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Mounting pressure in the Middle East depressed market sentiment, with most equity indices logging weekly losses. US trading got off to a positive start to the week, helped by a strong retail sales report from the Commerce Department as well as financial stocks gaining on their quarterly earnings reports. However, there was growing caution over Iran’s missile and drone strike on Israel over the weekend and whether it would prompt retaliatory action. Indeed, on Friday Israel launched a retaliatory attack, with the Cboe Volatility Index hitting its highest level since late October. As well as the worsening geopolitical situation, equities continued to be under pressure by the prospect of rate cuts from the Federal Reserve coming later than initially hoped.

For the week, the S&P 500 declined 3.1% and has been down for six consecutive sessions, its longest losing streak since October 2022. Tech mega-caps weighed on indices, lagging on the possibility of higher rates for longer. The Nasdaq Composite was also on a six-session losing streak and fell 5.5%, its worst week since November 2022. The Dow Jones managed to eke out a marginal gain. The yield on the 10-year Treasury bond ended the week slightly higher at 4.62%. Oil prices had ticked higher amid caution on potential supply disruptions given the tensions in the Middle East, however they actually lost ground for the week. Similarly, gold had been up at record highs but ultimately ended lower, while the dollar index saw a slight weekly rise.

European markets also dipped on the Middle East conflict. The pan-European STOXX 600 was down 1.2%, its worst week since mid-January. The technology sector was the worst performer, hurt by losses in ASML which was down over 10% for the week after the chip equipment maker delivered lower-than-expected first quarter new bookings. Individual regional performance was mixed with Germany’s DAX amongst decliners while Italy’s FTSE MIB logged a 0.5% gain. Comments from a number of European Central Bank policymakers indicated that June was the likely date for the first rate cut, but they would continue to monitor incoming data.

In Japan, the Nikkei 225 sank 6.2% on the already mentioned factors. This also came as the yen strengthened, helped by its perceived safe haven status, however gains were modest overall, and it still remains close to 34-year lows. The yen continues to be closely watched for any potential intervention by authorities. Indeed, finance ministers from Japan, South Korea and the US met to discuss foreign exchange market conditions given the depreciation of the yen and won.

The Hang Seng was also weaker, down almost 3% for the week, however on the mainland Chinese indices bucked the trend, with the Shanghai Composite up 1.5%. Investors welcomed the better-than-expected gross domestic product figures, with the economy expanding 5.3% in the first quarter. There still however remains weakness, with new home prices dropping for a ninth consecutive month.

Weekly macro highlights

China’s GDP growth accelerates in Q1

China’s GDP rose 1.6% quarter-on-quarter (QoQ) in Q1 2024, above market expectations for a 1.4% increase and the 1.0% expansion registered in Q4 2023. The data, which was published by the National Bureau of Statistics (NBS), contributed to a 5.3% year-on-year (YoY) expansion. Value added by the secondary industry rose 6% YoY in Q1, above the 5.5% growth in Q4 2023 and reflecting strength in the manufacturing sector. The NBS also released data showing that fixed asset investment rose 4.5% YoY in Q1, driven by manufacturing investment and infrastructure investment, which rose 9.9% and 6.5% YoY respectively. Conversely, real estate investment fell 9.5% YoY in Q1, with property sales and prices continuing to fall as sector deleveraging remains a drag on growth. Value added by the tertiary sector slowed from 5.3% YoY in Q4 2023 to 5.0% in Q1 2024, with strong consumption data in January and February offset by weaker data in March.

Japanese inflation eases in March

Japanese headline CPI inflation rose 2.7% year-on-year (YoY) in March, below the 2.8% increase in February. Core inflation, which excludes fresh food prices but includes energy prices, fell from 2.8% YoY to 2.6% YoY, in line with market expectations. The declines in headline and core inflation reflected falling prices for non-fresh food, for which the 12-month inflation rate eased from 5.3% to 4.6%. Core-core inflation, which excludes both fresh food and energy prices, fell from 3.2% YoY in February to 2.9% YoY in March. The Bank of Japan (BoJ) continues to closely watch the respective contributions of goods and services prices to inflation to gauge underlying domestic inflationary pressures. In March, goods prices were unchanged at 3.3% YoY, while services prices fell from 2.2% to 2.1%. With services prices easing, markets do not anticipate any change in policy at the next BoJ meeting on 26 April.

UK inflation eases in March

UK headline CPI inflation rose 3.2% year-on-year (YoY) in March, below the 3.4% increase registered in February but above market expectations for a decline to 3.1%. Food and non-alcoholic beverage prices fell from 5.0% YoY to 4.0% YoY, accounting for around half of the decline in headline inflation. Partially offsetting this was an increase in transport prices which, having fallen 0.1% YoY in February, rose 0.1% YoY in March as motor fuel prices rose. Excluding food and energy, core inflation rose 4.2% YoY, below the 4.5% YoY increase in February. The Bank of England (BoE) has been closely watching services prices and much of March’s headline disinflation was driven by goods prices, which fell from 1.1% YoY in February to 0.8% YoY in March. Services inflation eased from 6.1% YoY to 6.0% YoY but was above the 5.8% the BoE forecast in its February Monetary Policy Report.