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Market Update August Monday 1st 2022

Equity markets set for their best month since late 2020

Markets are set for a strong finish to the week, as investors were encouraged by comments made by US Federal Reserve (Fed) Chair, Jay Powell. The central bank raised its federal fund’s rate by 0.75% to a range of 2.25% to 2.50%, which was widely expected. However, comments from Powell that the central bank may soon slow the pace of further rate rises were well received by investors. Although inflation remains high, central bankers are looking to raise rates without choking off growth and consequently, stock markets have tended to react positively to any indication of less hawkish monetary policy.

As of 9am London time, the US index and the US technology sector both finished higher by 2.8%. Markets in Europe followed suit, with the European index up 2.36%, whilst the UK market rose by 1.2%. Asian stocks gave a mixed picture, however. Australian equities posted a strong gain of 2.26%, but the Hong Kong index dropped by 2.55%, following heavy selling in Alibaba after several executives stepped down. The Shanghai composite finished lower by 0.89% with investors disappointed by the lack of any new stimulus announcements from the Chinese government politburo meeting on Thursday.

Well received company earnings boost equity performance.

What also helped performance this week were well received earnings updates from several bellwether companies. US Technology giants Microsoft and Google parent Alphabet signalled better than expected full year forecasts, even if quarterly revenues were behind initial expectations. Microsoft and Google stock prices rose 6.6 and 7.7% on the announcements. Meanwhile Amazon shares leapt 14%, after revenue results beat expectations. The company also offered an upbeat outlook for the rest of the year on the strength of its cloud computing business. It was not all good news however, major retailer Walmart dropped 7.6% after the company issued its second profit warning since May, citing rising prices for fuel and goods weighing on demand.

Away from the US we also saw a strong earnings boost in the UK for energy giants Shell and British Gas owner, Centrica. Shell attributed its record profits of £9.4bn in the second quarter due to higher energy prices and gas trading, whilst Centrica enjoyed £1.3bn operating profits boosted again by rising energy prices as well as asset sales.

US economy in “technical” recession

A day after the Fed meeting, data revealed US Q2 GDP growth falling 0.9% on an annualised basis. This followed a contraction of 1.6% in the first quarter of this year, putting the country into a technical recession, as defined as two consecutive quarters of negative growth.

However, it is the National Bureau of Economic Research (NBER) who officially declare whether the economy is in recession, based on a range of factors such as GDP, real income, and employment. They have yet to designate the US as being in a recession, whilst the White House has also pushed back on the idea of being in a recession, citing robust monthly job creation.

Nonetheless, US government bonds rallied on the news. Safe haven 10-year government bonds returned 1% for the week, with its yield falling by 6 basis points to trade at 2.69% as of 9am London time. Equivalent UK Gilt yields and German Bund yields also declined, by 10 and 16 basis points respectively to trade at 1.9% and 0.88%.

European gas prices jump higher

In other news, European gas prices rose as much as 13% on Wednesday as flows from the Nord Stream 1 pipeline from Russia to Germany were cut to just 20% normal capacity. European politicians have accused Russia of weaponizing gas supplies in response to sanctions imposed following the invasion of Ukraine. Gas supplies were already cut to 40 per cent of capacity in June before Moscow threatened to make further cuts this week.

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