The offshore yuan weakened to past 7 per US dollar for the first time in five months due to concerns over China's economic data indicating a slowing recovery from the pandemic. China's April industrial output and retail sales growth figures missed forecasts, suggesting momentum had been lost at the start of Q2. Barclays has cut China's GDP forecast citing "big downside surprises" in the figures. Tensions between China and the West also pose a drag on the yuan, according to Maybank.
Uncertainty over the US debt ceiling is set to continue as traders brace for April inflation data for the eurozone, with European markets predicted to open lower. UBS Group AG is poised to release its financial statement detailing the $17bn hit it took from the takeover of Credit Suisse Group AG. Meanwhile, BlackRock is requesting its staff return to the office at least four days a week as pandemic restrictions are lifted globally. The recession in Japan has lifted as the country rebounds post-pandemic to offset global economic challenges, while Warren Buffett increased his influence in Capital One Financial Corp.
Global public finances are being hit by an ageing population with ratings agencies warning that higher pension and health care costs are rising along with recent interest rate hikes. Moody’s, S&P and Fitch have all warned that ongoing issues with demographics are already impacting government credit ratings with little hope for change unless there are sweeping reforms. These downgrades could lead to a vicious circle of increased fiscal burdens and a rise in borrowing costs.
On Tuesday, the Chinese yuan dropped to its lowest level to the US dollar this year, resulting in India's rupee falling. Non-deliverable forwards indicate that the rupee will open at around 82.28-82.30 to the US dollar compared with 82.2050 in the previous session. Resilient US economic data such as strong retail sales and control retail sales caused demand for the safe haven dollar to rise. The US Federal Reserve's continued push back against rate cuts that investors have priced in for later this year has also caused pressure on emerging currencies.
Wall Street rallied on Wednesday on hopes that the US government will avoid defaulting on its debt. The S&P 500 was up 1.2% and the Dow Jones Industrial Average was up over 1.3%. The Nasdaq composite was also up roughly 1.3%. Despite the recent optimism, fears that the US may default on 1 June continue to grip markets. If Congress does not allow the government to borrow more money by this date, it could be disastrous for Treasurys, likely leading to a wider damage across the US economy.
The Federal Reserve’s internal watchdog, Mark Bialek, has testified with the Senate Committee on Banking, Housing and Urban Affairs, defending his unit's independence as well as its ability to investigate. However, the inspector general acknowledged that he has faced some criticism over the way that investigations of the central bankers' trading activities have been conducted. Fed insiders have meanwhile suggested that Bialek's role will come under increasingly close scrutiny following allegations of inappropriate trading activity by two regional bank leaders and the confirmation hearing of President Joe Biden's nominee to lead the SEC.
US banks are rethinking the role of social media, as the speed at which panics can strike, and stock prices offered by short sellers, threaten financial stability. Following the recent internet-fuelled run that toppled Silicon Valley Bank, lenders across America are focussed on adapting to changing times, devising emergency plans to counter online threats, including rumours around the health of banks that could lead to deposit outflows. The effects on local banking institutions have illustrated the essential need to manage social media risks responsibly, with efforts designed to measure, prepare and respond to such threats being set to escalate.
Central banks globally have been accused of failing to spot the degree to which inflation rates would rise and stick, despite record monetary and fiscal support. Almost all rate-setters failed to foresee inflation rising and then overestimated the pace of decline. Advanced economies are experiencing the most vigorous and enduring outbreak of inflation in a generation. The Bank of England is currently holding a “Festival of Mistakes” to celebrate lessons learnt from financial disasters of the past, instead of what some suggest should be more recent errors. Central bankers failing to identify soaring inflation have not only left themselves risking financial instability due to being forced to raise rates faster than is usual but threatened the credibility of institutions that rely on trust to steer the economy toward sustainable growth.
The US dollar is close to a six-month peak against the yen as a result of rising US Treasury yields and optimism surrounding debt ceiling talks between President Biden and US Congressional Majority Leader Kevin McCarthy. Previous fears over an unprecedented US debt default were calmed, leading markets to speculate about where US interest rates may head. US data showing potential for a tight US labour market contributed to expectations that the Federal Reserve would deliver another rate hike in a bid to lessen inflation. Two Fed policymakers have said US inflation is not dropping quickly enough for the central bank to halt its interest rate hike campaign.
Oil prices fell slightly in early Asian trading on Friday as optimism that a US debt default will be avoided was weighed against sticky inflation data that could potentially result in more interest rate hikes from global central banks. Brent futures were down 2 cents at $75.84 a barrel, while West Texas Intermediate crude fell 10 cents, or 0.043%, to settle at $71.76. A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.
The United States may pause its interest rate hiking cycle sooner than previously expected, following Friday's release of critical US inflation data. Investors are expecting the Federal Reserve to wait for sustained signs of inflation before raising interest rates further. Additionally, markets are also watching for the June 1 deadline for the US federal government to avoid defaulting on some debts if the nation's debt ceiling is not lifted and PMI figures across the globe on May 23.
Global shares reached a one-month high after a boost on Wall Street. The dollar made significant gains, resulting in the decline of other major currencies, including the euro. Hopes for a deal over the US debt ceiling that should manage to avoid a calamitous default were reflected in the markets. Investors will watch for signals across various markets today, including Federal Reserve interest rates, as the US government faces the threat of sliding into a recession and possible downgrading of Treasury debt.
European stocks rose on Friday as investors awaited central bankers' speeches for clues on the future direction of interest rates. Germany's Dax was 0.3% higher in early trade, putting it less than 100 points off the 16,290 high set in November 2021. The Stoxx 600 gained 0.4%, while London's FTSE 100 added 0.3% at the market open. Meanwhile, China's onshore currency fell to 7.027 against the US dollar, its lowest level since December following weak consumer spending and industrial production, as well as record-high youth unemployment in April data.
Global shares were mostly higher on Friday on hopes that the US Congress would reach a deal to avoid defaulting on the nation's debt. In Japan, the benchmark Nikkei 225 rose 0.8% to the highest close for the index in about 33 years. However, Chinese shares fell on renewed worries set off by signs that an extended lockdown over the coronavirus pandemic hurt sales. Additionally, inflationary pressures and geopolitical risks weighed on Chinese shares. The U.S. government faces running out of cash to pay its bills as soon as June 1 unless a deal is made.
The UK’s pledge of £1bn ($1.4bn) to boost its semiconductor industry over the next decade has been criticised as “insignificant” by industry figures, compared to the $50bn promised by the US and €43bn pledged by the EU. The boost is intended to expand the domestic industry, protect national security and reduce the risk of supply chain disruption. However, the UK currently has to import critical silicon chips from Taiwan. Simon Thomas of UK start-up Paragraf described the announcement as “quite frankly flaccid” and Garner consultant Gaurav Gupta said it would not create a UK company capable of competing with major chip producers.
Rapid rate rises, low growth and a lack of due diligence could lead the private capital market to experience a slow deflation, rather than a sudden implosion, in the future, some analysts have warned. Asset managers have grown fivefold since the 2008 global financial crisis to over $11tn, and now include roughly $2tn of that sum from Blackstone, Apollo, KKR and Carlyle, the four largest listed fund managers. However, opaque private capital markets, unlike publicly-traded equities, could sway investor confidence, and it remains unclear how interlinked the emerging sector is with other markets and banks.
The recent AI frenzy sparked by chatbot sensation ChatGPT has driven the S&P 500's 9% rally so far this year, with Microsoft, Google parent Alphabet, Nvidia, Apple and Meta Platforms accountable for the index's returns, according to Jessica Rabe, co-founder of DataTrek Research. About 25% to 50% of these gains are owed to the buzz around artificial intelligence, Rabe added. A recent Societe Generale analysis showed that removing the 20 AI-related stocks widely owned by ETFs would reduce the S&P 500's performance by about 10 percentage points, putting stocks in negative territory for the year.
Deposits at all US commercial banks slipped to $17.10tn from $17.16tn for the week ending 10 May, according to Federal Reserve data. Deposits had fallen significantly after the March collapse of Silicon Valley Bank. Meanwhile, credit provided by banks dipped to $17.32tn from $17.37tn the previous week, driven by falling securities holdings although loans and leases saw a modest drop.
Investors are choosing emerging market local currency bonds over dollar assets, as inflation drops and attractive yield rates are offered. From January to April, emerging market hard currency bond funds were hit with a net withdrawal of $2.65bn, while $5.23bn was invested in local currency bond funds. According to fund flow data provider EPFR Global, this year JPMorgan’s emerging market benchmark for local currency government bonds has delivered a 6.8% total return - more than three times its hard currency counterpart.
The US government is just weeks away from running out of money if the “X-date” when the so-called debt ceiling is not raised arrives. Although the White House is playing down the dangers, it is typically dismissed as posturing to put pressure on Republican congress members. However, current conditions differ considerably from earlier episodes of the debt-ceiling standoff and complacency could cause a dangerous storm. If the June 1 deadline passes and the debt-ceiling has still not been raised, the government will likely be forced to drastically cut spending which may cause a recession with disastrous effects globally.
