Market Commentary 30th May 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 30th May 2022

Equity Indices

The UK’s FTSE 100 index rose by 2.65% across the week, whilst the FTSE 250 gained 2.70%. Investor sentiment improved around the globe, with most major equity indices recording gains.

An initial Purchasing Managers’ Index (PMI) covering both services and manufacturing in the UK indicated that the pace of growth significantly slowed this month. The index, compiled by S&P Global, fell to 51.8 from the 57.6 level recorded in April, marking the slowest pace of expansion since lockdown restrictions were in place in February 2021.

Huw Pill, the chief economist at the Bank of England (BoE), stated that he believes further interest rate rises will be needed. He cautioned that too much hiking could result in a recession, but that too little could lead to sustained momentum for inflation.

Europe

European equity indices rallied last week, with the broad FTSE All World Index – Europe ex UK gaining 4.82%. Germany’s DAX index rose by 3.44%, whilst France’s CAC 40 moved 3.67% higher.

The initial PMI estimate from S&P Global for the Eurozone indicated that growth remained robust this month, with the composite PMI falling to 54.9 from the 55.8 recorded in April. The better than expected reading contributed to investor sentiment improving, with concerns around a Eurozone recession fading.

The European Central Bank (ECB) President, Christine Lagarde, indicated in a blog post published last week that the central bank will implement interest rate hikes in July and September. Lagarde said that the ECB is likely to be in a position to exit negative interest rates by the end of third quarter, downplaying speculation regarding a hike of 0.50% in July.

The risk on sentiment resulted in the major US equity indices staging a strong reversal last week. The S&P 500 rose by 6.58%, the Dow Jones Industrial Average climbed by 6.24% and the NASDAQ 100 gained 7.15%.

Speculation around inflation peaking appeared to be one of the drivers for the rally last week. An initial PMI reading indicated that growth slowed from the pace seen in April, but remained strong in both the manufacturing and services sectors. The Federal Reserve’s preferred measure of inflation, the Personal Consumption Expenditures (PCE) index, showed that the rate of inflation slowed in April versus the reading for March.

The release of minutes from the Fed’s May policy meeting appeared to re-assure investors that interest rate hikes of more than 0.50% were unlikely. This contributed to sectors which are typically sensitive to rising interest rates performing strongly and the NASDAQ outperforming the S&P and Dow Jones Industrial Average across the week.

Asia

The major Asian equity indices underperformed their global counterparts last week, resulting in the broad FTSE All World Index – Asia Pacific seeing a relatively muted increase of 0.79%. China’s Shanghai Composite Index fell by 0.52%, whilst Japan’s Nikkei 225 gained 0.16%.

Authorities began to implement the easing of lockdown restrictions in Shanghai, allowing some residents to leave their homes and businesses to re-open, albeit with reduced capacity. Li Keqiang, a senior member of the Chinese Communist Party, told government officials during a video confidence that the economic consequences of lockdown would be dire if measures were not taken to reverse the slowdown. President Xi Jinping appears to remain in favour of zero-covid policies, whilst some politicians, such as Keqiang, have called for pandemic controls to be eased to avoid too much economic damage.

The pace of growth in the manufacturing sector slowed in Japan, with a PMI survey indicating that supply chain issues are hindering factory activity. The services sector showed an improvement for the second month in a row.

Bond Yields

The 10-Year Gilt yield rose from 1.89% to 1.92% across the week. Yields were relatively stable, with demand reducing as investors rotated into risk assets during the week.

Europe

The 10-Year German Bund yield moved from 0.94% to 0.96% across the week. Government bond yields across the Eurozone saw little change. Comments from the ECB chief Christine Lagarde appeared to alleviate concerns around the steeper interest rate hikes which some ECB members have called for.

The 10-Year Treasury yield decreased slightly during the week from 2.78% to 2.74%. Speculation that inflation may have already peaked in the US appeared to be one of the drivers for yields declining during the week.

Currency

GBP / USD – Current 1.2631 Previous 1.2480

GBP / EUR – Current 1.1769 Previous 1.1825

The Pound gained 1.21% against the US Dollar, with the greenback weakening as a rally in risk assets coincided with investor demand for the ‘safe haven’ currency reducing. Sterling fell by 0.47% against the Euro, with the Eurozone currency strengthening following the release of data which indicated that growth in Europe remains in healthy territory.

Commodities

Gold

The Gold spot price saw a marginal gain across the week, rising by 0.39% to $1,853.72 per ounce. Weakness in the US Dollar and a decline in US Treasury yields appeared to contribute to the precious metal moving higher.

Oil

Oil rallied last week, with the Brent Crude spot price gaining 6.11% to reach $119.43 per barrel. The easing of lockdown restrictions in China contributed to expectations for rising demand, together with data indicating that US and Eurozone economic growth remains relatively healthy.