Market Update August Monday 22nd 2022

Mixed economic data and company results have led to a similarly mixed week in markets

It has been a mixed week for markets as economic data and company results were mixed, providing little direction. Whilst there are some signs of cooling growth, such as in the US housing market, other areas, such as employment, remain robust, pointing towards further rate rises. And, whilst China has been gently easing monetary policy this year, the country’s zero covid policy continues to sap consumer confidence, which has been reflected in lacklustre retail sales growth and rising unemployment.

Dollar strength returns

As of 12pm on Friday, London time, US equities were up 0.1% over the week, although investors based outside of the US were able to benefit from renewed dollar strength. The Dollar index, which measures the value of the dollar against a basket of internationally traded currencies, strengthened by a massive 2.2% over the week. US technology stocks, faced with rising expectations of further rate tightening, fell 0.6%. European markets dropped 0.45%, not helped by European natural gas futures rising by almost 20% over the week alone, having risen 250% year to date. UK stocks rose 0.2%, although weakness in sterling accounted for much of this. More domestically orientated UK mid cap stocks fell 1.9%. Japanese equities rose 1.1%, aided by currency weakness, with the Yen falling against most major currencies, as unlike other major central banks monetary policy remains very accommodative under the Bank of Japan as inflationary pressures remain muted. Australian shares rose 1.2%, supported by very strong results from commodity producers. Emerging markets fell 0.7%, with the Hong Kong Hang Seng falling 2.0%.

UK inflation data leads to a selloff in short-dated government bonds

Developed market government bond yields rose (yields move inversely to price) this week as economic data on balance pointed to continued rate hikes. The 10-year yield on US Treasuries is now trading at 2.9%, German bunds 1.22% and UK gilts 2.44%. The bigger move was in shorter dated bonds following the latest release of inflation data out of the UK. Consumer price inflation came in at 10.1% for the year to July, higher than last month’s reading of 9.4% and above forecasts of 9.8%. Short-dated gilts rose over half a percent as the market reappraised UK interest rate expectations, with the 2-year gilt now trading at 2.59%, dragging the yield up on both US Treasuries and German bunds mid-week.

Crude oil slips further

Crude oil fell, with Brent crude down by 3.6%, now trading at $94.6 a barrel. Copper prices were also weak, falling 0.5% to $8,045 a tonne. Iron ore shed 8.6% on the back of weak Chinese economic data. Meanwhile gold suffered from the rally in the US dollar, falling 2.8% to $1,764 an ounce.

Zero covid policy continues to take its toll on China’s economy

The week began with disappointing data out of China, with both retail sales and industrial production coming in lower than forecasts. China continues to lock down cities as a key part of its zero covid policy resulting in lacklustre economic growth. Youth unemployment has risen to a record high of 19.9%. The People’s Bank of China reduced its medium-term lending rate by 0.10%, but expectations are growing for further easing.

US housing market continues to soften, whilst employment picture remains robust

In the US, new home construction moderated to its lowest level since mid-2021, with housing starts falling by 9.6% from the previous month. However, the DIY store Home Depot reported its highest quarterly sales and earnings on record as consumers continue to spend on home improvement despite the high levels of inflation. Following two sets of profits warnings, the hypermarket chain Walmart reported stronger than expected figures and raised their full year guidance, whilst the department store Target Corporation missed earnings forecasts and described the operating environment as “very challenging”. The employment picture continues to remain more robust than expectations as initial unemployment claims came in beneath expectations.