Market Commentary 17th May 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 17^th May 2022

Equity Indices

The FTSE 100 index finished the week 0.41% higher after a relatively volatile week for equity markets around the globe. The FTSE 100 declined by 2.32% on Monday, before experiencing choppy mid-week trading, followed by a rally during Friday’s session. The mid-cap FTSE 250 followed a similar pattern and finished the week with a gain of 0.52%.

Weakness in mining stocks weighed on the FTSE 100 index last week, as concerns around reduced demand due to slowing economic growth dented sentiment on the sector. Glencore saw their share price fall by 5.38% across the week, whilst Anglo American experienced a decline of 5.27%.

Data for UK Gross Domestic Product (GDP) indicated that the UK economy unexpectedly shrank during March, with GDP falling by 0.1%. Overall, for the first quarter of 2022, the economy grew by a smaller than expected 0.8%.

Europe

Germany’s DAX index gained 2.59%, whilst France’s CAC 40 ended the week 1.67% higher. The FTSE All World Index – Europe ex UK declined by 1.45%, with weakness in heavily weighted Swiss equities dragging the broad index lower. Pharmaceutical giant Roche declined by 7.79% after the company announced a new lung cancer drug had failed to produce satisfactory results during a trial. Swiss food giant Nestle saw their share price decline by 2.00% across the week.

Debates between European Union (EU) member states regarding the procurement of oil and gas continued throughout the week. Germany announced that they plan to stop importing oil from Russia by the end of 2023, regardless of whether an EU wide embargo is successfully implemented. Some politicians accused Hungary of ‘holding the EU hostage’ during the week, with Hungarian officials signalling they would veto an EU wide ban on Russian oil imports.

The president of the European Central Bank (ECB), Christine Lagarde, stated that the central bank’s quantitative easing programme could finish soon after the end of the 2^nd quarter, with a rate hike being implemented a “few weeks later”. Other ECB members made similar remarks during the week.

All of the major US equity indices suffered declines last week. The S&P 500 and the NASDAQ 100 both fell by 2.41%, whilst the Dow Jones Industrial Average lost 2.14%.

Investors paid close attention to the US Consumer Price Index (CPI) data released on Wednesday. The higher-than-expected inflation reading of 8.3% for April prompted a sell off in US equities, with investors appearing concerned that inflation will remain high in the coming months and the Federal Reserve will be forced to continue raising interest rates to cool demand for goods and services.

Areas of the market which are typically hurt by rising interest rates struggled, with expectations for tighter monetary policy strengthening following the release of the CPI data. The S&P 500 Information Technology sector fell by 3.50% across the week.

Asia

Asian equity indices were mixed last week. The broad FTSE All World Index – Asia Pacific fell by 2.51%, the Nikkei 225 moved 2.13% lower, whilst China’s Shanghai Composite Index gained 2.76%.

Sentiment on Chinese equities improved last week. The number of new Covid cases continued to decline in Shanghai, with investors appearing encouraged by the prospect of lockdown restrictions easing. Positive rhetoric from market regulators in Beijing also contributed to the improvement in investor sentiment. China’s securities commission stated that the recent stock market rout is “an overreaction” and that they will implement measures which encourage more technology companies to go public, either domestically or via stock exchanges overseas.

The governor of the Bank of Japan (BoJ) pushed back against concerns around the central bank’s commitment to continued loose monetary policy. Haruhiko Kuroda stated that medium to long term inflation expectations remain low and the short term increase due to rising energy costs will lack sustainability. Kuroda pointed out that Japan’s economy is yet to fully recover from the Covid shock.

Bond Yields

UK government bond yields reversed all of the previous week’s rise, with the 10-Year Gilt falling from 1.99% to 1.74%. Investors appeared to increase their exposure to government bonds during the week, whilst concerns around slowing economic growth also cast doubt on the likelihood of continued interest rate rises.

Europe

The 10-Year German Bund yield declined from 1.13% to 0.94%, with investor demand for government debt outweighing hawkish remarks from ECB officials during the week.

The 10-Year Treasury yield moved from 3.13% to 2.92% during the week. Treasury yields spiked following the release of Wednesday’s CPI data, before fading as the week progressed.

Concerns regarding an economic slowdown appeared to drive the decline in yields, with investors paying close attention to a key consumer sentiment gauge which fell to the lowest level recorded since 2009.

Currency

GBP / USD – Current 1.2262 Previous 1.2348

GBP / EUR – Current 1.1778 Previous 1.1699

The Pound continued to decline against the US Dollar, falling by 0.70% as the Greenback continued to attract flows from around the globe. Against the Eurozone currency, Sterling gained 0.68%.

Commodities

Gold

Although equity markets suffered outflows during the week, Gold failed to attract any demand from investors. The precious metal’s spot price declined by 3.82% to reach $1,811.79 per ounce. Continued strength in the US Dollar has proven to be a headwind for Gold in recent months.

Oil

Oil prices slumped during the early part of the week, before rising again to finish the week broadly unchanged. The Brent Crude spot price fell by 0.75% to $111.55 per barrel. The state-owned oil giant, Saudi Aramco, reported profits of nearly $40bn for the first quarter and reclaimed the title of the world’s most valuable company from the US tech giant Apple.