Weekly Market Update Monday 21th August 2023

The primary U.S. stock indices experienced a decline of over 2%, with both the S&P 500 and the NASDAQ marking their third consecutive weekly drops. This downward trajectory comes after a three-week period of gains that concluded in late July, right in the middle of the quarterly earnings season.

In the UK, the annual inflation rate eased in July to 6.8% from June's 7.9%, primarily due to decreased energy and food costs. However, underlying price pressures remained robust, with the core inflation rate, which excludes items like food, energy, alcohol, and tobacco, remaining steady at 6.9%. Services prices, considered by the Bank of England (BoE) as a key indicator of underlying domestic inflation, accelerated to 7.4%, reaching their highest point since March 1992.

The UK's wage growth picked up speed, intensifying the pressure on the Bank of England (BoE) to further raise interest rates. Average weekly earnings (excluding bonuses) increased by 7.8% during the three months ending in June, up from 7.4% in the preceding three months. Concurrently, signs of a slowdown in the labour market became apparent, as the unemployment rate unexpectedly rose to 4.2%, up from 3.9% in the previous three months.

In the real estate sector, Country Garden, a prominent Chinese developer, incurred a loss of $7.5 billion in the first half of the year and halted trading of certain bonds after missing coupon payments earlier in the month. Meanwhile, Evergrande, a struggling property giant, sought bankruptcy protection in the United States, citing ongoing restructuring efforts in Hong Kong, the Cayman Islands, and the British Virgin Islands. Despite having 1,300 projects across 280 Chinese cities, the real estate unit of the group reported a combined loss of $81 billion over the past two years.

China's central bank reduced its medium-term lending-facility rate to 2.5%, marking the second cut in three months, as new economic data highlighted China's faltering economy. Industrial production and retail sales in July fell short of expectations, and nationwide unemployment rose to 5.3%.

The global equity markets mirrored the decline in the U.S., with international equities mostly following suit. European stocks retreated by 2.34%, driven by concerns of extended periods of higher European interest rates. The UK's FTSE 100 Index also dropped by 3.48%. In Hong Kong, the benchmark Hang Seng Index plummeted by 5.89% due to China's economic challenges, while Japanese stocks fell by 3.2% despite Q2 GDP figures exceeding expectations.

Within the Fixed Income market, the yield of the 10-year U.S. Treasury bond briefly surpassed 4.32% on Thursday, reaching its highest level since November 2007. Yields slightly receded on Friday, with the 10-year bond closing the week around 4.25%. However, this spike in the 10-year yield does not necessarily signal a resumption of rate hikes by the Federal Reserve. The increase in longer-term rates did not correspond with a similar rise in short-term rates, evident from the recent steepening yield curve. Meanwhile, the price of U.S. crude oil declined by 2%, reaching around $81 per barrel, breaking a seven-week streak of gains. Prior to this recent positive streak, the commodity was trading below $70 per barrel.

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