Weekly Market Recap

Asia Pacific

2022/06/27

Week in review

UK CPI inflation rises to 9.1% y/y
Eurozone composite PMI fell to 51.9
U.S. composite PMI fell to 51.2

Week ahead

U.S. PCE inflation
Japan unemployment rate
China PMI manufacturing

Thought of the week

Markets received some positive news over the past week as the U.S. Federal Reserve (the Fed) announced that all 33 major U.S. banks passed their annual stress test. In the hypothetical economic stress scenario conducted by the Fed, it was estimated that while U.S. banks could lose up to USD 612billion, they would maintain an equity capital ratio (a measure of leverage) of 9.7%, which is more than double the minimum requirement of 4.5%. Importantly, robust capital levels mean banks would be able to continue lending to households and businesses even under unfavorable economic conditions. Confidence in the banking sector’s ability to weather a severe economic downturn may provide fodder to extend the recent outperformance of Value over Growth equities: since the start of the year, the MSCI U.S. Value index has outperformed the MSCI U.S. Growth index by more than 15%. The results of the stress test mean banks may be able to boost the return of capital to shareholders through share buybacks and dividend payouts, free of the Fed’s restrictions put in place during the pandemic. While dividend payments should continue to hold up, buybacks may be delivered at a smaller scale compared to last year given uncertain economic conditions ahead. That said, the rising rate environment will continue to support net interest margins for banks, which should provide tailwinds for Value and Financial sector stocks in the near-term.

Recent stress test result could extend year-to-date outperformance of Value stocks

Index, rebased 31/12/21 =100