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Market Updates

Market Update July Monday 4th 2022

Markets turn south on persistent inflation, whilst China provides a glimmer of optimism

Following last week’s strong rally in US equities, this week markets lurched lower as the latest inflation data released in the US, the Personal Consumption Expenditures index, continued to point towards elevated levels of inflation, with prices having risen by 6.3% over the year to May, in line with the previous reading.

In addition, whilst inflation data out of Germany pointed towards some mild moderation, with the Consumer Price Index (CPI) coming in at 7.6%, versus 7.9% for the previous reading, inflation data out of Spain showed a sharp acceleration, as annual CPI surged to 10.2%, up from 8.7%.

China further relaxes Covid restrictions

However, it was not all bad news for markets as China announced further relaxations in Covid controls, with quarantine requirements for arrivals into China being cut from twenty-one days to ten. In addition, the latest Purchasing Managers Indices (PMI) in China, which provide an indication of the operating environment companies find themselves in, were on the whole encouraging, with the latest service sector PMI coming in at 54.7 (anything above 50 represents an expansionary environment), ahead of forecasts. On Friday, the latest Caixin Manufacturing PMI for China also beat expectations, coming in at 51.7, versus forecasts of 50.2.

US equities record their worst start to a year since 1970

As of 12pm on Friday, London time, US equities fell 3.2% over the week, whilst the US technology sector dropped 5.0%. US stocks have now recorded their worst start to a year since 1970, having fallen 20.6% over this period, whilst the technology sector has given up 29.5%. However, for a Sterling based investor, this fall has been significantly cushioned by the weakness in the Pound, with the fall in US equities having been halved over this period, returning -10.7%.

European markets dropped 1.8% over the week, having fallen by 16.9% year to date. UK equities lost 1.1%, but year to date are only down by 6.6%, with the UK market having comparatively low exposure to expensive stocks. Japanese stocks fell by 1.2% over the week, down 7.4% year to date. Australian stocks gave up 0.6% for the week, down 12.2% for the first half of the year. Whilst in contrast, Chinese equities rose 1.1% over the week, but remain down by -6.9% year to date, whilst the wider emerging market complex fell -1.0%, down 18.8% year to date.

Interest rate expectations show signs of moderation

Government bond markets rallied this week as fears of a recession, combined with a moderation in future interest rate expectations, lowered government bond yields. The yield on 10-year US Treasuries, which moves inversely to price, fell under 3% this week, currently trading at 2.94%, as the futures markets priced in US interest rates hitting 3.5% by early 2023, down from 3.9% priced in two weeks ago. Similarly, German bund yields fell to 1.30% and UK gilts to 2.17%.

Recessionary fears take their toll on commodities

Gold weakened over the week, falling by just over 2% to $1,790 an ounce. Whilst recessionary fears took their toll on the crude oil price, as Brent crude fell to $111.3 a barrel, having traded as high as $128 a barrel at the outset of the Russian invasion of Ukraine in March. Copper is also sharply down from its high this year, now trading at $8,254 a tonne, having peaked at $10,702 in March, a fall of 23%.

Market Update June Monday 27th 2022

Equity markets move higher, despite recession uncertainty

The majority of equity markets managed to record a positive week for the first time this month, despite investors’ uncertainty over the prospect of a potential recession. With the equity market still very much in negative territory for the year, and after last week’s sharp declines, markets this week took a breather and found support, perhaps an indication that the selloff had gotten slightly ahead of itself.

That said, investors remain concerned by an aggressive monetary policy tightening path which could exacerbate an already slowing economy, stoking fears of a recession. US Federal Reserve Chairman Jerome Powell told Congress on Wednesday; recession was a “possibility” as he reiterated that the central bank is “strongly committed” to bringing down inflation.

In particular, economic data this week made for disappointing reading. The Flash US Purchasing Managers Index (PMI), a survey of economic activity, showed the US economy slowing sharply in June to its lowest reading in 16 months. The index registered 51.2 indicating that economic activity is still growing, however the reading has dropped from 53.6 in the previous month. Meanwhile the Eurozone PMI also fell to a 16 month low, with a reading of 51.9 for June, well beneath estimates of 54.

As of 9am London time, over the week the US market managed to rally 3.29% with the US technology index leading the way, up 4%. Gains in Europe were more modest with the main index up 0.58%, whilst the UK market was up only 0.38%, weighed down by the underperformance of miners and energy companies in the index, after commodity prices fell this week. Markets in Asia also finished strongly with the Hong Kong index and Japanese index rising by 2.89% and 1.6% respectively.

Inflation remains stubbornly high in the UK

Much like the US or Europe, UK inflation shows no signs of abating. The latest year on year reading this week showed prices had risen 9.1%, the highest rate in 40 years, with food and energy prices the biggest drivers of inflation. The Bank of England has warned inflation could peak at 11%. The squeeze on the cost of living has encouraged workers and unions to push for higher pay rises, and this was best illustrated by strike action by Railway workers this week, bringing trains across the UK to a standstill.

Recession fears prompt a rally in core government bonds…

With markets now turning their attention from entrenched inflation to the possibility of recession, safe-haven assets rallied accordingly. As of 9am London time, the US 10-year government bond yield (which moves inversely to its price) fell 16 basis points from 3.22% to 3.06%. The sharp fall in bond yields were also followed in the UK and Europe. Equivalent 10-year German bund yields fell by 27 basis points to trade at 1.39% whilst UK gilt yields fell by 21 basis points to finish the week at 2.28%.

But Commodities pare it’s gains

Commodity prices on the other hand declined this week, as a global slowdown could see weaker demand of oil and industrial metals. Iron ore prices slumped by 8% on Monday, whilst copper is down 6% for the week as of 9am London time. The price in oil also subsided with Brent crude oil down 2.76% to trade at $110 per barrel. Gold prices remained more stable, with the price of the precious metal down 0.5% to $1,831 per ounce.

Market Update June Monday 20th 2022

Markets fall further whilst inflation has yet to peak, triggering a more urgent response from central banks

Following the high inflation print in the US last Friday, with the consumer price index coming in at 8.6%, markets sold off once more this week as fears rose that the already narrow path to a soft economic landing just got a whole lot narrower. Speculation on Monday that the US Federal Reserve (Fed) would raise rates by 0.75% came to pass on Wednesday, as the Fed raised rates to 1.75% (range 1.5% to 1.75%) and signalled that there was a high probability of a similar increase at its July meeting. This was followed by the Bank of England raising rates by 0.25% to 1.25%, and the Swiss National Bank increasing rates by 0.5%, its first rise in fifteen years.

As of 12pm on Friday, London time, US equities fell by 6.0% over the week, with the US technology sector dropping 6.1%. European stocks lost 3.6%, whilst the UK market fell by 3.0%. Japanese equities were down 5.5% and Australian stocks declined by 6.6%. Emerging markets fell by 4.4%, although domestic Chinese stocks managed to buck the trend, rising 1.0%.

Government bond yields, which move inversely to price, rose as markets priced in higher future rate expectations, with US interest rates now expected to hit 3.6% by the end of the year. Intraweek, 10-year yields on US Treasuries rose to 3.49%, a level not seen since 2010, before settling back down to 3.22%.

ECB convenes an unscheduled meeting as indebted Eurozone countries’ borrowing rates spike higher

German bund yields touched 1.89% although, more worryingly, the more indebted Eurozone countries have seen their yields back up even more. Italian yields reached 4.18%, which is a yield spread above German bunds of 2.4%, with Greece suffering a similar fate as yields rose by 2.9% above Germany’s. Not oblivious to the dangers for the Eurozone, the European Central Bank (ECB) convened an unscheduled meeting and announced that they would speed up work on a new “anti-fragmentation instrument” to tackle widening borrowing costs, although few details are known at present. Following this, the yield premium countries such as Italy and Greece are suffering fell, with the Italian yield premium now standing at 1.9% and 2.3% for Greece.

Bitcoin falls by close to 70% since its November peak

The price of gold fell by 1.5% as rate expectations in the US rose, with the precious metal now trading at $1,848 an ounce. In many respects it has been a similar, although magnified story for Bitcoin, which has fallen by close to 70% since its peak in November. One bitcoin is now trading at $21,100, a fall of 22% over the week. However, it remains 185% higher than where it traded at the start of 2020.

Industrial commodity prices moderate on rising risk of recession

As the risk of recession from rising rates increases, so the value of industrial commodities fell. Copper dropped by 3.9%, now trading at $9,080 whilst crude oil prices also moderated, with Brent crude falling by 1.9%, now trading at $119.7 a barrel.

Market Update June Monday 13th 2022

China easing of Covid 19 restrictions fails to deflect from monetary policy tightening concerns

Most equity markets finished the week in negative territory as the news that China started to ease its Covid 19 restrictions gave way to continued fears over monetary policy tightening in the face of stubbornly high inflation. On Friday the latest US consumer price index is due for release, with forecasts of inflation remaining at 8.3% over the year to May, in line with April’s data. Markets are pricing in US interest rates to hit 2.8% by the year-end, versus the current rate of 1.0% (range 0.75% to 1.0%) and exceed 3.0% next year.

This is against slowing forecasts for economic growth, with the OECD (Organisation for Economic Cooperation and Development) lowering global forecasts down to 3% from their previous forecast of 4.5%, made in December due to the war in Ukraine and higher energy prices. Normally central banks are tightening monetary policy into strengthening growth, therefore the risk of stagflation (rising prices, slowing growth and rising unemployment) is that much greater in today’s environment.

Chinese stocks one of the few bright spots in equity markets

As of 12pm London time on Friday, US equities fell 2.2% over the week, with the US technology sector falling by a similar level. European equities dropped 2.8% as even the European Central Bank (ECB) signalled that rates could be back above zero for the first time in a decade by their September meeting. This is against a backdrop of inflation running at 8.1% in the Eurozone, four times the target level of 2.0%. UK stocks fell 1.9%, as the country was ignominiously singled out by the OECD as most likely to suffer from stagflation next year.

The OECD forecasts the UK to have the weakest economy in the G20 outside of Russia in 2023. The Japanese market rose by 0.5%, helped by a sharp devaluation in its currency, the Yen, as the Bank of Japan is one of the few central banks not expected to raise rates anytime soon with inflation currently running at 2.5%. Although this is remarkable in itself in a country that has battled with deflation for many years. Australian stocks fell sharply, as the market lost 4.2% over the week.

Emerging markets rose 0.6%, although this was primarily down to Chinese stocks which rose following the relaxation of Covid restrictions, as the state media announced on Sunday that public transport and restaurants would reopen in Beijing. The domestic Chinese ‘A’ share market rose 2.8%, whilst offshore Hong Kong stocks gained 3.4%. The Latin American subsector of the emerging markets fell by 5.3%, not helped by the US dollar strength.

Government bond yields resume their upward momentum

Government bond yields, which move inversely to price, rose over the week, with the 10-year US Treasury yield rising to 3.03%. Similarly, German bunds rose to 1.41%, and UK gilts climbed to 2.31%, levels not seen since 2014.

Crude oil nears this year’s peak following the Russia Ukraine invasion

Gold fell 0.3%, now trading at $1,845 an ounce, whilst Brent crude rose to $124 a barrel, taking it perilously close to the peak experienced just after Russia invaded Ukraine when it hit $128 a barrel.

Issues under discussion

Inflation once more concerns the market

The market is preoccupied with inflation once more, with concerns that stubbornly high inflation will require central banks to tighten monetary policy to a level that triggers a recession. And whilst we cannot rule out a further higher spike in energy prices, triggered by the Russia-Ukraine war, as time moves on, given that inflation is a year-on-year comparison, it becomes increasingly likely that it will at least start to moderate.

Research published from the Leuthold Group this week suggests that, since 1940, although inflationary spikes tend to trigger a recession almost half of the time, once inflation has peaked, the stock market tends to rise regardless of whether a recession occurs.
So, while it is still too early to call a peak in the inflationary cycle or a bottom in the stock market, it is not all doom and gloom and there are good reasons to start to become constructive on markets.

Market Update June Monday 6th 2022

Stocks withdraw from last week’s rally

Stocks relinquished a part of last week’s solid gains as investors remained to doubt whether the Federal Reserve will be able to suppress inflation without triggering a recession. Industrials shares were the standout, assisted by an increase in Boeing.

Volatility continued to maintain since its recent peak in mid-May, although cautions from JPMorgan Chase CEO Jamie Dimon that an economic “hurricane” was on the horizon due to rising interest rates and increased commodity prices appeared to unsettle some investors on Wednesday. A report Friday that Elon Musk had emailed fellow executives that Tesla may have to lay off 10% of its workforce—and that he had a “super bad feeling” about the global economy—also seemed to unnerve investors to some extent. US Markets were closed Monday in observance of Memorial Day.

On the other hand, the week’s economic data had minimal effect in promoting concerns of an imminent recession—specifically one fueled by layoffs. On Friday, the Labor Department disclosed that employers added 390,000 nonfarm jobs in May, well over consensus expectations of around 320,000.

Inflation may have come to a head, however, Fed’s course remains unclear.

Inflation signals were arguably more challenging to decode, as were remarks from Fed officials about the prospective long term implications of rate hikes – comments were watched vigilantly given the Fed’s upcoming “blackout” period ahead of the June 14‒15 policy meeting. Some belief developed that the Fed may pause rate hikes at its September meeting to assess their imprint to date on the economy, and Federal Reserve Vice Chair Lael Brainard mentioned on Thursday that financial conditions had already been firmed significantly—while caution that policymakers may still raise rates by half a percentage point in September.

Global markets

A spike in eurozone inflation data and news that the European Union will ban most Russian oil imports by the end of this year aided in driving Treasury yields up at the start of the trading week, while belligerent policy motions by the Bank of Canada brought in greater pressure to shorter-term U.S. interest rates.

European shares tumbled in low volume as the UK market closed early to commemorate Queen Elizabeth II’s 70th year on the throne. Investors remained to grasp with worries about increased inflation, lagging economic growth, the rate of central bank policy tightening, and the invasion of Ukraine seeing the FTSE 100 Index declining 0.69% through Wednesday. The STOXX Europe 600 Index ended the week 0.87% lower. Major indexes were generally weaker. Germany’s DAX Index was barely altered, CAC 40 fell 0.47% in France, and FTSE MIB lost 1.91% in Italy.

EU settles on partial restriction on Russian oil; Russia severs gas supplies to the Netherlands

European Union (EU) leaders established that at the end of the month, there would be a prohibit to all seaborne Russian oil deliveries, encompassing about two-thirds of such imports, within months. Hungary, Croatia, Slovakia, and the Czech Republic—countries that depend drastically on Russian energy supplied via pipelines—were excused temporarily from the embargo. Part of the restriction also includes a coordinated restriction with the UK on insuring ships carrying Russian oil. Earlier, the European Commission revealed a €300 billion plan to finish the EU’s reliance on Russian energy imports before 2030.

Subsequently, Russia’s state-owned energy company Gazprom closed off gas supply to the Netherlands, the fourth country to be sanctioned for declining to pay in rubles rather than dollars. Russia cut off supplies to Finland, Poland, and Bulgaria earlier in the month.

Market Update May Monday 30th 2022

Bad news’ is ‘good news’ as slowing US economic data draws investors back

The US equity markets rose this week, following seven weeks of losses, as a number of economic data touch points signalled a softening in growth, whilst consumption continued to expand despite the high levels of inflation. This served to calm the markets’ view on rate increases, drawing investors back into equities.

As of Friday, London time, US equity markets rose 4.0% over the week, having fallen 18.7% from its all-time high. It was a similar story for the US technology sector which was up 3.4% over the week, having fallen by almost 30% since its peak, taking it deep into bear market territory. European equities increased by 2.4%, whilst the UK stock market rose by 2.5%. Japanese and Australian markets rose by 0.5%, whilst the emerging markets fell 1.2%, although the Latin American subset rose by 3.2%, helped by further near-term weakness in the US dollar and a strengthening oil price. Brent crude rose by 4.3% over the week, now trading at $117.4 a barrel.

First-quarter US GDP revised down to a fall of 1.5%, although consumption continues to rise

US stocks made gains this week, despite a wobble earlier on after the social media group Snap warned of a deteriorating profits outlook due to high inflation, rising rates and ongoing supply chain issues. However, given that the US Federal Reserve’s (Fed) policy of increasing rates is intended to cool the economy to calm inflationary pressures, a series of data releases provided some indication that economic growth is moderating. US home sales for the month of April fell 17%; purchasing managers indices (which measure the month on month change in the economic environment faced by companies) moderated for both the manufacturing and service sectors; and the growth in US capital goods orders, which are an important proxy for future manufacturing output, rose by 0.4% in April, having slowed down from 0.6% in March, whilst also missing economists’ forecasts. In a repeat of ‘bad news’ is ‘good news’, this helped to calm investors frayed nerves over the scale of future US rate increases, tempting investors back into both equity and bond markets.

US Treasuries continue to rally

In consequence, the 10-year US Treasury yield (which moves inversely to price) fell over the week, now trading at 2.73%, having been as high as 3.20% at the beginning of May. Similarly, US 2-year Treasury yields, which are considered a proxy as to the market’s view on future US interest rates, fell to 2.46%, having traded up to 2.82% a few weeks earlier, with US interest rates currently standing at 1.0% (Fed Funds range 0.75% to 1.00%). Whilst German and UK government bonds remained broadly flat over the week, with 10-year yields now trading at 0.97% and 1.92% respectively, both close to their near term high.

Chinese industrial profits for April record their steepest fall in two years, but largely already priced in

In China, news that industrial groups had reported their worst profit decline in two years in April, due to economic lockdowns to contain the spread of the Covid coronavirus, was largely looked through by investors. The Shanghai Composite and Hong Kong Hang Seng fell by 0.5% and 0.1% respectively over the week. Further to this, shares in Alibaba, the eCommerce company, rose by 12% on Friday, on news that its first-quarter earnings had beaten estimates, with revenues rising by 9% year on year.

US inflation data released later today

All eyes are now on the latest US Personal Consumption Expenditures indices due out later today, the Fed’s preferred measure of inflation. Economists have forecasted an increase in prices of 6.2% for the year to April, down from 6.6% in March. Excluding food and energy, prices are forecast to have increased by of 4.9%, also down from 5.2% for March.

Market Update May Monday 23rd 2022

US stocks continue to fall

US stocks continued their decline this week as results from two key grocery retailers, Walmart and Target, spooked investors, as inflationary pressures impacted their results, raising concerns that pricing pressures are taking their toll on the strength of the economy. The US stock market fell 4% on Wednesday, its biggest one-day loss since June of 2020. Unless there is a sharp bounce today, the US market will not have fallen for such a sustained period since 2001 when the dotcom bubble burst. However, outside of the US, where valuations are not so stretched, the picture was not so gloomy with many regions recording gains in equity markets over the week.

As of 12pm on Friday, London time, US stocks fell 3.1% over the week, with the US technology sector declining by 3.5%. European and UK equities rose 0.3%, Japanese stocks were up by 0.7% and the Australian market increased by 1.0%, helped by commodity prices which were on a firmer footing as the US dollar weakened. Emerging markets rose 1.0%, with Latin America in particular benefitting from both the fall in the US dollar and the bounce in commodity prices.

UK’s inflation hits 9%

US government bond yields, which move inversely to price, fell a little over the week, with the 10-year Treasury trading at 2.86%. German bunds were largely flat, with the 10-year currently trading at 0.98%. Whilst UK gilt yields rose, trading at 1.93% in a week that the UK’s inflation data hit 9% in the year to April, the highest level on record in over forty years, with three quarters of the increase coming from the increase in the energy price cap, which rose by 54% in April. However, price increases were also climbing in almost all categories of expenditure and inflation in the UK is forecast by the Bank of England to rise to 10% later this year.

Dollar weakens

The US dollar weakened earlier on in the week by 1.6% against a basket of internationally traded currencies, leading to a good week for commodity prices which often move inversely to the dollar. The gold price rose 1.8%, now trading at $1,848, copper was up 3.0%, now priced at $9,460 a tonne, and Brent crude oil gained 0.9%, now trading at $112.6 a barrel.

Market Update May Monday 16th 2022

US inflation stays stubbornly high

A combination of slowing economic data and inflation took their toll on markets once again this week. On Monday, data released by China showed export growth had fallen to its lowest level in two years last month, whilst the latest US consumer price index remained stubbornly high, coming in at 8.3%, above forecasts of 8.1%. Whilst growth in the UK was up 0.8% for the first quarter, the data revealed a contraction in the economy for the months of February and March as the inflationary environment took its toll. Against this background, markets continued to reprice towards an environment of higher inflation, slowing growth and rising rates.

As of 12pm on Friday, London time, US equities fell 4.7% over the week whilst the US technology sector dropped 6.4%. European stocks, despite their proximity to the Ukraine Russia conflict, rose 0.1%. The UK stock market lost a relatively modest 0.6% with the large cap index suffering most of the pain in a broad-based selloff, triggered by fears of recession from central bank tightening. Japanese equities fell 2.7% and the Australian market dropped 1.8%, whilst the emerging markets lost 4.2% with the Asia Pacific region accounting for most of the pain.

Chinese export growth falls to a two-year low

Year-on-year Chinese export growth came in at 3.9% for the year to April, sharply down from 14.7% for the year to March. This data came hot the heels of a weakening picture in the US and European manufacturing sectors. Key commodity prices weakened in response with copper falling 3.3%, currently trading at $9,103, iron ore down 7.9% and Brent crude falling 2.7%, trading at $109.3 a barrel.

Haven government bonds rise

Government bond yields (which move inversely to price) fell, reflecting the risk that central bank action to combat inflation leads economies into recession. The yield on 10-year US Treasuries fell as low as 2.82% on Thursday, now trading at 2.90%, having touched a new high in this economic cycle at 3.20% on Monday. Similarly German bund yields traded down to 0.89% and UK gilts to 1.71% by Friday.

Whilst gold offers no protection

Gold on the other hand failed to provide any defence as it fell 3.5% to trade at $1,817 an ounce, suffering from a US Federal Reserve which seems intent on dragging inflation back down through rate increases.

Issues under discussion

Rebalancing in market

It has been a torrid start to the year, as inflationary pressures have led to a decisive pivot from central banks as they look to tighten monetary policy in an attempt to get the inflation genie back into the bottle. The picture has been compounded by the Ukrainian war and China’s ongoing zero Covid policy. This has led most major markets to be in negative territory year to date, with some recording losses over one year, including the US market with the technology sector particularly badly affected.

These falls reflect a rebalancing in market pricing with the most expensive stocks being hit commensurately harder, whilst some of the cheaper stocks in the market have made gains. Without wanting to call a bottom to this weakness, we are reminded by research from Man Group, that year-on-year falls are relatively rare, particularly over the past decade. Further to this, history suggests where markets have fallen over a year, the returns over the following twelve months are positive, with a tendency for those markets with a greater exposure to riskier stocks performing better. Small-cap indices have often outperformed large-cap and technology-heavy markets have often posted some of the strongest returns. This holds true even if the research goes back to the 1960s to understand the effects of unorthodox monetary policy which may have artificially boosted returns in recent years.

Market Update May Monday 9th 2022

Central banks in unison move to regain control of inflation

It has been a volatile week for equities as markets fret over the potential for a policy error as central banks attempt to regain control over a sharp spike in inflation to levels not seen in forty years. On Wednesday, the US Federal Reserve raised rates by 0.5%, a quantum not used in over twenty years, whilst communicating to the market that the same should be expected over the subsequent two rate-setting meetings. This led to a sharp rally in equities, as this seemingly ruled out a 0.75% increase, whilst also largely being priced in. However, all of this move and more was swiftly undone on Thursday, as markets rotated sharply by a level not seen since March 2020 when lockdowns were first introduced in response to the Covid pandemic. US Treasury yields, which move inversely to price, rose above 3% for the first time in more than three years. Investors are now waiting for the release of the US non-farm payrolls later today, with expectations that wage growth will have exceeded 5% year-on-year for the fourth month in a row.

As of 12pm on Friday, London time, US equities were up 0.4% over the week, whilst the US technology sector recorded a small loss of -0.1%, although futures markets are currently pricing in further falls when the market opens later today. European equities were down 4.2%, whilst the UK dropped 2.0%, although this masked a 4.7% fall in UK mid-cap stocks. Japanese equities rose 0.9%, whilst Australian stocks fell 3.1% and Emerging markets lost 1.6%.

US Treasury yields rise above 3% for the first time in three years

10-year US Treasury yields traded up to 3.08% by the end of the week and German bunds also sold off, with bund yields touching 1.08%, a level not seen in seven years. UK gilts were somewhat more stable, as the Bank of England acknowledged that simply raising interest rates may not solve the UK’s inflation problem whilst so much of it is imported in. 10-year gilts fell in value, now trading at 1.94%, having exceeded 2% earlier in the week. UK rates were raised rates by 0.25% on Thursday to reach 1%, the highest level since February 2009, with the bank forecasting inflation to top 10% in the fourth quarter. The Reserve Bank of Australia had set the tone earlier in the week, as it too raised rates by 0.25%. Australia’s 10-year bond traded up to just shy of 3.6% mid-week, a level not seen since 2014.

Crude oil rises as the EU steps closer to banning Russian imports

Gold fell 1.6%, now trading at $1,882 an ounce, as did copper, falling 3% to $9,512, whilst iron ore fell by 6% over the week. Crude oil bucked the trend as the EU stepped closer towards a plan to ban Russian oil imports, although Hungary looks set to vote against the policy. Brent crude traded up 3% to $112.6 a barrel, whilst US WTI (West Texas Intermediate) traded 5% higher at $110 a barrel.

Issues under discussion

Stimulus policies during Covid have supercharged demand whilst supply chain bottlenecks

It has been a difficult year for markets so far, as stimulus policies put in place during Covid have supercharged demand whilst supply chain bottlenecks and the Ukrainian war have only served to compound the rise in inflation. And now the siren of recession risk grows ever higher as central banks attempt to regain control of the narrative. However, if we take a step back and look dispassionately at markets, in reality, what has really happened is a rebalancing in valuations. Expensive stocks have become cheaper, whilst cheaper stocks have become more expensive. Valuation dispersions had become extreme and an increasing discount rate on the risk-free asset i.e. government bonds has led to the market reappraising prices.

Looking forward, how much further this readjustment has to run is always difficult to judge, however, what is unlikely in the immediate term is for the investment winners of the last decade simply to reassert themselves. The market is much more sensitive to valuations today and this is likely to endure, at least until the inflation genie has been put back into its bottle. Whilst the increasing risk of a recession due to a policy mistake by central banks means that we are increasingly looking to move up the quality spectrum in terms of the companies we invest in, rather than just focus on ‘value’ or ‘growth’. Companies with strong balance sheets, solid earnings, low gearing, and defendable competitive positions married with lower valuations are becoming much more attractive places, increasingly referred to as the ‘forgotten middle’.

Market Update May Monday 2nd 2022

Markets and key events

Markets struggled for direction this week, with investors very much focused on key company earnings results. It was a mixed picture for US equities, and particularly US technology stocks, although both indices finished the week respectively higher by just 0.37% and 0.25% as of 12pm London time. Despite the tumble in Netflix shares last week, shares in Microsoft and Facebook’s parent Meta surged after both companies reported a larger-than-expected profit on Wednesday. Meanwhile, Amazon shares tumbled about 10% in pre-market trading after the company forecasted current-quarter sales below estimates. In addition, Apple warned supply chain shortages could cost the company up to $8bn in the second quarter; Apple’s shares on Friday trended lower in pre-market trading.

With a clear focus on corporate news, US equity markets shrugged off poor economic data. US GDP unexpectedly dropped for the first quarter of 2022, down by 1.4% on an annualised basis against expectations of a 1% increase. This was primarily driven by a growing trade deficit as import volumes and prices surged. However, US households remain resilient with personal consumption growing over the first quarter.

Elsewhere European markets trended lower. As of 12pm London time, the UK market finished lower by just -0.23%, whilst the European main market traded into negative territory by -0.86%. This comes as the current quarterly earnings season approaches the halfway stage in Europe. According to Barclays nearly 75% of companies so far have beaten profit expectations.

Strict lockdowns persist in China

In Asia, equity markets declined over the week, primarily driven by the continuation of strict lockdowns due to the Covid wave in China. Panic buying ensued in Beijing at the start of the period as residents anticipated harsh social restrictions similar to those in Shanghai. On Friday, the Chinese government promised to provide fiscal support to “strengthen macro adjustments” and “achieve full-year economic and social development goals” in light of the lockdowns. The Shanghai Composite still finished down,1.29% over the week, but the messaging on Friday helped the Hong Kong index into positive territory, up 2.18% over the week. Elsewhere the Japanese index finished marginally lower by -0.29%.

Government bonds trade flat

After a poor start to the year, government bond prices faced a pause in selling. US 10-year treasury bond yields (which move inversely to their price) declined 4 basis points to trade at 2.85%. The equivalent 10-year UK Gilts yields also declined by 10 basis points, now trading at 1.86%. Meanwhile, 10-year German bund yields declined by 6 basis points to finish the week trading at 0.91%.

Russian Ukraine conflict continues to dominate commodity prices

European gas prices soared this week after Russia’s state-owned Gazprom suspended gas supplies to Poland and Bulgaria on Wednesday. The wholesale gas price jumped as much as 20%, as EU leaders accused Moscow of blackmail. Oil prices settled higher on reports that Germany will join other European Union member states in an embargo on Russian oil, which could further tighten supplies in a bid to stop funding Russia. As of 12pm London time, Brent Crude rose 2.91% over the week, to $109 per barrel.

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