Global Markets Weekly Wrap KW 26 : French and UK Bond Yields Rise as Elections Approach

Global Markets Weekly Wrap KW 26 : French and UK Bond Yields Rise as Elections Approach 

French and UK Bond Yields Rise Ahead of Elections

U.S.

Small Caps and Tech Stocks Lead in Quiet Week

Most major U.S. stock indexes saw gains in a relatively uneventful week, attributed to a lull before the release of second-quarter earnings reports, according to T. Rowe Price traders. Small-cap and information technology stocks outperformed, with growth stocks surpassing value stocks. Activity towards the end of the week may have been influenced by the rebalancing of the Russell indexes by FTSE Russell after Friday's close.

Banking Sector Boosted by Positive News

The banking sector gained prominence, driving the KBW Bank Index to strong performance. Reports early in the week indicated that the Federal Reserve is considering lighter additional capital requirements for banks than initially proposed post the March 2023 regional banking crisis. The Fed's stress tests revealed that all 31 large U.S. banks maintained capital levels above the minimum required, potentially allowing them to return capital to shareholders through dividends and buybacks.

Core PCE Inflation Slows

The Bureau of Economic Analysis reported that the core personal consumption expenditures (PCE) price index rose by 0.1% from April to May, a deceleration from the previous month's revised 0.3%. This slowdown in the Fed's preferred inflation measure was seen as a positive sign for a potential rate cut in September.

U.S. Treasury Yield Curve Steepens

Yields on longer-term Treasuries rose, while short-term Treasury yields fell slightly, resulting in a steeper yield curve due to heightened expectations for a September Fed rate cut. Tax-exempt municipal bonds had a quiet start to the week, with increased yields mid-week due to heavy issuance and rising Treasury yields. Investment-grade corporate bond issuance met expectations, with regional bank bonds notably outperforming.

Market Indexes Performance

Index Friday's Close Week's Change % Change YTD

DJIA 39,118.86 -31.47 3.79%

S&P 500 5,460.48 -4.14 14.48%

Nasdaq Composite 17,732.60 43.24 18.13%

S&P MidCap 400 2,930.09 -1.77 5.34%

Russell 2000 2,047.69 25.66 1.02%

Data source: Reuters, Yahoo! Finance, Bloomberg.

Europe

Political Uncertainty Affects Markets

The STOXX Europe 600 Index fell 0.72% in local currency terms amid political uncertainty in France ahead of President Emmanuel Macron's snap election. Major stock indexes showed mixed results: Germany's DAX rose by 0.40%, Italy's FTSE MIB fell by 0.46%, and France's CAC 40 declined by 1.96%. The UK's FTSE 100 dropped by 0.89%.

Bond Yields Increase

Eurozone government bond yields rose ahead of upcoming inflation data in the eurozone and the U.S. Comments from European Central Bank officials suggesting a cautious approach to cutting interest rates added to the upward pressure. The yield spread between French and German debt widened before France's election on June 30. UK yields also climbed ahead of the UK elections on July 4, influenced by upward revisions to the UK's first-quarter GDP.

Inflation Trends

Inflation slowed in France and Spain due to lower increases in fuel and food prices. In France, the annual rate fell to 2.5% in June from 2.6%, while in Spain, inflation dropped from 3.8% to 3.5%.

German Economy Struggles

Germany faced a rise in unemployment to 6.0% in June from 5.9% in May, along with a decline in business confidence. The Ifo business confidence indicator fell to 88.6 in June from 89.3 in May, reflecting weaker expectations in manufacturing and trade. Consumer sentiment also declined, as shown by GfK's Consumer Climate Indicator, which dropped to -21.8 for July from -21.0 in June.

Mixed Eurozone Confidence Data

The European Commission's economic sentiment indicator slightly decreased to 95.9, below the forecast of 96.2. However, consumer confidence showed a marginal improvement, with the final reading of the consumer confidence indicator increasing to -14.0, the highest since February 2022.

Japan

Stock Markets Rise Amid Weak Yen

Japanese stock markets saw gains, with the Nikkei 225 Index rising 2.6% and the TOPIX Index up 3.1%, supported by a weak yen, which hovered at its lowest levels in 38 years, reaching around JPY 160.6 against the USD. Despite expectations of intervention to stabilize the yen, only verbal reassurances were made by Finance Minister Shunichi Suzuki.

Rising Government Bond Yields

The 10-year Japanese government bond yield rose to 1.06% from 0.97% the previous week, driven by anticipation of further monetary policy tightening by the Bank of Japan (BoJ). The BoJ is expected to announce plans to taper its massive bond-buying program at its July meeting.

Economic Data

Tokyo-area core consumer price index rose 2.1% year-on-year in June, driven by services inflation, exceeding expectations. Retail sales and industrial production also grew more than anticipated in May.

China

Stocks Decline Amid Economic Concerns

Chinese stocks weakened due to a light economic calendar and concerns about the slowing economy. The Shanghai Composite Index and the CSI 300 Index both recorded slight declines, while the Hang Seng Index fell by 1.5%. Industrial profits at large companies edged up by 0.7% in May from a year earlier, but this was down from April's 4% gain, reflecting sluggish consumption and deflationary pressure.

Other Key Markets

Czech Republic

The Czech National Bank cut its main policy rate by 50 basis points to 4.75%, larger than expected. The decision, influenced by recent weak macroeconomic data and a strengthening currency, was not unanimous. Future rate cuts may slow as rates approach neutral levels.

Turkey

Turkey's central bank kept its key interest rate at 50.0%, citing persistent inflationary pressures. Policymakers reiterated their commitment to maintaining tight monetary conditions until inflation expectations align with their forecast range.

Market Summary

Positive Returns for U.S. Markets

U.S. markets ended the first half of the year with positive returns. The Nasdaq had its best month of the year (+4.7%) and a first-half return of +18%, while the S&P 500 was up 15% over the last six months.

Fed Stress Test Results

The Federal Reserve's annual bank stress test showed all 31 banks tested have sufficient capital to withstand severe scenarios, with a combined hypothetical loss of $685 billion.

Consumer Sentiment and Inflation

U.S. consumer sentiment declined less than expected in June, with consumers predicting lower inflation in the future. The latest personal consumption expenditures (PCE) index showed a flat reading, supporting the possibility of a Fed rate cut.

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