Last week we saw some volatility creep into markets as we turned the page on a new financial year. You can find an AI generated summary in our weekly newsletter that gives a good sense of what dominated the headlines, but in short:

• US labour data was mixed but just strong enough to suggest that higher rates might be around for a bit longer.

• This caused some volatility in bond markets, with short term (2 year) rates up again and hitting 15-year highs. But what we haven’t seen for a while was 10 year rates moving so much, and last week they passed 4%, which was probably more of a worry for equity markets and potentially an early sign that markets are questioning the Fed’s level of control over inflation.

• The RBA followed the US Fed and kept local interest rates at 4.1%, accompanied with hawkish commentary designed to restrain the ‘animal spirits’ while buying time for central banks time to work out whether further rate rises are necessary to slow down an exuberant consumer and services sector, or risk crushing the sharply slowing industrial economy.  

• What was less prominent in the headlines but, we suspect, was a bigger concern for markets was the more general weakness in the world’s second biggest economy. Manufacturing, services, and consumer indicators in China all showed a struggling economy, while the authorities seem to be struggling to come up with a ‘master plan’ to reboot the economy.  

What was less obvious, and less reported (so not reported in the AI summary) was that European markets sold off especially sharply in response to some very strong US jobs data last Thursday. This was moderated the next day by a somewhat softer US Non-Farm Payroll number. When the first jobs report came out US interest rates jumped, and this may give us a further insight into the transmission mechanisms of interest rate policy around the world, and some of the potential fault lines. Europe was down by almost 5% at one point while the US market was only down 1% at most, and the usually volatile Nasdaq by only a little more. German industrial and French luxury good exporters were the worst hit, while other markets closely linked to China, like Australia and Japan, also fell sharply. The Chinese stock market on the other hand hardly moved and was one of the best performers, suggesting much of the bad news is already baked in and valuations may be providing a floor. The implication may be that tighter US monetary policy could have an especially detrimental effect outside of the US, but markets like Europe might be worse affected than China and indeed other emerging markets because of where the debt has ended up and where equity market valuations have got to. Well, that could be what the market was hinting at last week anyway.

In Australia, banks and resources accounted for most of the 2% fall in the index by virtue of their size, but the reversal in sentiment was broad based with all sectors barring utilities down between 1% and 4%, and 90% of individual stocks in the red on a mix of overseas and domestic concerns.

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