Market Commentary 9th May 2022 from Charlie Hancock

Posted by Telford Mann
Market Commentary 9th May 2022
Equity Indices
UK
During a week in which investor sentiment was poor around the globe, the UK’s FTSE 100 index declined by 2.08%. The more domestically focussed FTSE 250 fell by 4.29%.

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 4th quarter.

Europe
All of the major European indices declined last week, with the broad FTSE All World Index – Europe ex UK moving 3.87% lower. Germany’s DAX index fell by 3.00% and France’s CAC 40 lost 4.11%. The Italian FTSE MIB index held up relatively well with a decline of 1.21%.

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.

US
The major US equity indices experienced significant volatility, with a mid-week rally being reversed during heavy declines in Thursday’s trading session. The S&P 500 finished the week 0.21% lower, the Dow Jones Industrial Average lost 0.24% and the NASDAQ 100 declined by 1.25%.

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.

Asia
Asian equities were mixed, with China’s Shanghai Composite Index falling by 1.49% and Japan’s Nikkei 225 rising by 0.58%. The broad FTSE All World Index – Asia Pacific moved 2.51% lower.

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.

Bond Yields
UK
UK government bond yields rose last week, with the 10-Year Gilt climbing from 1.90% to 1.99%.

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.

Europe
The 10-Year German Bund yield rose from 0.94% to 1.13% across the week.

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.

US
The 10-Year Treasury yield climbed from 2.94% to 3.13%.

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.

Currency
GBP / USD – Current 1.2348 Previous 1.2574

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.

Commodities
Gold
Gold failed to benefit from any perceived “safe haven” status last week as the spot price declined by 0.69% to $1,883.81 per ounce. Growing expectations for further US interest rate rises appeared to reduce demand amongst investors, with an asset that provides no yield typically considered an unattractive option in an environment of rising interest rates.
Oil
Oil prices moved higher across the week as traders attempted to price in the possibility of the EU successfully implementing an embargo on Russian oil. The US also reported a significantly higher than expected drawdown from inventories. The Brent Crude spot price gained 2.79% to reach $112.39 per barrel.