Last Week in Investment Markets

Global Market Performance

Last week, the major benchmarks experienced a downward trend, reflecting a decline in investor sentiment. The Nasdaq Composite, after two months of consecutive growth, suffered its first weekly decline. Similarly, the S&P 500 Index recorded its first drop in six weeks. Growth stocks outperformed value shares, while large-caps fared better than small-caps. This decline in the market can be attributed to various factors, including concerns about further Federal Reserve rate hikes and the impact of rate hikes by central banks such as the Bank of England and Norges Bank.

The Australian Equity Market

The global investment markets experienced a challenging week, with the ASX200 in Australia extending its sell-off and closing at 7098. Various factors contributed to this decline, including tax loss selling, a hawkish Powell, and the Bank of England's surprise 50 basis point hike. Few sectors were spared from the sell-off, with energy, real estate, and financials experiencing significant drops. However, some companies, such as Fletcher Building, Endeavour Group, and Spark New Zealand, managed to gain more than 1%. On the other hand, Ingenia, Woodside, and Gold Road Resources faced declines.

Last week, consumer discretionary stocks faced pressure for various reasons, including downgrades from UBS . Flight Centre shares were under pressure despite some investors betting on the prospects of reopening consumer stocks. TPG shares also took a spill following a decision to block a network-sharing agreement between TPG and Telstra. Johns Lyng Group and Gold Road Resources also had negative performances due to market updates and downgraded production guidance, respectively. However, Bubs experienced a positive week after receiving approval from the US FDA to continue selling its products in the US market.

Federal Reserve Rate Hikes

Investor sentiment was influenced by signals from the Federal Reserve regarding future rate hikes. In his testimony before Congress, Fed Chair Jerome Powell stated that the majority of policymakers expect interest rates to be raised further by the end of the year. The Fed's latest Summary of Economic Predictions revealed that most members of the policy committee anticipate at least two more quarter-point rate hikes in the coming year. However, futures markets have a different prediction, indicating that further rate hikes may be unlikely. This discrepancy in predictions adds to the uncertainty and volatility in the market.

Other Central Bank Actions

In addition to the Federal Reserve, other central banks made significant moves that impacted investor sentiment. The Bank of England and Norges Bank both accelerated their pace of rate hikes, intensifying rate fears in the market. The Bank of England's surprise 50 basis point hike shocked the market and signalled its concern regarding inflation. These actions by central banks contribute to the overall sentiment in the market and influence investor decision-making. The Reserve Bank of Australia (RBA) minutes revealed a "finely balanced" decision to hike rates in June, with interpretations leaning towards a more dovish stance. These central bank actions and decisions have implications for global markets and investor sentiment.

Stimulus measures in China, including rate cuts by the People's Bank of China, were expected but already priced into the market.

Economic Outlook

Despite concerns about rate hikes and market volatility, the U.S. economy continues to defy recession predictions. The labor market remains resilient, with an unemployment rate near multi-decade lows and healthy wage growth. However, there are early signs of a cooling labor market and economy. Rising jobless claims, lower quits rates, and falling job openings indicate a potential softness in the labor market. Leading economic activity indicators, such as the ISM manufacturing and services indexes, have also been moving lower. These factors suggest that the U.S. economy may be heading towards below-trend growth.

Outlook for the Second Half of 2023

Looking ahead to the second half of 2023, there are three key trends to consider: the cooling of the economy and inflation, the Federal Reserve's rate-hiking cycle, and market volatility. The economy and inflation are likely to cool down, with signs of a potential slowdown in the labor market and leading economic indicators pointing towards a softer economy. The Federal Reserve is expected to pause its rate-hiking cycle, although rate cuts may not be likely until 2024. This pause in rate hikes may provide some relief to investors. However, markets may still face periods of volatility as the economy softens. These periods of volatility can present opportunities for investors to position themselves for a recovery period in the future.

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