Financial Markets’ Weekly Recap, December 12-16

Financial markets’ sentiment was still negative for most of the previous trading week amid accelerating recession-linked fears. This development, for sure, reinforced US Treasury bond yields but the US stock futures and equities in the Asia-Pacific region maintained mostly dull performance ahead of the final batch of data from the big week.

Stocks

The US and European stocks suffered a decline at the end of last week due to the environment that guarantees more rate hikes in the next stage, which leads to undermining the ability of companies in the major economies to borrow in light of the high costs involved.

In the trading week of December 16, the Dow Jones Industrial Average fell 1.7%, with the Standard & Poor’s 500 losing about 2.1% and the Nasdaq Technological Heavy falling 2.7%.

The European Stoxx 600 composite fell by 1.1%, with the German DAX30 falling by -0.8%. The losses of the French CAC and the British FTSE 100 were about -1.1% and -1.3%, respectively. IBEX 35 for the Spanish Stock Exchange and Italian FTSE Milano declined by -1.2% and -0.3%.

The reason for the lack of negative performances for equities could be linked to the hopes for more stimulus from China. With the mixed signals, on Friday, the US Dollar Index failed to extend the Thursday’s recovery moves.

On Thursday, global central bankers’ rush towards higher rates and willingness to keep them high for longer, to combat inflation, seemed to have caused a widespread state of risk aversion and underpinned the US Dollar demand.

On the same line could be the latest Sino-American tensions after the White House, on Thursday, added Chinese memory chipmaker YMTC and 21 big Chinese companies in the artificial intelligence chip industry to a blacklist, broadening the US crackdown on China’s chip industry.

Moving on, the market forecasts surrounding the US S&P Global PMIs looked mixed as Services activities are likely to improve but not the manufacturing ones. Even so, both these sectors are expected to record below 50 figure that suggests a contraction in activities and could weigh on the US Dollar in case of a negative outcome.

It is worth mentioning that the Fed’s hesitance in favoring the hawks, despite raising rates by 50 basis points, seems to challenge the DXY bulls.

More, But Slower, Tightening

US Dollar Index’s losses could be linked to the failure to cross a one-week-old descending resistance line, around 104.55. The Fed, the ECB, the BoE, and the Swiss central banks decided interest rate hikes last week with the emergence of official expectations by several central banks of further deterioration in economic conditions, which negatively impacted the performance of risk assets in general.

The Fed raised the interest rate at the end of its last meeting in 2022, on Wednesday, by 50 basis points, which was in line with most market expectations. The major trend was favouring slower pace of monetary policy tightening and raising interest, confirmed at the same time that policymakers will continue to raise interest until inflation could be brought under control even at the expense of potential recession.

The European Central Bank raised interest rates by 50 basis points at its last monetary policy meeting for 2022, marking the fourth increase after two consecutive increases of 75 basis points.

Thus, the deposit facilities rate reaches 2%, the refinancing rate to 2.5%, and the marginal lending rate to 2.75%, which are levels not seen in the market in fourteen years.

The Bank of England (BoE) announced that it raised interest rates by 50 basis points to 3.5% as expected following its December meeting.

The Swiss National Bank raised its benchmark deposit rate by 50 basis points to 1.0% from 0.50% previously, as was widely expected. In its December policy meeting, the SNB raised rates for the third consecutive meeting, netting up to 175 basis points of rate increases this year.

US retail sales recorded a decline of -0.6% in November, compared to the previous month’s reading, which recorded an increase of 1.3%, which was lower than the market expectations, which indicated a decline of -0.1%.

Monetary policy decisions, which are all in favour of quantitative tightening, were behind a state of negativity that led to a decline in US stocks, leading to further deterioration of other risk assets.

US Treasury bond yields fell to lower levels on Friday, after weekly losses that came as a result of raising interest rates at a lower pace and reducing the speed of raising them, despite confirmation of the continuation of quantitative tightening so that the Fed can control inflation.

The deterioration in US retail sales also contributed, according to the data released on Friday, which cast a negative shadow on the US benchmark bond yields at the end of the last day of trading week (December 12-16), as the yields are affected by any negative developments in the US economy.

US Treasury bond yields for ten years fell to 3.565% at the end of the trading week, compared to the previous weekly closing, which recorded 3.492%. The returns on this type of bond rose to levels last week at 3.590%, compared to the lowest levels in the same period, which recorded 3.444%.

The US dollar ended the trading week (December 12-16) with losses, despite the interest rate hike by the Fed last Wednesday.

Despite Jerome Powell’s confirming that the central bank continues to raise interest rates, the currency drop came as a result of the tendency of the Fed members led by the Chairman to slow down the pace of quantitative tightening. The dollar index, which provides an accurate assessment of the performance of the US dollar against a basket of major currencies, lost about a point to settle at the end of last week at 104.80 points, compared to the previous weekly closing, which recorded 105.14 points.

Oil

On Friday, WTI price headed lower for the second straight day, as sentiment soured on unexpected hawkish stance of three major central banks, though optimism on hopes about China’s demand recovery and fears on supply disruptions, were still in action. Signals from daily chart, on Friday, were in favour of further weakness as negative momentum was strengthening and MA’s are in bearish setup.

Gold

Gold was unable to take advantage of the weekly decline in the US dollar, as futures contracts for the precious metal fell and suffered weekly losses due to expectations of continuing to raise interest in the coming period, which came from a number of monetary policy makers in the main central banks.

The Week Ahead

Over the next week, several factors are expected to drive price actions, most notably data on inflation levels, which are the readings of the Personal Consumption Expenditures Index, which is the most accurate indicator ever for the Fed. Other important data will also be released including housing data, US Consumer Confidence Conference Board and the University of Michigan, as well as the final reading of GDP, personal spending and personal income. As for monetary policy, the Bank of Japan will issue its rate decision next Friday.