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Weekly Market Update Monday 6th March 2023

Global equities rise, despite US Treasury yields rising to 4% and further data suggesting sticky inflation.

Bonds sold off this week as continued robust economic data led to expectations of rates staying higher for longer, with the yield on 10-year US Treasuries hitting 4%. However, despite this, and following the losses suffered last week, most equity markets made gains, aided by data out of China that suggested the manufacturing sector had grown at is fastest pace in more than decade during February as a direct consequence of the end to zero covid policies.
As of 12pm on Friday, London time, US equities rose 0.3%, with the technology sector climbing 0.6%. European equities increased by 1.1% and UK equities were up by 0.9%. Japanese equities were up by 1.6%, whilst the Australian market fell by 0.3% against expectations of further monetary policy tightening. Emerging markets rose by 0.8% despite the interest rate outlook, bolstered by strong performance from Chinese stocks, with domestic ‘A’ shares up by 1.9% and offshore Hong Kong stocks up 2.8%. Latin American stocks fell 0.2%, with Brazilian stocks falling by 2.3%.

Bond markets flash recession warning, as US Treasury yield curve inversion strengthens.

US Treasuries inverted by the most in forty-two years, whereby shorter dated bond yields trade at higher levels than longer dated bonds, considered an indicator of an impending recession. Two-year Treasury yields, which move inversely to price, rose to 4.88%, versus the 10-year trading close to 4.00%. It was a similar story for European bonds, where 10-year yields rose to 2.74%, with two-year bond yields rising by a similar amount, to a yield of 3.22%. However, in the UK, whilst 10-year bond yields rose to 3.9%, 2-year bonds rallied, with the yield falling to trade beneath 10-year yields at 3.72%. The switch from yield inversion to yield steepening is normally a signal by bond markets that a recession is going to hit sooner rather than later, as markets start to price in rate cuts. However, on this occasion, this reaction to gilt prices may have been triggered by comments from Andrew Bailey, the Bank of England’s governor, who suggested on Wednesday that investors were wrong to assume many more rate rises were needed to tame inflation.

Eurozone inflation surprises to the upside, with core inflation rising further.

Inflation data released in the Eurozone surprised to the upside, with Germany, France and Spain all releasing figures above forecasts, although lower than figures released in January. For the Eurozone as a whole inflation came down to 8.5%, however, forecasts were set at 8.3%. Stripping out food and energy, inflation rose to 5.6% for the year to February, an increase of 0.3%. Swaps markets are now pricing in European rates at 4% by the year end, versus the current level of 2.5%.

Chinese manufacturing sector benefits from the end to zero covid policies

Chinese manufacturing purchasing managers indices (PMI), which are surveys that aim to quantify the operating environment companies find themselves in, strengthened, with the official manufacturing PMI coming in at 52.6 (50 is the dividing line between expansion and contraction). The Caixin manufacturing PMI, which has less of an emphasis on large state-owned companies, came in at 51.6, the first expansion in seven months.

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