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Netflix and Nvidia's losses helped drag the Nasdaq to a 319-point daily deficit, its largest drop in months. AI fulled buying seems to have just fallen off a cliff. No doubt it will be back, but without buyers, it could fall further.
With nearly all of TPP’s active strategies being short it was a great week for our portfolios. Some profits have been taken, but the short positions are still very much in play. It’s during times like this that TPP stands out from the crowd. We aim for our portfolios to perform regardless of market climate, and this week we really saw that happening.
London's markets closed in a mixed state on Friday as traders kept a close watch on escalating tensions in the Middle East.
The FTSE 100 index edged up 0.24%, closing at 7,895.85 points, while the FTSE 250, slipped 0.31% to settle at 19,391.30 points.
Market participants were monitoring geopolitical developments, after reports of an Israeli strike on a target in Iran's central province of Isfahan, where key nuclear installations are located.
The strike was seen as a response to Iran's earlier attack involving over 300 drones and missiles targeting an Israeli air force base.
In currency markets, sterling was last down 0.47% on the dollar, trading at $1.2378, while it weakened 0.46% against the euro to change hands at €1.1631.
Consumer prices in the UK grew at an annualised rate of 3.2% in March, down from 3.4% in February. Although the inflation rate fell to its lowest level in two and a half years, the decline was slightly less than forecast by analysts and the Bank of England due to elevated price growth in fuel and communication goods.
Services inflation, a measure of underlying price pressures that is watched closely by the BoE, remained high but slowed to 6.0%from 6.1%.
Wage growth also slowed less than expected in the three months through February. Excluding bonuses, pay increased 6% year over year, down from 6.1% in the preceding period. The unemployment rate rose sharply to 4.2% in February from 3.9%. Job vacancies continued to decline in the first quarter.
Higher oil prices and the somewhat sticky inflation data prompted financial markets to push out expectations for a first cut in UK interest rates from June to sometime in autumn.
The market is always trying to price in new information and constantly moving. We believe that the market has pulled back too far here and the first cut will still come before autumn, unless oil prices have a quicker unwanted effect on inflation than expected.
BoE Governor David Bailey sounded more upbeat: “In the UK, we're disinflating at what I call full employment,” he said at the International Monetary Fund’s (IMF) annual meeting. “I see, you know, strong evidence now that that process is working its way through.”
In Europe
The pan-European STOXX Europe 600 Index ended 1.18% lower as tensions rose in the Middle East. Major stock indexes were mixed: Germany’s DAX fell 1.08%, Italy’s FTSE MIB gained 0.47%, and France’s CAC 40Index was little changed. The UK’s FTSE 100 Index declined 1.25%. European government bond yields broadly climbed.
A slew of European Central Bank (ECB) policymakers at the IMF meeting reiterated that June was the likely target date for lowering borrowing costs, barring unexpected economic shocks. ECB President Christine Lagarde declined to say whether there might be more than one reduction in rates.
In the US
Stocks in the US recorded their third consecutive week of broad losses.
Mega-cap technology shares lagged as rising rates placed a higher theoretical discount on future earnings. A first-quarter revenue miss from advanced chipmaker supplier ASML Holdings also seemed to weigh on the sector.
Small-caps continued to struggle, pushing the small-cap Russell 2000 Index further into negative territory for the year-to-date period.
On Monday, the Commerce Department reported that retail sales rose 0.7% in March, well above consensus expectations of around 0.3%, while February’s gain was revised upward to 0.9%.
As was the case the previous week, Fed officials expressed their concern with recent economic data. On Tuesday, Fed Chair JeromePowell stated at an economic conference that “recent data have clearly not given us greater confidence and instead indicate that it’s likely to take longer than expected to achieve that confidence.” On Thursday, New York Fed President John Williams warned that a rate hike is not the baseline, but that one is possible if the data warrants. Atlanta Fed President Raphael Bostic said that policymakers would not be in a position to cut rates until the end of the year.
The US economy is still looking strong so right now, there really is no reason for the Fed to cut. This could be a problem for both commercial and residential property markets, as there is only so much high borrowing costs they can take before something breaks.
In Asia
In Asia, Japan’s stock markets suffered sizeable losses over the week. The Nikkei 225 Index was down 6.2%, and the broader TOPIX Index lost 4.8%. An additional factor weighing on the markets was some concern about waning AI-related demand.
In fixed income, the yield on the 10-year Japanese government bond closed the week at around 0.84%, broadly unchanged from the prior week.
Chinese equities rose after the economy expanded more than expected in the first quarter. The Shanghai Composite Index gained 1.52%,while the blue-chip CSI 300 added 1.89%. In Hong Kong, the benchmark Hang Seng Index gave up 2.89% as escalating geopolitical tensions in the Middle East hurt investor sentiment.
China’s gross domestic product expanded an above-consensus 5.3% in the first quarter from a year ago, accelerating slightly from the 5.2% growth in last year’s fourth quarter. On a quarterly basis, the economy grew 1.6%, rising from the fourth quarter’s 1.4% expansion.
What's coming next week
Earnings season is underway. This week we’ll hear from: SAP, General Motors, Lockheed, MSCI, Pentair, Pepsi, Spotify, Boeing, Hilton, Meta, Tesla, AstraZeneca, Honeywell, Microsoft, Exxon, Whitbread, Barclays, Sainburys, WH Smith and many more.
Whether earnings will be heard over the noise in the Middle East remains to be seen, but they will give us a good idea of how the corporate market is getting on behind the scenes.
There isn’t a great deal this week aside from earnings, but there is the big one, PCE inflation.
Inflation data remains a hot topic for traders given its potential impact on the Fed’s monetary policy. Yet now markets have slowly unwound bets of multiple Fed cuts to likely none at all this year, I am left wondering how much of an impact next week’s PCE inflation data might actually have on markets.
A volatile market reaction to any data release requires a surprise, one way or another. Yet with PCE inflation data itself being less volatile than headline CPI reads, markets preparing for no or very few cuts and the likelihood that PCE will not soften enough to change these views, it leaves an upside surprise if anything.
The Bank of Japan are unlikely to change policy in their meeting on Wednesday, and even if they did it won’t be much and is unlikely to be followed up by much else any time soon. At least, if comments from BOJ member Noguchi are to be believed when he said “it’s short-term policy rate adjustment is likely to be slow”.
Markets are pricing in less than a 50% chance of a 10bp hike by July, according to Bloomberg. With that said, the BOJ is not one to base its policies on market pricing and will ultimately say and do what it wants, when it wants.
