US stocks slumped while yields on US government debt shot up after higher-than-expected inflation data threw cold water on traders’ hopes for interest rate cuts by the Federal Reserve (Fed) any time soon. The Bank of Canada kept interest rates unchanged for a sixth consecutive time on Wednesday and the European Central Bank (ECB) is expected to follow suit on Thursday while setting up the possibility of an interest rate cut as soon as at its June meeting.
The US consumer price index (CPI) rose by 0.4% in March compared with the previous month, driven largely by price increases for gasoline and shelter. When compared with the same month a year earlier, CPI was up 3.5%. Core CPI - which ignores volatile food and energy prices - was up 3.8% on an annual basis. While inflation has come down considerably from a mid-2022 peak of more than 9%, recent readings suggest the Fed’s current restrictive policy may have a difficult time getting inflation all the way back to its 2% target.
That caused traders to increase bets that rates would stay higher for longer. Yields on US Treasuries shot up across the curve, with yields on 2-year debt approaching the psychologically important 5% mark and 10-year yields at more than 4.5%. Gold dropped more than 1% immediately after inflation data, coming down from recent all-time highs to trade around USD 2340 per ounce.
In New York, stock indices opened clearly lower on Wednesday after the surprisingly high inflation data destroyed market sentiment. The Dow Jones Industrial lost 1.1%, trading at its lowest level in 8 weeks during the session, and the S&P 500 dropped 1%. The Nasdaq-100 finished Wednesday’s session 0.9% lower. The CBOE Volatility Index - a gauge of market fear - spiked on Wednesday.
In Europe, stocks also swiftly swung to negative territory following the sticky inflation data before recovering most losses by the end of the session. The Euro Stoxx 50 closed 0.2% higher, Germany’s DAX ended the day up 0.1% and France’s CAC 40 lost 0.1%.
The negative sentiment spilled over into the Asia-Pacific region’s open on Thursday. In Tokyo, the Nikkei 225 dropped 0.4% and South Korea’s Kospi was trading down 0.3% after returning from a public holiday. In Australia, the S&P/ASX 200 lost 0.6%. In China, inflation came in softer than expected with CPI gaining 0.1% in March when compared with the same month a year earlier. The Producer Price Index decreased by 2.8% during the same period. The Shanghai Composite was the only major index trading in positive territory on Thursday, up 0.5%. Hong Kong’s Hang Seng Index lost 1%.
Corporate news in focus: Earnings figures from Fastenal, Helvetia.
Economic data in focus: European Central Bank interest rate decision, US Producer Price Index, US weekly initial jobless claims.
Global economic and market trends at a glance
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Unless otherwise stated or specified, the rates used in the analysis are normally the share prices provided by the news agencies Reuters and/or Bloomberg at the close of the stock exchange of the domestic market of the analyzed security or the relevant principal market of this security on the respective local stock exchange on the eve of the day of compilation.
Explanation of investment recommendations for stocks
We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).
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Explanation of investment recommendations for bonds
We employ both qualitative and quantitative methods to derive our recommendations, which are to be seen as relative to sector/quality peers among comparable maturities. “Buy” and “Sell” recommendations demand a qualitative in-house analyst opinion, in which we incorporate both historical and projected financial results and credit metrics as well as past and anticipated company and sector-specific observations and trends. We recommend “Buy” for a security for which we expect a strong relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Sell” if we expect strong relative underperformance compared to sector/quality peers among comparable maturities. The ratings “Attractive”, “Hold” and “Unattractive” can be based purely on a quantitative approach, which includes the market price of credit risk, valuation of equities and associated instruments, corporate leverage, liability structure, size, and agency rating. We recommend “Attractive” for a security for which we expect a relative outperformance compared to sector/quality peers among comparable maturities. We recommend “Hold” if we expect an average performance compared to sector/quality peers among comparable maturities. We recommend “Unattractive” if we expect a relative underperformance compared to sector/quality peers among comparable maturities.
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Definition of rating categories of S&P and Moody’s which are relevant for us:
AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates
For more information on our methodology for bonds, please contact your LGT relationship manager or your local LGT Group company.
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