The main indices in the US ended last week on a negative territory. The aggressive policy of the central banks around the world put the market’s sentiment to the test. The concerns of the investors sharpen by the possibility of a recession amid the persistently high inflation and the fast increase of the main interest rates.
In addition, the weaker economic data and “bearish” sentiment of executives in the corporate world focused investors’ attention on the preliminary reports for the second quarter (Q2) in anticipation of weaker results. Last but not least the problem with China and its blocking still exists. The measures used in combating Covid-19 have a direct influence on the global supply chain.
Stocks of the developed international markets (MSCI EAFE) also closed the week on red territory. This is largely due to the European Central Bank (ECB) and its attempts to balance inflation and aids. ECB must fight at the same time the rising inflation by tightening its monetary policy with increasing the main interest rate, but at the same time it needs to be cautious about the state of the heavily indebted euro nations, for which the future higher interest rates will cause upwind. The developing markets are no exception in terms of the weekly performance. They also finished weak, but there seems to be light in the tunnel as Covid-19 improves in China. However, the situation remains delicate given the spread of the virus and the aggressive measures of China.
Bloomberg Aggregate Bond Index and Bloomberg High Yield Index finished also on red last week. This is mostly due to the yield of the 10-year government US bonds. It increased sharply and exceeded 3.2%. The influence of the monetary policy of the Fed has its impact on the performance of the fixed income instruments, which has the worst start in the last 50 years.
Crude oil and natural gas withdrew this week despite the lower resources around the world. Despite the decline, the fundamental indicators remain positive for the investors in the energy sector. Due to the increased demand during the summer season, the gas resources are currently on an 8-year low.
Three key events for the upcoming week
Jerome Powell must testify before Congress on Wednesday and Thursday and is expected to repeat the Fed’s obligation for restricting the inflation, which is the highest in 40 years.
The ECB President Christine Lagarde will testify before the European Parliament in Brussels today and will likely be carefully questioned about the progress on the bank’s new instrument for the fight with the crisis after it was announced last week. The ECB is developing plans for new scheme for a purchase, aimed at combating “fragmentation” or the increasing gap between the expenses of loans which are paid by Germany and more indebted countries from the periphery of the Eurozone like Italy, Spain, and Greece.
The economic calendar is light next week with the main focus being on the update of the state of the housing sector. The data from Tuesday on sales of existing houses in the US is expected to show a slowdown in May as interest rates on mortgages continue to increase. The US must publish data on sales of new houses on Friday, with markets looking for a rebound after the decline of 16.6% in May.
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