Market volatility resumes
Markets continued their decline this week, following on from last Friday’s hawkish comments from US Federal Reserve (Fed) Chair, Jerome Powell. Powell’s remarks that the Fed would continue to fight inflation and raise rates despite the risk of pushing the economy towards recession, weighed on markets. Economic data releases, in particular worse manufacturing numbers, did not help matters, adding to investors fears over a global slowdown. Meanwhile close attention is being paid to US employment figures announced later today as markets closely gauge whether a hot labour market will pressure the Fed to raise rates further. That said, US non-farm payrolls are expected to have added 300,000 new jobs in August, fewer than the 528,000 added in the previous month.
As of 9am London time, over the week the US market is down 2.24% with the US technology sector performing slightly worse, finishing lower by 3%. European stocks struggled too, with the UK and European main indices falling 3.3% and 3.5% respectively. Asia did not fare much better either, with the Hong Kong index down 3.78% and the Shanghai Composite lower by 1.5%, exacerbated by the news of a new Covid lockdown in the city of Chengdu. Meanwhile, the Australian index fell by 3.88%, driven by underperformance in energy and mining companies, given falls in commodity prices this week.
Poor Manufacturing PMIs shows signs of a slowing global economy.
As alluded to, Manufacturing Purchasing Manager Indices (PMIs), a measure of economic activity, showed signs of slowing within the manufacturing sector for key regions. Readings above 50 indicate an expansion in activity, whilst readings below 50 represents a contraction. For the Eurozone, the manufacturing PMI contracted for a second month in a row to 49.6. Weaker demand conditions were a drag on goods producers, reflecting deteriorating purchasing power across Europe amid high inflation. Meanwhile the Caixin manufacturing PMI for China also contracted heavily to a reading of 49.5, from July’s reading of 50.4. The latest print reflected the impact of widespread COVID lockdowns and electricity shortages. In the US the PMI slowed to its lowest reading since July 2020, of 51.5. Though still technically indicating expansion, the reading dropped from 52.2 the prior month.
Core government bonds fail to provide protection
Equities were not the only asset class to struggle. As we remain in a backdrop of rising rates, and elevated inflation, this weighed on core government bonds. Bond yields, which move inversely to its prices, rose dramatically across the board. With Eurozone core price inflation (CPI) hitting a record 9.1% increase year on year, German bund prices declined, as the 10-year yield rose 20 basis points to 1.58%. Similarly in the UK, investors are increasingly concerned that the rising energy cost crisis will exacerbate inflation, forcing the Bank of England to raise borrowing costs. The 10-year gilt yield saw a big jump by 32 basis points to trade at 2.92%.
Equivalent 10-year US treasuries also sold off at the start of the week, following last Friday’s Fed commentary, with the yield rising 21 basis points over the week to trade at 3.25% as of 9am London time.
Commodities sell off on fears of recession
With focus back on the health of the global economy, and fresh lockdowns in China, oil and industrial metal prices fell sharply on weaker demand fears. As of 9am London time, Brent crude oil declined 6.7% to $94.15 per barrel with the majority of the decline occurring on Tuesday. News that Iraq’s oil output had been unaffected by days of violence in Baghdad also contributed to the fall in oil price. Meanwhile, Copper and Iron ore prices also declined significantly by 6.55% and 9.89% respectively.