Equity Global equities were lower on the week amid rising long-term interest rates, as ratings agency Fitch downgraded the US sovereign credit rating one notch to AA+ from AAA. Fitch cited expected fiscal deterioration over the next three years, a high and growing general government debt burden, and the erosion of governance relative to peers that has manifested in repeated debt limit standoffs over the last two decades[1].

The yield on the US 10-year note approached its highest levels since 2007, reaching 4.20% having started the week at 3.96%, though a softer labour report cushioned the slide in bonds.  July nonfarm payrolls rose less than expected at 187,000 and the prior two months were also revised lower. Despite this, the unemployment rate fell fractionally to 3.5% and average hourly earnings rose ahead of expectations at 4.4%, year-on-year.

A sharp rise in oil prices also contributed to the rise in yields as both West Texas Intermediate and Brent crude oil rose circa $2 per barrel over the course of the week.

Elsewhere, European government bond yields broadly climbed as well, supported by fairly resilient economic data during the week. Whilst the 10-year UK Gilt yield also edged higher on the week, shorter-dated yields bucked the trend and retraced despite the Bank of England (BoE) raising its base rate for a 14th consecutive time. Peak rate expectations in the UK have fallen back a shade over the last month.

Whilst most major equity markets saw modest losses during the week, Chinese stocks edged higher as Beijing announced wide-ranging policies focused on removing restrictions on consumption in sectors including autos, real estate, and services. This offset concerns about the latest batch of disappointing economic data. The Shanghai Stock Exchange Index gained 0.37% on the week.

Week Ahead

Source: Refinitiv Workspace, 07/08/23

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[1] Fitch Ratings – Fitch downgrades united states long-term ratings to AA from AAA outlook stable 01/08/23. 07/08/23

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