Last week, MSCI All Country World Index (MSCI ACWI) lost -1.1% (-16.9% YTD); its seventh consecutive weekly loss.
In the US, the S&P 500 dropped -3.0% (-17.7% YTD). Wall Street continued its weekly losing streak as fears grew that inflation was causing consumers to pull back on discretionary spending, setting the stage for a coming recession. At its low point on Friday, the S&P 500 was down roughly 20.9% from its January intraday high, exceeding the 20% threshold for a bear market and placing it back at levels last seen in February 2021. The index’s biggest declines came on Wednesday, when it suffered its biggest daily loss since June 2020. Market activity was surprisingly subdued, however, with trading volumes more than 10% below recent 20-day averages and below every day of the previous week. Value stocks outperformed their growth counterparts and small-caps outperformed large-caps. Russell 1000 Growth returned -4.1% (-26.8% YTD), Russell 1000 Value -1.8% (-9.2% YTD) and Russell 2000 -1.1% (-20.7% YTD).
Disappointing earnings and revenue results from several of the nation’s major retailers appeared to spill over into negative broader sentiment. Most dramatically, shares in Target fell roughly 25% after earnings fell short of estimates by nearly a third, which the company attributed to a combination of reduced sales of discretionary items, such as televisions, and higher costs. Results from Walmart, Lowe’s and Home Depot also fell short of expectations – while Costco shares may have tumbled in part on rumours that it was raising the price of its popular café hot dog. Aside from the hit to profit margins, investors seemed to worry that major retailers would be forced to pass on more of their higher input costs to customers in coming months, keeping inflation elevated.
In Europe, the Euro Stoxx 50 pulled back -1.0% (-12.9% YTD) amid fears of slowing economic growth and faster interest rate increases. The main market indexes were mixed. France’s CAC 40 slipped -1.0% (-10.6% YTD), Germany’s DAX lost -0.3% (-12.0% YTD) and Italy’s FTSE MIB advanced 0.2% (-10.6% YTD). Switzerland’s SMI dropped -2.9% (-9.8% YTD). The euro appreciated against the US dollar, ending the week at 1.06 USD per EUR, up from 1.04.
In the UK, the FTSE 100 gave up -0.2% (1.8% YTD) and the FTSE 250 was down -0.4% (-14.6% YTD). The British pound was stronger against the US dollar, ending the week at 1.25 USD per GBP, up from 1.23.
Japan’s stock market returns were positive for the week. The Nikkei 225 advanced 1.2% (-6.2% YTD), the broader TOPIX was up 0.7% (-4.6% YTD) and the TOPIX Small Index gained 0.6% (-5.8% YTD). Regional sentiment toward the end of the week was boosted by China’s action to support its property sector, the latest in a series of monetary easing measures aimed at boosting an economy weighed down by coronavirus lockdowns. An announcement by Japan’s government that the country’s strict border control measures would be eased further also lent some support. Against this backdrop, the yield on the 10-year Japanese government bond remained steady at 0.24%. The yen strengthened to JPY 127.9 against the US dollar, from JPY 129.2 the prior week.
In Australia, the S&P ASX 200 was up 1.2% (-1.5% YTD) thanks to a solid session to close the week. The Friday rebound was driven by the decision from China to lower key interest rates after weak economic data was released on Wednesday. The Australian dollar advanced for the week, mainly due to a drop in the US dollar following weaker than expected economic data. Government bond yields retreated, reflecting weaker than expected wage growth.
MSCI Emerging Markets Index returned 3.1% last week (-15.4% YTD), with a positive contribution to performance from the stock markets of China, Taiwan, South Korea, India and Brazil.
Chinese stocks rose as the central bank cut interest rates to support the country’s flagging property sector even as disappointing economic data weighed on sentiment. For the week, the blue-chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.3% (-17.4% YTD) and the broad, capitalisation-weighted Shanghai Composite Index advanced 2.1% (-13.5% YTD).
The yield on China’s 10-year government bond was broadly unchanged at 2.82%. In currency trading, the yuan firmed to 6.68 from 6.80 per US dollar. The International Monetary Fund said it increased the yuan’s weighting in the Special Drawing Rights (SDR) currency basket following its first review of the SDR since China joined the basket in 2016. The SDR is an international reserve asset made up of five global reserve currencies (the US dollar, euro, yuan, yen and British pound).
In Chile, the S&P IPSA Index returned 2.7% (15.7% YTD). The first draft of the new constitution was completed early in the week, after 10 months and more than 100 plenary sessions within the Constitutional Assembly. The document, which totals 160 pages and includes 499 articles, is reviewed by three internal committees to harmonise drafting, to set up rules for the transition to a new constitution, and to create a preamble. This process is expected to continue until 9 June in order to allow for a plenary vote by 29 June and to deliver a final draft to the nation by 4 July. The general public will vote for or against the new constitution in a mandatory referendum on 4 September.
According to a recent survey, voting intentions for the new constitution stand at 38% in favour, 46% against and 16% undecided. T. Rowe Price emerging markets sovereign analyst Aaron Gifford notes that the margin between the “no” vote and the “yes” vote has decreased over the last week. However, he believes that President Gabriel Boric’s government will need to rally support if it wants the new constitution to become the country’s new basic law.
Gifford notes that the draft completed during the week should be close to the final draft, as no new laws can be introduced during the harmonisation process. On a positive note, he sees that many radical proposals have not made it into the draft. However, political uncertainty, as well as regulatory uncertainty for businesses, will continue for some time, as many proposals are open to interpretation.
In Mexico, the IPC Index returned 4.0% (-2.4% YTD). The equity market performed well – despite significant volatility in the neighbouring US market – helped in part by a stronger peso stemming from several factors. These include hopes that China, a major global economy, will soon end its COVID-19 lockdowns in Shanghai and other places, as well as rising expectations for a more aggressive pace of interest rate hikes following the Bank of Mexico’s increase in its key interest rate late last week from 6.5% to 7.0%, which would increase the peso’s relative appeal.
According to T. Rowe Price’s Gifford, the central bank’s post-meeting statement was hawkish, as policymakers acknowledged more inflationary pressures, specifically China's zero-COVID policy, which now joins the list of other shocks – including supply chain bottlenecks and the Russia-Ukraine war – for them to be worried about. Notably, policymakers introduced the following sentence in the statement: “Given the growing complexity in the environment for inflation and its expectations, taking more forceful measures to attain the inflation target may be considered.” The central bank also increased its near-term inflation forecasts.
Last week, Bloomberg Global Aggregate Index (hedged to USD) returned 0.2% (-7.5% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.6% (-11.1% YTD) and Bloomberg Emerging Markets Hard Currency Index 0.1% (-14.5% YTD).
The 10-year US Treasury yield fell as low as 2.77% in intraday trading on Thursday, its lowest level in nearly a month. It ended the week at 2.78%, decreasing 14 basis points from 2.92% (127 basis points higher YTD).
Core eurozone government bond yields fluctuated, ending roughly unchanged. Hawkish signals from several European Central Bank (ECB) officials caused yields to rise early in the week. ECB Governing Council member Klaas Knot, for example, appeared to suggest the possibility of a 50-basis-point interest rate increase in July. Yields subsequently pulled back, as weak retail earnings in the US worsened fears of an economic slowdown. Over the week, the German 10-year bund yield was little changed, ending at 0.94% (up 112 basis points YTD). Peripheral eurozone bond yields, which broadly tracked core markets over the week, ended slightly higher.
UK gilt yields rose on inflation reaching its highest level in 40 years, better-than-expected employment data, and hawkish comments from Bank of England Chief Economist Huw Pill. The 10-year gilt yield ended the week 15 basis points higher, up from 1.74% to 1.89% (92 basis points higher YTD).
US investment-grade corporate bonds weakened as an active primary calendar weighed on market technicals. Also, the earnings misses from some prominent retailers resulted in growing fundamental concerns across the market. Despite these concerns, newly issued bonds performed well in general as attractive concessions bolstered investor demand.
Conversely, high yield bond performance marginally improved early in the week as the earnings season progressed. However, the market later retraced the gains with CCC rated names faring worse than higher-quality bonds. The recent acceleration of outflows industrywide contributed to the unwinding of the significant inflows the asset class experienced in 2020, while the primary market remained quiet with minimal issuance.
The recent volatility in the bank loan market subsided as the week began, leading to a few new deal announcements. There was an increased demand from bank buyers as recent paydowns resulted in elevated cash balances. However, the hawkish Fed commentary fostered broad risk-off sentiment.
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