Global markets – week in review
Global stocks eased back for the 2nd week in a row, with a series of poorly received US bond auctions helping to push up bond yields and push down equity values.
Probably the main highlight last week was several US bond auctions which were met with tepid demand and placed upward pressure on global bond yields. Along with sticky inflation and geopolitical upheaval, concerns over the still-huge US budget deficit is a third – but so far less considered – risk to the global market outlook.
No one quite knows when and if America will face its “Truss moment”*, whereby markets start to demand a higher bond yield risk-premium due to mounting bond supply.
What we do know is if and when that day arrives, it would likely also cause ructions on Wall Street, with higher yields threatening economic growth and hence corporate earnings, but also currently elevated equity valuations. The Fed might try to stem the disruption by buying bonds (or engaging in some form of yield curve control), but this might only cause more market disquiet.
Also weighing on the US market last week was a surprise revenue downgrade by tech-darling Salesforce, which saw its share market value shed by a lazy 20%. It momentarily also knocked valuations among some of the Magnificent 7.
A few Fed speakers also chimed in, continuing to suggest a low risk of another US rate hike – though with the first possible rate cut not until later this year.
The week ahead
The major global highlight this week will be Friday’s May US payrolls report, with another solid 185k employment gain expected. The unemployment rate is expected to hold steady at 3.9%. Private average hourly earnings are expected to rise 0.3% in the month – which would keep annual growth steady at a still firm 3.9%.
Such a result would be consistent with a still solid outlook for the US economy and “higher for longer” interest rate outlook.
That said, two central banks this week are widely expected to cut rates – the Bank of Canada and European Central Bank – due to somewhat better progress in lowering inflation and relatively softer economic growth than in the US. That said, Friday’s EU inflation report was a touch stronger than expected, suggesting the ECB this week may push back against expectations for deeper cuts later this year.
One last point of interest will be the OPEC meeting, with the expectation being of an extension of production cuts to help hold oil prices up in the face of slowing demand.
Global equity trends
Looking at global equity trends, the equity rebound over recent weeks has favoured a bounce back in the relative performance of Nasdaq 100/global quality exposures. There are also growing signs of a broader rebound in global growth over value.
At the same time, the China-led rebound in emerging market relative performance has stalled a little. Japan is enduring a relative performance correction after recent strong gains while Australia and global small caps continue to underperform.