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%.
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.
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.
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%.
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%.
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