Equity markets fell over the week following hotter-than-expected US CPI data and heightened tensions in the Middle East following Iran’s missile strikes on Israel.
What You Will Learn
- The impact of hotter than expected US CPI data on market expectations for interest rate cuts.
- Escalating tensions in the Middle East and their effect on global markets, including oil and currency markets.
- How economic data and geopolitical events influence performance among different equity markets worldwide.
Shift in Rate Cut Expectations Due to Inflation Data
One month ago, markets predicted that the US Federal Reserve would cut interest rates at its upcoming June and July meetings.
However, following last week’s announcement that Consumer prices rose by 3.5% year over year, markets have almost written off expectations of a June rate cut and are now applying only a 50% chance that US rates will be cut in July.
US consumer prices rose 3.5% year over year in March, up from 3.2% the prior month. Core CPI, which strips out volatile food and energy prices, held steady at 3.8%, slightly above consensus expectations.
Whilst service inflation remains stickier than expected, mainly due to the financial health of the US consumer, there were more positive signs of continued downward moves in shelter and automobile prices.
Israel and Iran Tensions Amplify Market Volatility
Later in the week, stocks pulled back sharply in the wake of reports that Iran was preparing to attack facilities on Israeli soil directly for the first time.
Oil prices rose on the news, along with the US dollar, typically viewed as a “safe haven” in times of international turmoil.
Meanwhile, the CBOE Volatility Index (VIX), Wall Street’s so-called fear gauge, spiked to its highest level since November.
Global Equity and Bond Market Responses
US equity markets fell 1.6% over the week, with small and midcap stocks faring worse than mega-cap growth names. European equities also fell 0.26%. However, UK equities bucked the downtrend, gaining 1.07%.
The British pound’s weakness relative to the US dollar helped support the index, which includes many multinationals that generate meaningful overseas revenue.
Japanese stock markets rose 1.4% as the Yen remains near multi-decade lows, while Chinese equities fell 1.62% as CPI data reached just 0.1% for March, below consensus expectations.
In the wake of Wednesday’s inflation report, the yield of the 10-year US Treasury bond rose to the highest level in five months, climbing as high as 4.59% at one point.
It did, however, close the week at 4.52% as investors sought safe-haven investments following the breaking news of Iran’s direct attack on Israel.
Gold prices rose for the third week, adding to the record highs in previous weeks.
Despite rising fears of escalating tensions in the Middle East during the week, oil prices fell 1.6%, with WTI Crude closing at just over $85 per barrel.
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