Market Commentary 23rd May 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 23^rd May 2022

Equity Indices

UK equity indices moved higher on Monday and Tuesday, but failed to sustain the rally and faded to finish the week with a slight loss. The FTSE 100 fell by 0.38% and the FTSE 250 lost 0.43%.

Data released last week showed that inflation accelerated to the highest level for 40 years last month. The Consumer Price Index (CPI) rose by 9% in the year to April, up from the 7% recorded for March. The Office for National Statistics (ONS) stated that the increase to the energy price cap during the month was one of the main drivers behind the rise in CPI. Further increases in fuel prices and the end of a temporary VAT cut for hospitality businesses were also contributing factors.

Disappointing earnings results from US retailers weighed on consumer goods companies in the FTSE 100, with B&M European Value Retail seeing their share price decline by 9.61% across the week. Next fell by 5.40%, whilst JD Sports lost 7.57%.

Europe

Most of the major European indices declined last week. Germany’s DAX index fell by 0.33%, France’s CAC 40 moved 1.22% lower and the Swiss Market Index declined by 2.93%. The broad FTSE All World Index – Europe ex UK gained 0.45% across the week,

Data showed that the Eurozone economy expanded by more than previously thought during the first quarter of 2022. Gross Domestic Product (GDP) growth during the quarter was revised up from 0.2% to 0.3%. Official European Union (EU) estimates for 2022 were revised lower, with the growth forecast cut from 4.0% to 2.7%.

The European Commission (EC) unveiled proposals to end the Eurozone’s dependence on Russian fossil fuels, dubbed the ‘REPowerEU plan’. The EC president, Ursula von der Leyen, announced the measures which includes a spending package of €300bn. The plan aims to reduce energy consumption, substitute Russian gas with other fuels, boost renewable energy investment and finance new energy related infrastructure.

The major US equity indices experienced another difficult week. The S&P 500 index fell by 3.05%, the Dow Jones Industrial Average moved 2.90% lower and the NASDAQ 100 lost 4.45%.

Concerns around weakening economic growth appeared to drive some of the risk-off sentiment during the week. Weekly jobless claims came in higher than expected, whilst existing home sales and new housing starts were weaker than anticipated. On the flipside, retail sales data for April came in above expectations.

Investor sentiment also appeared to be dented by earnings results from major retailers Walmart and Target. Both reported lower than expected profits, with margins squeezed by higher costs. Across the week, their share prices declined by 19.55% and 29.28% respectively.

Asia

Asian indices moved higher across the week, with Japan’s Nikkei 225 rising by 1.18% and China’s Shanghai Composite Index gaining 2.02%. The broad FTSE All World Index – Asia Pacific rose by 2.64%.

Official data showed that the Japanese economy shrank by 1% during the first quarter of the year. The weakness was largely attributed to fragile consumer spending due to coronavirus related restrictions. Consumer price inflation rose above the central bank’s target, reaching 2.1% in April, but remained well below the levels currently being experienced in most of the developed world.

Chinese economic data pointed to a significant slowdown, with strict coronavirus lockdowns hindering activity. Retail sales saw a year-on-year decline of 11.1% in April, whilst youth unemployment rose to a record 18.2%. The People’s Bank of China (PBOC) responded to the economic weakness by cutting key lending rates again on Friday, prompting a rally for Chinese equities.

Bond Yields

UK government bond yields rose last week, with the 10-Year Gilt yield climbing from 1.74% to 1.89%. Some of the rise in Gilt yields appeared to be driven by the week’s inflation data, which suggested that price increases were broad across the economy. The average price of diesel in the UK hit a record high during the week, resulting in rising expectations for a higher inflation print next month.

Europe

The 10-Year German Bund yield was unchanged across the week at 0.94%. Eurozone government bond yields were relatively stable despite data showing that inflationary pressures worsened last month. Germany reported a record increase of 33.5% for producer input prices during April. As well as lowering growth forecasts, the European Commission said that inflation is expected to average 6.1% this year.

The 10-Year Treasury yield declined from 2.92% to 2.78% last week. The disappointing weekly jobless claims, a slowdown in the real estate market and a survey pointing to weakness in the manufacturing sector all contributed to expectations for economic growth to slow in the coming months. Investors increased their exposure to ‘safe haven’ assets such as US Treasuries as a result, sending yields lower.

Currency

GBP / USD – Current 1.2480 Previous 1.2262

GBP / EUR – Current 1.1825 Previous 1.1778

The Pound rose by 1.78% against the US Dollar, with the greenback giving up some of its recent strength. Against the Euro, Sterling gained 0.40%.

Commodities

Gold

Gold found some support last week, aided by a weakening US Dollar. The spot price rose by 1.92% to reach $1,846.50 per ounce.

Oil

Oil prices saw relatively sharp declines at the beginning of the week, with traders appearing to price in an economic slowdown and reduced demand from the European Union. Sentiment improved on Thursday and Friday and the Brent Crude spot price recovered to finish the week 0.90% higher at $112.55 per barrel.