Central Bank Actions and Global Business Slowdown Weigh on Markets

The global financial markets experienced a turbulent week as U.S. stocks closed their worst week since the collapse of the Silicon Valley Bank in March. The market’s three-month rally appeared to come to an end, primarily due to concerns stemming from the tightening actions of central banks worldwide. Additionally, business activity in both Europe and the United States showed signs of slowing down, albeit to a varying extent. Meanwhile, the strength of the U.S. dollar was bolstered by risk aversion and hawkish remarks from central banks. Commodity prices, particularly crude oil, faced downward pressure amid rising interest rates and recession fears. On the other hand, cryptocurrencies saw a positive trajectory, with Bitcoin reaching a one-year high on the announcement of BlackRock’s Bitcoin exchange-traded fund (ETF) plans.

Central Bank Actions and Business Slowdown:

The recent actions of central banks have sent ripples through the global economy, sparking concerns about a potential cooldown. The Bank of England surprised the market by hiking its key interest rate by half a percentage point, surpassing expectations. Similar moves were observed in Switzerland, Norway, and Turkey, while the Reserve Bank of Australia and the Bank of Canada resumed their rate hikes after a brief pause. These aggressive tightening measures have had an impact on business activity, especially in Europe, where growth slowed significantly in June. The Eurozone experienced a virtual stall in business growth, with manufacturing declining and the services sector showing minimal expansion. The United States also witnessed a downturn in business activity, with the manufacturing sector experiencing a deepening contraction and services growth easing to a three-month low.

U.S. Stock Market Performance:

Following a period of range-bound trading between 3,800 and 4,200 points since January, the S&P 500 surged from 4,200 to 4,400 points in a rapid ascent. This milestone marked the first time the S&P 500 reached the 4,400 level since April of the previous year. However, the momentum quickly reversed, with all three major equity indices breaking their multi-week winning streaks. The S&P 500 lost 1.4%, ending five consecutive weeks of gains, while the Nasdaq and the Dow shed 1.4% and 1.7%, respectively, snapping their winning streaks.

Dollar Strength and Currency Markets:

The U.S. dollar gained strength as risk sentiment deteriorated due to dismal business activity data worldwide and hawkish comments from central banks. The Eurozone experienced a significant slowdown in business growth, while the United States witnessed a contraction in the manufacturing sector and eased services growth. The Dollar Index rose 0.49% to 102.89, and the EUR/USD pair fell 0.57% to 1.0893. USD/JPY climbed 0.44% to 143.76, reaching its strongest level in over seven months. The Japanese Yen faced renewed pressure as the Bank of Japan (BOJ) maintained an ultra-dovish stance. Surprisingly, Japan’s core consumer inflation exceeded expectations in May, prompting calls for the BOJ to reconsider its stimulus measures.

Currency Market Movements:

GBP/USD declined by 0.30% on Friday, closing the week with its largest weekly loss in six weeks, as rising expectations of a UK recession loomed following an outsized rate hike by the Bank of England. AUD/USD fell by 1.16%, marking its worst week since late August, while NZD/USD slid by 0.62%, down approximately 1.6% for the week.

Commodity Prices and Market Outlook:

Commodity prices faced downward pressure, primarily influenced by concerns about rising interest rates and the potential for global recession. West Texas Intermediate (WTI) crude oil experienced a second consecutive session of decline, as demand worries intensified due to interest rate hikes in the United States and elsewhere. Additionally, the market was cautious despite optimistic demand forecasts from OPEC and the International Energy Agency. OPEC+ supply cuts and a reduction in Saudi Arabia’s July exports are expected to lower global inventories in the second half of 2023. Gold, on the other hand, closed higher following three days of losses, as investors sought safe havens amid rising interest rates. COMEX gold for August delivery settled at $1,929.60 per ounce, up $5.90.

Cryptocurrency Performance:

Bitcoin (BTC) displayed a remarkable performance, rising more than 3.5% and reaching a one-year high of $31,458 on Friday. This gain marked Bitcoin’s best weekly performance since mid-March. The surge was fueled by BlackRock’s announcement of plans to create a Bitcoin exchange-traded fund (ETF). This development further solidified the mainstream acceptance and adoption of cryptocurrencies.

Impact of Failed Military Coup Attempt in Russia:

Over the weekend, news of a failed military coup attempt in Russia emerged, generating anticipation about its potential impact on financial markets during the upcoming week. This development adds an additional layer of uncertainty and may cause fluctuations in various asset classes.