14th October 2023 – 20th October 2023 | Another week in the markets
This week, the US 10-year Treasury yield rises to 16-year highs, the International Monetary Fund cuts the global growth forecast for 2024, and the Indian Finance Ministry looks at ways to reduce government debt.
- US 10-year bond yields cross 5% for the first time since 2007 as investors react to Federal Reserve Chair Jerome Powell’s remarks on the possible further tightening of the monetary policy.
- The World Bank and International Monetary Fund’s annual meetings cut the 2024 global growth forecast and highlight the risks of the high debt levels of emerging markets and developing countries.
- The Israel-Hamas war’s impact on the global markets has been mild so far; however, if major regional powers get involved, it can pose a great threat to the global economy and worsen inflation.
- The Indian Finance Ministry is looking to reduce government debt and to reduce the fiscal deficit to 4.5% of the GDP by FY 2026.
- Netflix’s Q3 earnings come in strong with a significant increase in its global subscriber base, while Tesla’s earnings disappoint as price cuts lead to a sharp drop in profits.
Taking stock | Yield curveballs | Morocco monetary musings | Collateral damage | Debttol | Quarter plate | Invest wisely
Wall Street ended sharply lower on Friday as 10-year Treasury yields surged and worries about the Israel-Hamas conflict spreading rose. For the week, the S&P 500 fell 2.39%, the Nasdaq lost 3.16%, and the Dow dropped 1.61%.
On Thursday, the US 10-year Treasury yield crossed 5% for the first time since July 2007, as Federal Reserve Chair Jerome Powell signalled that the monetary policy may need further tightening given the strength of the US economy and labour markets.
While Powell acknowledged the recent economic data that showed that inflation was beginning to cool, he also remarked that to reach the target 2% inflation rate, the economy might need to go through a period of below-trend growth. Such remarks by Powell pushed the yields on 10-year and 30-year Treasury bonds higher.
Morocco monetary musings
The International Monetary Fund (IMF) and World Bank wrapped up their annual meetings this week in Morocco. The World Bank’s new vision statement — to create a world free of poverty and maintain a liveable planet — aligns with its new mission to fight climate change. In addition to this, the World Bank endorsed the use of debt-like hybrid capital. This, along with its new portfolio guarantee platform, could translate to $100 billion in new lending over the next 10 years.
The IMF cut its 2024 growth forecast for the global economy from 3% to 2.9%, but left the 2023 forecast unchanged. The US’s growth forecast was raised by 0.3% for 2023 and 0.5% for 2024, making it the only major economy in the world to be ahead of its pre-pandemic forecasts. However, the growth forecasts for the Eurozone and China were cut for both 2023 and 2024.
The global inflation forecast for 2024 was also revised and increased to 5.8%, which is almost 1% higher than the previous forecast. While this is lower than this year’s projected 6.9%, it still remains fairly high. The IMF also pointed out that almost half of all emerging markets and developing countries were either already in high debt distress or at risk of it. No consensus was reached in the meetings regarding the ongoing Middle East conflict.
The US stock market has a relatively high exposure to Israel. Over 100 Israeli companies, with a combined market cap of more than $150 billion, are listed on US stock exchanges. After the US, China, and Canada, Israel has the most companies listed on the Nasdaq. So, how has the Israel-Hamas conflict impacted the US and the global financial markets?
As of now, market reactions have been mild. However, there are fears that if the conflict spreads further, it could lead to another hit to global economic growth and worsen inflationary pressures. The impact of this conflict on global financial markets will depend on whether major regional powers get involved or not.
If the conflict remains restricted to Israel and Hamas, its impact will mostly be limited to countries that have significant trade exposure to Israel or Palestine. But if it spreads, energy costs could skyrocket for households and businesses around the world. This would hamper the ongoing efforts of central banks around the world to bring down inflation.
On Friday, Indian Finance Minister Nirmala Sitharaman said that the government was looking at ways to bring down its debt. India’s debt burden is not as high as that of other major economies, and it’s nowhere close to the debt distress faced by several emerging market economies. According to Sitharaman, the aim is to be prudent when it comes to government spending so that future generations are not burdened.
As of March 2023, the central government’s debt stood at ₹155.6 trillion, which translates to 57.1% of the GDP, while the debt of state governments was about 28% of the GDP. The country is on track to meet its target fiscal deficit of 5.9% of the GDP for the current year, and aims to bring down the fiscal deficit to 4.5% by the financial year 2026. Sitharaman also indicated that in addition to reducing debt, the government’s focus continues to be on spending money in a way that ensures the right level of returns.
Netflix, Tesla, Bank of America, and several other companies reported their quarterly earnings this week. Netflix’s password-sharing crackdown efforts helped boost subscriber growth, and the streaming giant added 8.76 million subscribers globally in the third quarter, greatly surpassing Wall Street’s estimate of 5.49 million. Its ad-plan membership also grew almost 70%, quarter over quarter, and its third-quarter revenue rose to $8.54 billion from $7.93 billion a year earlier.
Tesla, on the other hand, reported a weak quarter, and its shares dropped by over 15%, closing the week at $211.99, marking the worst week for Tesla’s stock this year. The company’s profit plunged sharply in the third quarter after it slashed its prices by about 25% in the US, prioritising sales over profit. At $1.9 billion, Tesla’s third-quarter net profit saw a 44% drop compared to the same period a year earlier.
Bank of America’s third-quarter revenue and earnings both surpassed Wall Street’s estimates, and its profit increased by 10% from a year earlier. Its interest income grew by 4%, supported by higher interest rates as well as loan growth.
Despite various challenges like high inflation and geopolitical risks, the US’s economic prospects continue to be strong, and it is the only major economy that’s come out ahead of its pre-pandemic forecasts. Hence, investing in the US market can help strengthen your investment portfolio and maximise returns. Use Appreciate to access US stocks and ETFs in a simple, quick, and cost-effective way. Download the app today!
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