Equity markets try to brush off rate worries

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities ended last Friday and the week mixed ahead of a long holiday weekend.  The markets continued to grapple with the possibility of further aggressive Fed measures to try to tamp down inflation pressures after last week’s reports showed continued elevated consumer and wholesale prices.  The Dow finished 130 points higher on Friday, while the S&P 500 and Nasdaq 100 lost nearly 0.3% and 0.6%, respectively.  For the week, the Dow lost 0.5%, while the S&P 500 and the Nasdaq 100 fell 0.8% and 0.2%.  Markets in Europe diverged, as the Euro Stoxx 50 ended the week up 1.5% even though it fell by 0.5% on Friday. 

Summary as at 20.02.2023 

• Asian equity markets were muted on Monday as trading volume was dampened by a US holiday, while hawkish signals from Fed officials continued to weigh on sentiment.  Meanwhile, the PBoC kept its key lending rates unchanged for the sixth straight month at its February fixing as rising global rates left it little room to ease policy.  Shares in Australia, Japan, South Korea, Hong Kong, and China fluctuated. 
• European shares are headed for gains while financial markets in the US are closed for the Presidents’ Day holiday. 

• Oil prices traded higher this morning after losing about 4% last week, as rising US crude supplies and the prospect of further Federal Reserve policy tightening outweighed optimism over China’s demand recovery.  Last week, oil prices came under pressure after the US government announced plans to release 26 million barrels of oil from strategic reserves, while the latest data pointed to a much larger-than-expected build in US crude inventories. 
• The People’s Bank of China (PBoC) left its key lending rates unchanged for the sixth straight month earlier today, as widely expected.  Companies’ borrowing surged in January after the PBoC urged banks to “front-load” credit extensions and help support the recovery.  Consumers, meantime, stayed cautious and rushed to make early repayment of their mortgages. 
• The US and Chinese officials were in Germany over the weekend looking to patch up a new rift opened by the uproar over a Chinese balloon. But a meeting between Secretary of State Antony Blinken and China’s State Councilor Wang Yi showed how difficult it will be to compromise. The top US diplomat also said China was weighing whether to give Russia weapons for its war in Ukraine, a move that would ratchet up the tension even further. 
• International atomic monitors in Iran last week detected uranium enriched to levels just below that needed for a nuclear weapon, according to two senior diplomats, underscoring the risk that the country’s unrestrained atomic activities could prompt a new crisis. The International Atomic Energy Agency is trying to clarify how Iran accumulated uranium enriched to 84% purity — the highest level found by inspectors in the country to date, and a concentration just 6% below what’s needed for a weapon. Iran had previously told the IAEA that its centrifuges were configured to enrich uranium to a 60% level of purity. 
• Meta Platforms is launching a subscription service called Meta Verified that will include a handful of additional perks and features, including account verification badges for those who pay. The new subscription will cost $11.99 per month — $14.99 if purchased through the iOS app — and is primarily targeted toward content creators. In addition to a verification badge, the subscription includes “proactive account protection, access to account support, and increased visibility and reach. 

• Deer & Company reported fiscal Q1 EPS of $6.55 on Friday, topping the $5.57 estimate, as revenues grew 32% year-over-year (yoy) to $12.65 billion, exceeding the Street’s forecast of $11.34 billion.  The company said its Q1 performance is a reflection of favourable market fundamentals and healthy demand for its equipment as well as solid execution on the part of its employees, dealers, and suppliers to get products to its customers.  It also raised its full-year guidance for net income and operating cash flow. 
• In the week ahead the focus in the US will be on the FOMC Meeting minutes and speeches by Fed officials. Investors will also closely follow personal income, spending, PCE price index, and 2nd estimate for Q4 GDP growth rate. Also, the attention will be taken by fresh PMI manufacturing and services readings for major economies including US, UK, France, Germany, and Japan. On the corporate side, earnings results from major US retailers will test the strength of the US equity market rally.