Equities continued their strong start to 2023 last week, with the latest US inflation print stoking optimism with investors. However, there is a cautionary sting in the tale in the form of the guidance issued by some of the major US financials on Friday. As ever, more detail below.
Those keeping a keen eye on overseas bond markets have been closely watching the Bank of Japan over the last month, which has provided the latest major shift in global monetary policy. The BoJ have long kept the key 10-year bond yield in a tight trading range: If the yield fell below -0.25% they would sell bonds, increasing supply, prices go down, and the yield goes back up. The converse would take place when the yield hit +0.25%.
This range was widened out to -0.50% and +0.50% just before Christmas, in a move that stunned markets. The key rate has made headlines in recent days as it touched up to 0.53%. Essentially investors are testing the Bank of Japan’s resolve to keep the yield range in place. This is not the first time this has happened, and indeed the strategy has failed investors so many times in the last 20 years it has unfortunately been dubbed the ‘widow maker’.
The extraordinary thing about this is that in theory it’s absolutely ordinary. The massive market intervention in markets by central banks since the financial crisis is unconventional and one could argue bond yields freely moving through the mechanism of supply and demand is conventional. Whether the Bank of Japan agrees remains to be seen. All eyes on Tokyo as they meet this week.
As always, if you wish to discuss anything in this newsletter in further detail, please do get in touch.
Weekly Investment News
US equities ended a stellar week of gains last Friday, up 2.0% in euro terms. Much of the optimism resulted from a lower-than-expected inflation figure for December. Released last Thursday, the US Consumer Price Index showed that inflation declined for the sixth consecutive month in the final period of 2022. The figure of 6.5% is the lowest annual inflation increase the US has seen in over a year. There was however some cause for more composed sentiment as the US Core CPI reading, which strips out volatile food and energy prices, increased by 0.3% in December. Markets are expecting the Federal Reserve to increase rates by 0.25% at their next meeting in February, a decrease from December’s 0.5% rise.
Across the Atlantic, European stocks also showed a positive week, aided by lower energy prices along with the easing of Chinese Covid restrictions. Europe, which is reliant on China’s economy, benefited from the prospect of a growth boost in Asia. Many investors agree that China, the world’s largest manufacturing economy, appears to have committed to softening its strict Covid protocols. European stocks were up 0.9% last week and have risen by 6.6% in 2023.
Investors also benefitted from the positive momentum brought on by lower oil and gas prices. West Texas Intermediate Crude Oil Futures, a benchmark for energy costs, finished the week at 79.24 per barrel, down -2.2% so far this year in Euro terms. Europe which has been beset with rising energy costs throughout 2022 because of the war in Ukraine has struggled to keep inflation at bay. The latest price dips have been a welcome reprieve for many companies in Europe struggling with energy costs throughout 2022. With many European equities trading at a discount following a tough year, last week presented an attractive market for many investors.
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