US rate rises moderated once more, spurring on a rally in US equities
US equities climbed to their highest level since August of last year, whilst the rally in the US technology sector since its December low now exceeds 19% as the Federal Reserve (Fed) slowed the pace of rate increases to 0.25%, taking rates to an upper range of 4.75%. Perhaps most notably, in a week when the European Central Bank and the Bank of England raised rates by 0.5%, the overly cautious tone evident in previous speeches was increasingly absent.
As of 12pm on Friday, London time, US equities rose by 2.7% over the week, with the US technology sector increasing by 5.0%. European markets were up by 0.8%, with UK stocks climbing by 1.1%, with mid and small cap stocks strongly outperforming large cap companies. Australian stocks also rose by 0.9%, whilst the Japanese market fell by 0.6%. Emerging markets also fell by 0.5% having risen strongly over January. Hong Kong stocks, which had risen over 50% since their October 2022 low, fell 4.5%, whilst Indian stocks, which have been a laggard since the beginning of the year, increased by 2.6%.
Bond markets rally too
Government bonds also rallied, with yields (which move inversely to price) falling, the 10-year US Treasury yield now stands at 3.38%. German bunds and UK gilts also rallied, with 10-yields now trading at 2.15% and 3.02% respectively.
Whilst commodity prices fall
The growing market confidence in inflation having peaked pushed gold prices lower over the week, falling by 0.9%, now priced at $1,928 an ounce. However, perhaps counter intuitively given the reopening of the Chinese economy, crude oil prices fell over the week, with Brent crude falling by over 5% and a barrel of oil now trading at $82.1.
Issues under discussion
Markets have been buoyed by downward signs in the trajectory of inflation and a sense that a peak in the interest rate cycle is near. So far unemployment has not risen, providing optimism that perhaps central banks can navigate a soft economic landing.
However, monetary policy acts with a lag, and having seen a massive increase in stimulus during the Covid pandemic, the major developed economies are now experiencing a massive fall in stimulus as interest rate rises are combined with quantitative tightening. Only time will tell whether we are out of the woods or whether we are due a recession and potentially another leg down in markets.
Our focus continues to be on areas of the market where we think valuations look compelling on a longer-term view, often with a margin of safety, whilst not chasing those areas of the market that still look expensive, despite having suffered some of the steepest falls last year.