During the previous week, global equity markets largely remained unchanged, while the US dollar experienced a slight increase. Despite a promising start to the earnings season, apprehensions persist regarding the possibility of central banks continuing to tighten. The DXY index for the US dollar saw a rise of 0.1%, while the MSCI All Country World Index remained largely stable.
In the equity market, the S&P 500 experienced a decline of 0.1% while the Nasdaq 100 index recorded a loss of 0.6% during the week. Conversely, the German DAX 40 appreciated by 0.5% and the UK FTSE 100 increased by an equal amount. In Japan, the Nikkei 225 improved by 0.3%, but in contrast, Hong Kong’s Hang Seng index suffered a decrease of 1.8%. Simultaneously, credit default swaps for a one-year period in the US market saw an increase to their highest level since at least 2008, indicating greater risk of insuring against a US government default within that timeframe.
Last week’s market performance was largely influenced by various factors including the earnings season, comments made by officials from the US Federal Reserve, better-than-forecasted economic data from China, and global inflation figures. At present, 18% of companies listed in the S&P 500 index have released their Q1-2023 results. Of these, 76% have reported actual earnings per share (EPS) that exceed initial estimates, while 63% have reported actual revenues that surpass expectations. For the upcoming week, FactSet reports that a total of 180 companies in the S&P 500 (including 14 components of the Dow 30) are scheduled to release their Q1 results.
The performance of the equity market thus far this year
Several Federal Reserve speakers have advocated for raising interest rates by 25 basis points. This move has been anticipated by market participants, who have priced in an 83% probability of the rate hike occurring. Furthermore, it is widely speculated that the Fed may begin reducing rates towards the end of 2023. While US macroeconomic data has been a mixture of positive and negative indicators, business activity increased to an eleven-month high in April. However, this upward trend may be dampened by the recent rise in weekly jobless claims, which suggests that the labor market may be losing momentum.
China’s GDP data has exceeded expectations, leading analysts to revise their projections for the economy of the world’s second-largest country this year. This positive development is likely to have a favorable impact on other regions in Asia and Emerging Markets. Meanwhile, core inflation in the UK did not decrease as predicted in the past month and instead remained stable at 6.2% year-on-year, surpassing the estimated rate of 6.0%. As a result, investors are now pricing in a 25-basis point hike in interest rates to 4.25% on May 11th.
The first quarter of 2023 saw a surprising decrease in inflation data in New Zealand, indicating that inflation may have reached its peak. Despite this, the Reserve Bank of New Zealand is expected to continue with its planned 25-basis point increase in May. Meanwhile, Japan’s Consumer Price Index increased by 3.2% year-on-year in March, meeting expectations but remaining below the Bank of Japan’s target of 2%.
The performance of significant currency pairs over the course of the year
Next week’s significant events in terms of data and policy focus include the German IFO business climate for April on Monday, US Consumer confidence and housing market data on Tuesday, Australia Q1 inflation, Germany GfK consumer confidence, and US durable goods data due Wednesday, US Q1 GDP on Thursday, and BOJ interest rate decision, Euro area Q1 GDP, and US core PCE price index due Friday.
The US debt ceiling, which may have a lesser impact in the upcoming week but holds greater significance for the period of June to August, has been signaled by an increase in the yield of US 3-month T-Bills and US credit default swaps. According to Treasury Secretary Janet Yellen’s statement in January, failure to raise the nation’s borrowing limit by June could result in federal government default on its debt obligations. While Democrats and Republicans seem to have conflicting opinions about a possible solution, it is anticipated that a compromise will ultimately be reached. Nevertheless, the resolution process may be tumultuous and induce market uncertainty.
- The upcoming week presents an opportunity for the EUR/USD currency pair to overcome its current state of low volatility. Despite being confined to a 90 pip range this week, the release of significant data in the coming days could potentially disrupt this pattern.
- The weekly forecast for the British pound examines whether the GBP/USD pair is poised for an upward breakout. Although the pound has experienced a surge against the US dollar, this momentum has slowed down and it is probable that consolidation may persist before initiating a fresh uptrend.
- The Australian dollar may face challenges in the upcoming week as the focus shifts towards the US. Technical analysis suggests that the currency may continue to experience negative trends.
- The present outlook for the US economy raises concerns about its potential for unimpressive growth, which may have ramifications for the US Dollar. Although the currency saw a reprieve from its prior losses this week, this may prove to be temporary if GDP indicators suggest underwhelming performance in the near future. In light of this, what are the critical DXY thresholds to monitor in the coming week?
- The XAU/USD is displaying indications of a potential breakdown in light of the upcoming US GDP report, according to the gold price forecast. The precious metal experienced a significant decline towards the end of the week, following an impressive US PMI data release that boosted the struggling dollar. It is expected that next week’s US GDP data will provide guidance for future market trends.
- The S&P 500 and Nasdaq 100 experienced a modest increase in value over the course of the week. However, there has been a noticeable decline in bullish momentum due to a recent rise in interest rate expectations, which have surpassed previous levels from several weeks ago. As a result, bears are showing signs of making a comeback.