Market Overview|Quilter Cheviot

Stocks recover as bond yields stabilise

Our Weekly Market Overview from Quilter Cheviot

by Alan McIntosh, Chief Investment Strategist

A fairly uneventful week in terms of economic news and releases saw global stock markets end higher, boosted by a strong Friday session in the US. Following back-to-back weekly declines, the MSCI All Country World Index rose 1.9% last week, signalling that the prevailing themes of late may have become a little fatigued as investors look ahead to a string of key events.

US benchmarks closed 2% higher, with the bulk of the gains coming in the final session of the week. Technology stocks outperformed once more, supported by a moderation in the rise of bond yields, ending up 2.6% on the week. The gains take the year-to-date rise for the sector to just shy of 12%, more than double the broader US market returns of 5.5%. The volatility index fell below 19 last week to trade close to its lowest levels of the past year, a sign that there is little caution in the market at present despite declines over the last month and higher interest rates.

Bond yields were broadly flat last week with the US 10-year Treasury yield rising by 1 basis point to 3.96%, pulling back a little from a three-month intraday high of 4.09%. The move higher in yields, and equity market retracement began in early February following a blowout non-farm payrolls release which led investors to re-price the probability that the Federal Reserve (Fed) will raise interest rates higher than previously thought.

This Friday we will get the subsequent US jobs report, which will no doubt be keenly viewed to see whether February’s release was a one-off or whether it signalled renewed tightening in the labour market. The release is the first of three major pieces of US data in as many weeks, with the Consumer Price Index (CPI) and the second Fed monetary policy decision of the year to follow.

In the UK, the 10-year gilt yield increased from 3.66% to 3.85% last week, a move broadly in line with core European government bond yields. The pound continues to trade in a fairly narrow range against the US dollar, hovering around the 1.20 level.

UK and European shares lagged their US counterparts a little on the week, with the former adding 1.1% and the latter 1.7%. Still, they are outperforming global indices so far in 2023 with UK benchmarks up 7.4% and European bourses higher by 10.2%.

Conservative goals

China has announced a 5% economic growth target for the year, slightly lower than economists expected in light of the widespread lifting of pandemic restrictions. The reopening has been widely cited as a major tailwind to the global economy this year, driven by a rebound in consumer spending and industrial output. There is often a degree of scepticism among market participants regarding the accuracy of Chinese growth numbers, but the modest target suggests a potential change of tack by publishing a less optimistic outlook.

Shares in Hong Kong advanced last week after a run of four consecutive weekly losses with the 3.1% gain taking the year-to-date return figure to 4.3%. The market continues to exhibit elevated volatility, closing out February with a sizable decline of 9.4% after a blockbuster start to the year.

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