Weekly Market Update Monday 7th August 2023
Major US markets closed lower as investors digested a US credit downgrade and weaker jobs report. The Nasdaq, S&P 500 and Dow ended the week 3%, 2% and 1% lower respectively.
The Labor Department announced early Friday that the U.S. created 187,000 jobs in July. That's a slight increase from the revised 185,000 jobs added in June, but slower than the 200,000 increase analysts were expecting and the smallest increase in more than a year. The jobs report shows the unemployment rate edged down to 3.5% from 3.6%, whereas hourly wages rose 0.4% in July from the month before, faster than the 0.3% analysts expected suggesting a relatively tight labour market.
Ratings agency Fitch unexpectedly downgraded the U.S. credit rating on Tuesday from AAA to AA+. The agency cited the recent debt ceiling standoff and concern over rising federal debt as factors leading to an “erosion of governance.” This marks the second credit downgrade in U.S. history after a similar decision was made by Standard & Poor's in August of 2011, a decision that has not yet reversed.
Looking at earnings, 84% of the companies in the S&P 500 have reported Q2 2023 earnings to date. Among the companies that released second-quarter results, 79% exceeded net income expectations, topping the five-year average of 77%. However, with this quarter’s earnings season coming to an end, it leaves fewer opportunities for potential good news driven surges.
In local currency terms, the pan-European STOXX Europe 600 Index ended 2.4% lower. Higher U.S. bond yields and some disappointing European earnings reports deflated investor enthusiasm for riskier assets. Germany’s DAX dropped 3.1%, France’s CAC 40 Index lost 2.1%, and Italy’s FTSE MIB slid 3.1%. The UK’s FTSE 100 Index fell 1.7%.
The BoE raised its key interest rate by a quarter of a percentage point to a 15-year high of 5.25%. It warned that rates were likely to stay high for some time, saying "the MPC [Monetary Policy Committee] will ensure that Bank Rate is sufficiently restrictive for sufficiently long to return inflation to the 2% target."
With global investor risk appetite dampened by a U.S. sovereign credit rating downgrade, Japan’s stock markets fell over the week. The Nikkei 225 Index registered a 1.7% loss and the broader TOPIX Index was down 0.7%. Chinese stocks on the other hand rose as Beijing’s supportive stance offset concerns about the latest batch of disappointing economic data. The Shanghai Stock Exchange Index gained 0.4% while the blue-chip CSI 300 was up 0.7%.
Yields on the 2yr UST ended the week at 4.76% while the 10yr yield fell 14bps to 4.03%. A miss on the headline non-farm payrolls number could prompt some tempering of expectations for how long the Fed will keep rates at restrictive levels, however, inflation data due to come out later this week will set the tone for US treasuries.
Oil prices rose on Thursday after news that Saudi Arabia’s voluntary production cuts would extend to September and possibly beyond. Oil prices declined earlier in the week but rebounded on supply concerns, ending the week at over $80 per barrel. Brent rose 1.3% on Friday to settle at USD 86.24/b and WTI was up 1.6% to USD 82.82/b, not far off its year-to-date high of USD 83.26/b recorded in April.