Commentary: Central banks in spotlight
Broad-based rally in US equities continued for the second consecutive week, as S&P 500 equal weighted index rose 0.9% last week, outperforming the traditional, market-cap weighted S&P 500 index. Positive performance was seen outside of large-caps too, with S&P mid-cap 400 and S&P small-cap 600 gaining 1.5% and 1.7%, respectively. Most of the sectors also delivered gains, with cyclicals mostly outperforming sensitive and defensive sectors. Generally, such a broad-based rally is a positive signal, indicating that investor appetite for equity markets has improved. Importantly, such reduction in investor risk aversion is usually achieved when the overall economic sentiment improves.
This week’s focus will shift towards macroeconomic events, as US and Euro Area will report inflation, while their respective central banks will make interest rate decisions. The Fed rate, which stands in the range of 5.0%-5.25%, is expected to remain unchanged, with only around 20% chance of 25bps hike. Meanwhile, the ECB is expected to lift the base rate by 25 bps to 4.0%. Importantly, if the Fed does in fact pause, this will not necessarily mean that interest rates have peaked. The idea of hike-after-pause is back on the table, with Bank of Canada making a precedent last week by lifting the base rate after 5 month-long pause.
