Market Update April Monday 25th 2022

US interest rate expectations dominate markets

Expectations for interest rates were front and centre for markets this week, as Jay Powell, chair of the US Federal Reserve (Fed), said on Wednesday that it was appropriate to move quickly in order to control inflationary pressures, with a 0.5% rate increase in May a real possibility. Earlier in the week, the chair of the St Louis regional Fed said a rate increase of 0.75% could not be ruled out sometime this year.

US Treasury yields, which move inversely to price, rose with the 10-year now yielding 2.93%. The market is pricing in US interest rates of around 2.8% by the end of the year, today they are in the range of 0.25% to 0.50%. Similarly, officials from the European Central Bank pointed to the possibility of a rate increase as early as July. It was only four months ago that Christine Lagarde, president of the ECB, said a rate rise in the Eurozone was very unlikely.

As of 12pm on Friday, London time, US equities were flat over the week, whilst the US technology sector had fallen 1.3%, having declined by 15.8% since the start of the year. European equities dropped 0.9%, and the UK market lost 0.6%. Japanese equities rose 0.5%, whilst the Australian market fell 0.7%. Emerging markets dropped by 2.3%, with China suffering a loss of 3.9%.

Sterling sells off following weak UK retail sales data

In line with US Treasuries, German bunds also sold off, with the yield on 10-year bonds now standing at 0.93%, a level that has not been seen since 2014. UK gilts also sold off, with the 10-year yield trading at 1.98%. This was exacerbated by weak UK retail sales figures leading to a sharp selloff in Sterling on Friday, and in consequence, increasing the inflationary pressures on the UK. Versus the US Dollar, Sterling is now trading at $1.29, as low as it has been since the end of 2020.

Commodities also sold off this week, with Brent crude falling just over 4%, now trading at $107 a barrel. Copper dropped by just over 1%, iron ore lost 3.2% and gold was down by almost 2% at $1,935 an ounce.

Netflix tumbles close to 40%

There were mixed company results this week, but perhaps most eye catching was the sharp fall in Netflix’s share price following the news that its subscriber numbers had fallen for the first time in over a decade, with the price falling by close to 40%. Tesla, the electric car manufacturer, on the other hand reported revenue growth more than doubling for the last quarter to $18.7 billion.

However, in an environment where investors are increasingly looking for profits today, rather than growth tomorrow, its high valuation (Price/earnings ratio 78x versus 19x for the US market) proved a headwind for the share price which fell slightly over the week. Whilst more lowly valued consumer discretionary stocks, such as Heineken, Danone and Procter and Gamble, saw share price rises over the week as first quarter sales rose despite hiking prices for end consumers.