US stocks closed modestly as S&P 500 enters bull market territory

Market Summary

Last week, the US market closed higher while the Asian markets closed mixed. The EU markets also closed mixed ahead of the central bank meeting.

US Stocks closed modestly higher in a week marked by the S&P 500 entering bull market territory, surging over 20% from its mid-October lows. Small-cap stocks outperformed their larger counterparts, while value shares outperformed growth stocks. This comes as jobless claims reached their highest level since October 2021, suggesting that the labour market might be cooling down.

In Europe, the STOXX Europe 600 Index ended lower, with caution prevailing ahead of central bank meetings. ECB officials acknowledged the ease in inflation but indicated that rates still need to rise.

In Japan, stock markets reached fresh 33-year highs, supported by an upward revision to the country's first-quarter economic growth.

In China, equities were mixed as inflation data raised concerns about the country's recovery. The services sector showed solid growth, but exports declined, indicating weakening global demand.

Major News

The US SEC has escalated its crackdown on the crypto market by filing lawsuits against major crypto exchanges Binance and Coinbase, accusing both exchanges of violating securities laws, offering unregistered securities, and operating as unregistered venues, among other charges.

The Reserve Bank of Australia has raised interest rates for the 12th time in just over a year. The decision comes as inflation remains high at 7% but is seen as necessary to bring it back within the target range of 2-3%.

China’s consumer price index increased by 0.2% after a three-month consecutive fall. This modest rise indicates that inflationary pressures remain relatively subdued.

What Caught Our Attention

The US Treasury had depleted its cash holdings in the past six months to avoid default, and now it must urgently replenish its funds, posing a potential risk to the economy. To rebuild its cash reserves, the Treasury plans to issue an estimated $1 trillion in bill issuance over the next three months.

There are concerns about the sources of cash and the impact of debt sales on liquidity in other asset markets. While the money-market funds could absorb the new bills through the Federal Reserve's reverse-repurchase facility, this would require higher coupon rates, potentially increasing funding costs for strained regional banks. The second option involves firms, pension funds, and other investors buying bills, which would reduce bank reserves and potentially raise questions about banking stability. While the Federal Reserve could provide liquidity support if needed, the influx of Treasury issuance is likely to create market anxiety and volatility, increasing the risk of disruption.

Source: Kredens Capital Management, T. Rowe Price, Bloomberg, Financial Times, Wall Street Journal, The Economist, Nikkei Asia