Global stock markets have managed to hold on to last week’s gains despite another central bank interest-rate increase, gloomy economic data and growing political tension between the United States and China.
Tensions over Taiwan
The visit by US House of Representatives Speaker Nancy Pelosi to Taiwan – which China considers to be a breakaway province – prompted Beijing to retaliate by planning a series of live-fire naval exercises. This led to heavy losses on equity indexes in mainland China as well as in the US at the start of the week.
Economic news has been largely negative, with high commodity and energy prices in recent months prompting a slowdown in global factory output in July: most notably, factory production fell in China, while electronics powerhouses South Korean and Taiwan both recorded their first dip since 2020.
Bank of England raises interest rates
The Bank of England (BoE) ratcheted up the pace of monetary-policy tightening, raising the bank rate by 50 basis points to 1.75% – its highest level since 2009 – as officials struggle to bring surging prices under control.
A fall in the oil price at the end of the week – despite President Biden’s unsuccessful attempt to persuade Organization of Petroleum Exporting Countries (OPEC) members to significantly boost production – raised hopes that inflationary pressures could start to recede in the weeks ahead.
Earnings boost sentiment in the US
On Wall Street, the Dow Jones Industrial Average ended trading on Thursday 0.4% down for the week so far, with the S&P 500 gaining 0.5%. New figures showed the US economy remained weak last month following its second-quarter contraction, but investors appear to be in a largely positive mood given the relatively strong earnings season and the fact there will be no further interest-rate increases until the next Federal Reserve meeting in September.
In the UK, the FTSE 100 closed on Thursday 0.3% up for the week, with sterling weakness helping to underpin the index. The exceptionally downbeat picture painted by the BoE at its August meeting suggested UK inflation could hit 13% in the autumn – largely because of the energy crisis created by Russia’s invasion of Ukraine in February.
While a recession in Britain seems now to be priced in by investors, the Bank predicted inflation could return to near its long-term 2% target by 2024.
In Frankfurt, the DAX index ended Thursday’s session up 1.3% for the week, while France’s CAC 40 gained 1%. Strong second-quarter company earnings and a surprise upswing in factory orders in June helped German stocks continue their recent rebound. Meanwhile, lawmakers in Paris approved a relief package to help French households deal with soaring energy bills and consumer prices.
Asia recovers from early losses
In Asia, the Hang Seng index in Hong Kong had edged ahead 0.1% for the week by Thursday’s close. Early losses prompted by US-China tensions on Monday and Tuesday were clawed back towards the end of the week by expectations of strong earnings for major technology companies.
Japan’s Nikkei 225 index of leading shares finished 0.5% ahead with the weakening yen again helping to boost the domestic value of shares in multinational companies.
Note: all market data contained within the article is sourced from Bloomberg unless stated otherwise, as at 5 August 2022.
2 Oil giant Shell to take £3.8bn hit by leaving Russia, bbc.co.uk, 7/4/2022.
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