Market Commentary 9th May 2022 from Charlie Hancock

Investor concerns regarding inflation, rising interest rates and the prospect of a recession contributed to a sell off for risk assets around the globe last week. The FTSE 100 fared better than most major European indices, with a heavy weighting to oil stocks cushioning the decline. The share price for Shell gained 5.82% across the week and the energy giant reported their highest ever quarterly profits. Rival BP saw their share price rise by 8.96% across the week.

The Bank of England (BoE) raised the UK base rate to 1.00% following their May policy meeting, with the interest rate now at the highest level seen since 2009. The central bank warned that the UK could slip into recession by the end of this year and that inflation may peak at higher than 10% during the 4^th quarter.

Debates between European Union (EU) members regarding a possible embargo on Russian oil continued throughout the week. Officials from Hungary, Slovakia and the Czech Republic remained sceptical, with the Hungarian Prime Minister stating that the EU’s current proposals would “be like an atomic bomb” for the Hungarian economy.

Economic data released during the week added to concerns regarding the possibility of a Eurozone recession. During March this year, German industrial production experienced the sharpest decline seen since the start of the pandemic in April 2020, whilst Eurozone retail sales fell by more than expected.

The Federal Reserve raised interest rates by the largest amount since May 2000, with a 0.50% hike taking their target range to 0.75% to 1.00%. US equities rallied following the central bank’s post meeting press conference, with Fed chairman Jerome Powell stating that hikes of 0.75% “were not actively being considered”. The gains were short lived and unwound during Thursday’s session.

US growth stocks, which typically react negatively to rising interest rates, sold off during the week. Amazon.com Inc saw their share price decline by 7.65% across the week, whilst streaming provider Netflix fell by 4.93%. E-commerce platform Shopify declined by 11.46%, with their share price now 77% lower than the peak in November 2021.

Purchasing Managers’ Index data for April provided evidence of the economic damage resulting from lockdown restrictions in China. The services sector saw activity shrink at the second fastest rate since records began in 2005.

Tensions between financial regulators in China and the US flared up again, with the US Securities and Exchange Commission (SEC) announcing an investigation into the failed initial public offering for Didi, the Chinese competitor for the taxi application Uber. The SEC also added more than 80 firms to a list facing possible de-listing from US stock exchanges. The list of new companies included technology giants JD.com and Pinduoduo, with their US listed shares declining by 9.81% and 11.37% respectively across the week.

During a visit to London, Japanese Prime Minister Fumio Kishida announced that coronavirus related border restrictions will ease further next month. Kishida also stated that the government was working on plans to reduce Japan’s dependence on Russian gas and oil, including by promoting renewables and nuclear power.

Yields reversed all of the previous week’s decline, with hawkish messages from the BoE contributing to the rise. Members of the central bank suggested that further interest rate rises would be necessary in the months ahead, but re-iterated that they believe inflation will fall to their 2% target by 2024.

Several key members of the European Central Bank (ECB) suggested that they would vote for an interest rate hike as early as July. The governor of the Austrian central bank, Robert Holzmann, told a German newspaper that he believes two or three interest rate rises would be appropriate before the end of this year.

Whilst the Federal Reserve implied that sharper interest rate rises are not being considered, financial markets moved to price in a 75% chance of a 0.75 hike at next month’s policy meeting.

GBP / EUR – Current 1.1699 Previous 1.1925

The Pound lost ground against both the US Dollar and the Euro last week, declining by 1.80% and 1.90% respectively. Comments from the BoE suggesting that the possibility of a recession is increasing appeared to dent confidence in the Pound.