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Both the US and European stock markets experienced a downturn this week amid surging bond yields following indications from Fed officials of hesitancy towards rate cuts this year. 

Commodity prices, particularly in crude oil and precious metals, surged due to heightened tensions in the Middle East and a prevailing risk-off sentiment. Brent futures reached nearly a six-month high, surpassing US$91 per barrel, while gold prices repeatedly reached record highs, exceeding US$2,300 per ounce for the first time on record. 

The rise in energy prices further complicated the global inflation outlook, dampening expectations for lower interest rates by central banks.

Europe

After an impressive five-month winning streak, major European benchmark averages are poised for a negative weekly close to begin the June quarter. In terms of weekly performance, the Euro Stoxx 600 declined by 0.29%, the FTSE 100 retreated by 0.19%, and the DAX fell by 0.64%. Profit-taking and a surge in global government bond yields likely contributed to this pullback. 

The plea for patience by US Fed officials before considering a rate cut added to the global bond jitters. However, it’s worth noting that European markets demonstrated more resilience compared to their global counterparts, driven by a stronger anticipation of a rate cut in June by the European Central Bank (ECB) compared to other central banks, particularly the US Federal Reserve.

Other potential factors supporting the regional stock markets could include a fund rotation towards cyclical stocks (such as banking, mining, and energy) from growth sectors or tech-focused peers. Compared with their US counterparts, European markets are more heavily weighted towards cyclical stocks. 

The energy and mining sectors performed well, with Shell rising by 5.78%, TotalEnergies jumping by 6.36%, BP up by 3.27%, Glencore surging by 8.12%, and Rio Tinto increasing by 2.33% over the five-day period. Banking stocks also outperformed, with HSBC rising by 4.34%, Lloyds Banking Group up by 4.43%, and UBS adding 1.1% over the same period. In contrast, some major tech shares experienced declines, such as SAP SE slipping by 2.21% and Siemens AG falling by 0.44%.

On the economic front, the Eurozone final Consumer Price Index (CPI) for March fell more than expected, printed at 2.4%, down from 2.6% in the previous month. German inflation also cooled to 2.3%, a sharp decline from 2.7% in February. Cooled inflation sparked optimism that the ECB may be convinced to commence a rate cut in June, which is a pleasant macro factor for market bulls.

Wall Street

The US stock markets retreated sharply from their record highs as the resilient economic data dashed hopes for a June rate cut by the Fed, leading to a spike in the government bond yields. Risk-off sentiment dominated Wall Street, with three benchmark indices-the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite-heading for a negative close for the week. 

AI stocks were particularly affected by risk aversion, with Nvidia declining by 1.54% and AMD slumping by 11.88% over the five-day period. Other major tech shares showed mixed performance, with Apple and Tesla continuing to underperform among large caps, down by 1.07% and 4.22%, respectively. However, Meta Platforms, Alphabet, and Amazon saw gains, rising by 4.36%, 2.70%, and 1.13%, respectively.

At a sector level in the S&P 500, Energy is the only sector in the green for a five-day performance, while Healthcare Real Estate, Consumer Discretionary, and Consumer Staples are the biggest laggards, experiencing declines between 3% and 4%.

The country’s recent data continues to indicate a soft landing economy, particularly highlighted by its March ISM Manufacturing Purchasing Manager Index (PMI), which expanded for the first time since October 2022. Private sector employment increased by 184,000 in March, marking the highest figure since July 2023. 

These job figures suggest that the upcoming non-farm payroll report could also be robust, serving as an indicator to keep the Fed on its hawkish stance, as a tight labour market tends to exert upward pressure on inflation. Should the data exceed expectations, markets could continue with the correction phase.

Asian Markets

While most Asian major benchmark indices experienced declines this week, the Chinese stock markets are in positive territory. Over a five-day period, the ASX 200 slid 1.63%. The Nikkei 225 was slightly down 0.1% and the Kospi fell 0.59% before these regional markets opened on Friday. 

In contrast, the Hang Seng Index, the benchmark index for Hong Kong, rose by 1.11% during the same time frame. This rebound was driven by recent positive Chinese economic data, with the manufacturing PMI for March expanding for the first time since September 2023, indicating an accelerated recovery for the world’s second-largest economy, despite the ongoing property crisis. 

However, stocks in mainland China and Hong Kong have collectively lost about US$4.8 trillion over the past three years due to economic challenges.