However this initial optimism for markets was not able to be sustained for the rest of the week. On Wednesday, minutes from the July Federal Open Market Committee meeting were perceived as hawkish, stating that there were “significant upside risks to inflation, which could require further tightening of monetary policy”. The minutes, alongside signs that the economy remained robust, fuelled expectations that the central bank would keep interest rates higher for longer.
For the week the S&P 500 ended 2.1% lower with all sectors seeing losses. The tech-heavy Nasdaq dropped 2.6% and the Dow Jones was down 2.2%. On Thursday the yield on the 10-year Treasury note had reached its highest level since October 2022, given positive economic surprises in retail sales and industrial output data. While there was a slight pullback on Friday the yield still managed to end the week higher at 4.251%. Attention will turn to the upcoming symposium at Jackson Hole for thoughts on the economic outlook.
Higher yields weren’t just restricted to the US, with European yields also advancing on the prospect of higher rates. The German 10-year yield rose to its highest level since 2011 and UK gilts rose to a 2008 high. The pan-European STOXX 600 declined 2.3% for the week, dropping to its lowest level in six weeks. The UK FTSE 100 also saw its worst weekly loss in over a month, falling 3.5%. UK inflation eased to 6.8% last month, although in a worrying sign inflation for services reached its highest level since 1992. Separately, annual wage growth hit a record pace for July, with markets expecting another rate hike from the Bank of England in September.
A lot of the downbeat sentiment globally was around the economic situation in China. Economic data has raised questions over the robustness of the Covid bounce with the latest figures coming in weak. It was notable that the latest youth unemployment figure was not reported, having hit a record high in June. In response to weak demand, the People’s Bank of China unexpectedly cut interest rates. There were further signs of strain in the property sector with new home prices dropping for the first time this year, while property developer China Evergrande Group filed for US bankruptcy protection. For the week the Shanghai Composite dropped 1.8% while the Hang Seng fell 5.9%. The Hong Kong index was down over 20% from its January high, entering bear market territory.
Japanese markets were also weaker, with the Nikkei 225 down 3.2%. Amid a surging US dollar, the yen weakened to its lowest level since November, prompting speculation the government could intervene once again. Japan’s second quarter GDP figure came in stronger than expected and consumer inflation eased, but these were not enough to offset the cautious China mood.
Argentinian markets saw chaos at the start of the week following the surprise victory of right-wing candidate Javier Milei in the weekend’s presidential primary. The peso touched a historic low on the black market, more than double the official rate of 350 fixed by the central bank on Monday. The central bank also raised its key interest rate from 97% to 118%. The Merval index however surged, hitting a new record close and rising 21.7% for the week, its best performance in over two decades.
The value of your investment can fall as well as rise in value, and the income derived from it may fluctuate. You might get back less than you invest. Currency exchange rate fluctuations can also have a positive and negative affect on your investments. Please note that EFG Harris Allday does not provide tax advice. Past performance is not a reliable indicator of future performance.
This document has been produced by the EFG Harris Allday research team utilising data from documents produced by EFG Asset Management (UK) Limited for use by the EFG group and the worldwide subsidiaries and affiliates within the EFG group. EFG Asset Management (UK) Limited is authorised and regulated by the UK Financial Conduct Authority, registered no. 7389746. Registered address: EFG Asset Management (UK) Limited, Park House, 116 Park Street, London W1K 6AP, United Kingdom, telephone +44 (0)20 7491 9111.