Events in the US Dominated the Week
Last week was marked by data points from three events in the US: (1) testimony by Fed’s Chair Powell in front of Congress on Wednesday; (2) unemployment claims on Thursday; and (3) employment numbers on Friday. Everything else took a back seat.
Triple Impact Pushed Down Equity Markets
Chair Powell was hawkish in his testimony. He surprised markets in wanting to hike interest rates up higher than previously advertised. Claims were higher, showing signs of a weaker job market. Employment numbers came out a little higher than expected, but on a downward trend.
High inflation, lower employment growth and hawkish Fed together drove all western equity markets downwards, leading to them suffering a loss of around 3% on the week.
Extreme Volatility Created a Snowball Effect
What was more remarkable was the extreme sell-off in bond markets following Chair Powell’s testimony. Markets repriced higher interest rates by almost 25 basis points within a span of only a one and a half days!
Two-year yields moved from 4.80 to 5.05; only to flip back down to 4.60 by Friday night, based on the news of the insolvency of Silicon Valley Bank (more on this in next week summary).
These rather volatile markets made a number of active participants close their exposures, mostly at a loss, creating a snowball effect whereby losses triggered more losses.
Equity and Fixed Income Follow Same Path
Until Wednesday, the equity markets had, to a large extent, been immune to higher yields since the start of the year. This was the first time that both equity and fixed income markets sold off significantly in the same direction.
