Quilter Cheviot|Weekly Comment

Stocks decline as bond yields rise

Our weekly market overview from Quilter Cheviot

By Alan McIntosh, Chief Investment Strategist

Stock markets around the globe retreated last week, starting the second half of the year lower with European and Asian bourses particularly soft. Bonds fell as yields moved firmly higher as expectations for further interest rate increases remain fairly high despite some softening in economic data releases.

A spate of data pointing to weakness in the Eurozone and the ongoing belief that further monetary policy tightening is in the pipeline weighed on European markets, sending them 3.1% lower last week. The latest German industrial production, factory orders and export figures all suggest slowing economic activity. Meanwhile, comments from European Central Bank president Christine Lagarde, did little to suggest an end anytime soon to the cycle of raising interest rates.

Chinese manufacturing and services figures also pointed to more subdued levels of activity and, while the western world continues to battle above target inflation, it seems like Beijing is in danger of facing deflation. The producer price index for June showed a 5.4% decline in annual terms, the ninth consecutive negative reading for this metric. Furthermore, the data is going to deeper into negative territory, representing a sharp reversal from the 6.1% annual increase shown by the same data point at this time last year.

UK stocks dropped 3.6% on the week, moving back into negative territory for 2023. The failure for Chinese demand to snapback as had been hoped at the start of the year continues to provide a headwind for the benchmark’s significant weighting to stocks exposed to the Chinese economy, like mining companies. A strong currency, largely due to market forecasts for a higher UK terminal rate than its peers, is another headwind and the pound gained to end last week at US$1.28 – near its highest level in a year. While bond yields rose in general, UK government bond yields gained more than US and European counterparts with the 10-year gilt yield ending at 4.48%, up 27 basis points on the week.

More to come from the Fed

The Federal Reserve (Fed) is expected to resume raising rates later this month, after holding its base rate steady following its last policy meeting. The release of minutes from the meeting supported this notion, showing that some members would have preferred to raise rates in June.

A slightly softer than expected non-farm payrolls is unlikely to change this view, as it still showed 209k jobs added in the month of June. There was also a 33k downward revision to May’s strong beat, but this still leaves the figure at 306k and suggests there is very little sign of any weakness in the US labour market. This was further reinforced by another month of solid wage growth and the unemployment rate ticking back down to 3.6%.

On the whole, the US appears to be in a more favourable position than its counterparts on this side of the Atlantic as economic data is holding up better and even though the Fed may resume rate rises, the US central bank is closer to the end of the cycle than the Bank of England or European Central Bank.

This was reflected by a relatively smaller increase in US yields last week and an outperformance for US equity benchmarks, declining 1.1% compared to 1.3% for global indices.

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