Nareit Germany Index (-3.09%), Hang Seng REIT Index (-3.97%), and S&P/ASX 200 A-REIT Index (-2.58%) are the notable REITs that generated negative returns over the past week. Closer to home, the iEdge S-REIT Index (-2.68%) and most of its subsectors generated negative weekly returns with Real Estate Operating Companies (-5.17%), the notable sector that outperformed 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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