Equity markets rebounded strongly this week after last week’s sell-off, with many viewing the equity correction as largely technical, due to wrong footed short volatility strategies exaggerating the fall. The rebound was tested on Wednesday when the latest US inflation data was released for January, coming in at 2.1% for the year, exceeding forecasts of 1.9%. Equity markets sold off sharply initially, but it was not long before they reversed course and rose strongly, providing further support to the correction having been technically led.
The sell-off in government bond markets, however, continued, with the yield on 10-year treasuries reaching 2.91%, its highest level in four years. Similarly, UK gilts sold off as UK Consumer Price Inflation remained stubbornly high at 3%, raising expectations for future interest rate rises in the UK, despite Brexit uncertainty continuing to loom over the UK economy. The UK 10-year gilt yield peaked at 1.65%.
Over the week to 12pm London time, the United States Standard & Poors index rose 4.3%, whilst the technology heavy Nasdaq Composite index rose 5.6%. The EuroStoxx 50 rose 2.7%, the UK’s FTSE All Share 2.6%, whilst the Japanese Topix only managed a lacklustre 0.3% as the Yen strengthened against the US dollar.
This was despite Harukiko Kuroda being re-appointed as head of the Bank of Japan for another five-year term, suggesting that ultra-loose monetary policy in Japan is here to stay. The MSCI Emerging Markets index rose 5.2%, even as many emerging Asian markets were closed on Friday due to the lunar New Year, including Hong Kong, China, Taiwan, Indonesia and Vietnam.
Gold, having sold off last week, despite its safe-haven status, made up lost ground this week, rallying over 3% and is now trading at $1,361 an ounce, its highest level in three weeks. Brent crude oil, having also fallen 12% since its recent peak of $70.7, made a modest recovery, now trading at $64.6, supported by the US Energy Information Administration’s latest report showing crude stocks rising less than expected last week, despite expectations for non-OPEC (Organisation of the Petroleum Exporting Countries) supply to start increasing.
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