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Team Asset Management offers its weekly round-up of global markets
GLOBAL stocks endured their worst week of 2023 as economic reports showed central banks still have more to do to tame inflation. The blue-chip S&P 500 and technology-focused Nasdaq indices fell 2.4% and 2.7%, respectively.
Markets got off to a fast start this year, but the rally has lost momentum as better-than-expected economic data and disappointing inflation reports have prompted investors to reprice the risk that interest rates will hike much higher.
It was announced on Friday that the US consumer price index, the US Federal Reserve’s preferred measure of inflation, rose 5.4% in January from a year earlier. Analysts had expected it to slow further in December from the revised 5.3% level.
The index is important because consumer spending makes up more than two-thirds of the US economy. Decades of low unemployment have sustained higher wages and allowed consumers to spend more on goods and services despite price increases.
Futures markets now expect the Federal Reserve to respond to the data with three more quarter-point rate hikes through the summer. At the beginning of February only one further rate hike was priced in.
Earnings reports from mining giants BHP and Rio Tinto also weighed on sentiment last week. BHP reported that pre-tax profit fell 30% to $10.2 billion in the second half of 2022 and cut the dividend to 90 cents a share from a record $1.50. The Australian group blamed a combination of lower commodity prices and around $1 billion in cost inflation, largely due to higher diesel costs. However, there is hope that the recovery in demand from China, particularly for iron ore used in steelmaking, will improve performance this year. Iron ore accounts for more than half of BHP’s revenues.
Rio said it would cut its dividend by more than half after full-year pretax profit fell 40% to $18.6 billion. The world’s second-largest miner gave similar reasons for the decline and also pinned its hopes on the Chinese economy reopening to offset the slowdown in the US and Europe.
CEO Jakob Stausholm also assured that the company would benefit from the world’s clean energy transition. Actively looking to grow its lithium business, Rio paid $3.3 billion to buy Turquoise Hill in December to gain greater control of Mongolia’s Oyu Tolgoi, one of the world’s largest copper mines.
However, there was some good news for companies. British Airways’ parent company, International Airline Group, reported its first annual profit of 1.3 billion euros since the pandemic began. Europe’s third-largest airline expects to operate 98% of its pre-pandemic schedules this year to benefit from “robust” appointment bookings and announced it will pay €400m for the 80% of Spain’s Air Europa it owns does not yet own .
Rolls-Royce is another beneficiary of the strong recovery in travel demand and its shares rose more than 23% on Thursday after the company reported a 57% rise in operating profit to £652 million. It’s paid for by long-term contracts based on how many hours its Trent jet engines are in the air. New chief executive Tufan Erginbilgic also pledged to address years of underperforming at the British engineering group by reducing working capital, improving efficiencies and enacting a culture shift.
HSBC shareholders also had a good week. The UK and Hong Kong-listed bank raised its dividend to its highest level in four years after reporting that its fourth-quarter pre-tax profit nearly doubled to $5.2 billion. To appease China’s insurance group Ping An, which is pressuring the bank to split its Asian and Western businesses, HSBC also said it plans to pay a special dividend once the sale of its Canadian business is complete.
The prospect of more rate hikes continued to weigh on energy markets and Brent crude fell another $2 to $82 a barrel. A US Energy Information Administration report also revealed that crude inventories rose to 479 million barrels, about 9% above the five-year average for this time of year.
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