In a week marked by light news and relatively low market activity, most major U.S. stock indexes posted gains.
Small-cap companies and technology stocks led the way, with growth stocks outperforming value stocks.
This period of calm seems to precede the release of second-quarter earnings reports. The FTSE Russell’s rebalancing of its indexes, scheduled after market close on Friday, may have also influenced investor positioning.
The banking sector saw significant activity, driving the KBW Bank Index higher.
Early in the week, reports suggested the Federal Reserve (Fed) might impose lighter capital requirements on banks than previously anticipated, following the regional banking crisis in March 2023.
This positive news was compounded by the Fed’s stress test results, showing all 31 major U.S. banks met minimum capital levels, which could pave the way for dividends and share buybacks.
The Bureau of Economic Analysis reported a 0.1% rise in the core personal consumption expenditures (PCE) price index for May, excluding food and energy. This deceleration from April’s 0.3% increase suggests a potential rate cut by the Fed in September. Consequently, long-term Treasury yields rose, while short-term yields dipped, steepening the yield curve. In the municipal bond market, heavy new issues and rising Treasury yields increased yields mid-week.
Investment-grade corporate bond issuance met expectations, with most new issues being oversubscribed. Regional bank bonds outperformed, benefiting from the news of potential lighter capital requirements. In the high-yield bond market, specific company developments influenced investor sentiment, with positive flows and moderate issuance supporting favorable conditions for the asset class.
The pan-European STOXX Europe 600 Index fell 0.72%, impacted by political uncertainty in France ahead of President Emmanuel Macron’s snap election. Germany’s DAX rose 0.40%, Italy’s FTSE MIB fell 0.46%, and France’s CAC 40 dropped 1.96%. The UK’s FTSE 100 Index decreased by 0.89%.
Eurozone government bond yields rose ahead of inflation reports from both the eurozone and the U.S. Comments from European Central Bank officials suggested a cautious approach to rate cuts, adding upward pressure on yields. The spread between French and German debt widened before France’s election. UK yields also increased, influenced by upcoming elections and upward revisions to the UK’s Q1 GDP.
France and Spain saw a deceleration in inflation, driven by slower increases in fuel and food prices. France’s annual inflation rate fell to 2.5% in June, and Spain’s dropped to 3.5%. However, Germany faced economic challenges with a rise in unemployment to 6.0% in June and weakened business confidence. Despite hosting the European Championship for soccer, German consumer sentiment remained cautious, with a drop in GfK’s Consumer Climate Indicator.
Eurozone confidence data presented a mixed picture. The European Commission’s economic sentiment indicator slightly declined to 95.9, below expectations. Service providers, industrial companies, and retailers reported weaker demand, while consumer confidence improved marginally to -14.0, the highest since February 2022.
Japanese stock markets experienced gains, with the Nikkei 225 Index up 2.6% and the TOPIX Index rising 3.1%. The yen’s historic weakness supported export-heavy industries, hovering at its lowest levels in 38 years against the USD. Despite expectations of government intervention to stabilize the yen, only verbal interventions occurred. The 10-year Japanese government bond yield rose to 1.06%, fueled by speculation of monetary policy tightening by the Bank of Japan (BoJ).
The Tokyo-area core consumer price index showed a 2.1% year-on-year increase in June, surpassing expectations and accelerating from May. This rise in inflation, driven by services, heightened speculation about BoJ policy normalization. Retail sales and industrial production data for May also exceeded expectations, indicating robust economic activity.
Chinese stock markets weakened, with the Shanghai Composite Index and the CSI 300 Index recording slight declines. Hong Kong’s Hang Seng Index fell by 1.5%. Industrial profits for large companies grew by 0.7% in May, down from April’s 4% gain, reflecting sluggish consumption and ongoing property market issues.
Foreign selling pressure increased, with global funds selling RMB 49.4 billion of onshore shares in June. Investors are now looking ahead to China’s official purchasing managers’ index and the private sector Caixin factory survey for further economic insights.
Lats week’s market activity saw notable performances from U.S. small-cap and tech stocks, European markets grappling with political uncertainty and mixed economic data, and Japanese markets benefiting from a weaker yen. Meanwhile, China’s economic slowdown and foreign selling pressure continued to weigh on its stock markets.
