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The Long and Short of it, week ending 10 February 2023

Posted: 15 February, 2023

Topic: Telecoms , Financials , Basic Materials , Energy , Industrials , Technology

Publication Type: Market Commentaries

All three major stock market indexes moved lower last week with the Nasdaq Composite Index markedly underperforming the other two. Market direction and sentiment was mainly determined by investors’ evolving expectations of Fed monetary policy going forward. Concerns of continued tight monetary policy eminating from the very strong jobs report released the previous Friday continued into Monday pushing stock prices lower and Treasury rates and the U.S. dollar sharply higher. Tuesday’s comments from Fed Chair Powell, basically reiterating comments following the FOMC announcement the previous week were interpreted positively by the market, focusing more on Powell’s message that the disinflationary process has begun and less on his statements rates will likely need to move higher and remain there for a while, boosting stock prices. That sentiment, however, was reversed over Wednesday and Thursday with Fed-induced recession concerns rising to the forefront, push stock prices lower again. The S&P 500 Index, for example, up 0.7% through Tuesday, was down 1.8% through Thursday. Markets were mixed Friday, with the Nasdaq Composite Index moving lower and the S&P 500 Index and the Dow Jones Composite Index moving higher as investors moved into the weekend and prepared for this week’s CPI release. The 10-year Treasury rate increased significantly over the week, rising every day but Wednesday, ending the week 22bps higher. The increase came from both an increase in real rates (up 10bps) and inflation expectations (up 12bps). The U.S. dollar ended the week stronger keeping gains registered Monday. At week’s end, the S&P 500 Index decreased 1.1% to 4,090.46, the Nasdaq Composite Index fell 2.4% to 11,718.12 the Dow Jones Industrial Average edged slightly lower, falling 0.2% to 33,869.40, the 10-year U.S. Treasury rate rose 22bp to 3.74% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) strengthened 0.6%.

European stock markets also moved lower last week suffering from many of the same concerns dominating U.S. markets. Both the STOXX 600 and FTSE 100 Indexes fell almost a percent Monday, driven lower by growing concerns of continued tight Fed, ECB and BoE monetary policy in light of the previous Friday’s much stronger-thanexpected U.S. jobs report. Markets moved higher through Thursday, however, with investors interpreting positively Fed Chair Powell’s comments on Tuesday and on good earnings reports and strong energy stock performance despite comments from both ECB and BoE officials calling for continued restrictive monetary policy. Reports of an offer for Standard Chartered Bank by First Abu Dhabi Bank helped move the FTSE 100 Index higher Thursday while slowing German inflation and upbeat earnings reports buoyed the STOXX 600 Index. Both indexes moved lower Friday, weakening on renewed central bank policy concerns (an ECB board member called for more tightening). First Abu Dhabi Bank’s denial Friday it was seeking to buy Standard Chartered Bank helped move the FTSE 100 Index lower as well. The 10-year Gilt rate, reflecting BoE tightening concerns, climbed 35bps higher over the week. For the week, the FTSE 100 Index decreased 0.3% to 7,882.45, the STOXX 600 Index fell 0.6% to 457.90, the 10-year Gilt rate rose 35bps to 3.40%, the 10-year Bund rate increased 17bps to 2.37%, the British pound strengthened 0.1% and the euro weakened 1.1% both versus the U.S. dollar.