Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and political backdrop
The US
Comments from Federal Reserve officials during last week did little to calm inflation and interest rate fears. On Wednesday, Fed Chair Jerome Powell told The Wall Street Journal that taming inflation was an “unconditional need” and that policymakers would not hesitate to raise rates as much as necessary, even if it meant “some pain [was] involved.” On Thursday, Kansas City Fed President Esther George acknowledged to CNBC the “rough week” in equity markets but seemed to welcome it as “one of the avenues through which tighter financial conditions will emerge.”
The week’s economic data offered mixed signals about whether a recession was imminent, and Wall Street’s reaction to the data was also arguably hard to decipher. On Tuesday, investors seemed to welcome news that retail sales, excluding the volatile auto segment, had risen more than expected in April (0.6% versus roughly 0.4%), while March’s gain was revised upward to 2.1%. Industrial production, manufacturing production and capacity utilisation figures in April also surprised on the upside.
On Thursday, however, a gauge of manufacturing activity in the Mid-Atlantic region fell short of expectations by a wide margin, and weekly jobless claims rose more than expected. Housing starts and existing home sales also came in lower than expected, reflecting the pressure from higher mortgage rates. The downside surprises appeared to spark brief rallies in stock prices, however, perhaps because they drove a sharp decline in longer-term interest rate expectations.
Europe
The eurozone economy was more resilient than previously thought in the first quarter. GDP growth was revised higher to 0.3% sequentially from the previous estimate of 0.2%. Even so, the European Commission (EC) cut its forecast for 2022 GDP growth to 2.7% from 4.0% and raised its estimate for inflation to 6.1% from 3.5% to reflect higher energy prices.
German producer prices rose by a record amount in April, surging 33.5% year over year. Energy prices increased 87.3% over this period due mainly to soaring prices for natural gas.
The EC announced a EUR 300 billion plan called REPowerEU that aims to end the EU’s dependence on Russian energy imports before 2030. It is based on four pillars: saving energy, substituting Russian energy with other fossil fuels, boosting green energy, and financing new pipelines and liquefied natural gas terminals. Unused loans from the pandemic recovery programme will provide most of the cash for the plan.
The UK
The latest macro data provided more evidence that the UK economy may be on the brink of stagnation. Inflation accelerated in April to the highest level since 1982, hitting 9.0% on surging electricity and gas prices, according to the Office for National Statistics. The unemployment rate in the three months ended 31 March fell to 3.7% – the lowest level since 1974 – with job vacancies exceeding the number of jobless for the first time on record. Weekly earnings growth (including bonuses) rose by 7.0% sequentially over this period.
Meanwhile, retail sales volumes in April unexpectedly increased 1.4% month over month. However, a survey conducted by research company GfK showed that UK consumer confidence dropped to its lowest level in nearly 50 years in May.
Japan
Japan’s economic recovery lagged that of its global peers, with the country’s GDP contracting by an annualised 1% quarter on quarter during the first three months of 2022. Factors behind the contraction included deteriorating trade as import prices soared and sluggish consumer spending due to the coronavirus restrictions that had been in place. The Bank of Japan (BoJ) has repeatedly said it would continue with its massive monetary stimulus to support the post-pandemic recovery – the relatively weak GDP data are likely to reinforce this stance. Inflation exceeded the BoJ’s 2.0% target in April, as the core consumer price index rose 2.1% from a year earlier. However, consumer price pressures remained far weaker in Japan than elsewhere in the world, also supporting the case for continued easing.
Separate data showed that Japan’s exports rose 12.5% year on year in April, led by US-bound shipments of cars, while shipments to China fell sharply as the economic slowdown caused by the country’s coronavirus lockdowns weighed on demand. Imports increased by 28.2% after energy prices soared due to the war in Ukraine.
Starting in June, the cap on overseas arrivals to Japan will be doubled to 20,000 per day, as the government announced its latest steps to ease the strict border control measures that have been in place to contain the spread of the coronavirus. COVID-19 testing and quarantine rules will also be relaxed for travellers from countries with the lowest infection rate. Prime Minister Fumio Kishida previously promised to align Japan’s border control measures with those of the other Group of Seven developed nations in June.
China
The previous Friday, the People’s Bank of China (PBOC) cut the five-year loan prime rate (LPR), a reference for home mortgages, by an unexpectedly large 15 basis points to 4.45%. That rate cut came after the central bank cut the lower limit of mortgage rates for first-time homebuyers the previous Sunday. The PBOC’s rate cuts followed data showing a plunge in home sales in April. (China’s five-year and one-year LPRs are based on interest rates that 18 banks offer to their best customers. Banks use the five-year LPR to price mortgages, while most other loans are based on the one-year rate.)
The reduction in the five-year LPR signals that China’s government is trying to bolster homebuying demand. Given that the rate cut was done at a national rather than a regional level makes the PBOC’s move more significant. Local-level rate cuts have so far failed to spur much demand after China’s government has stepped up efforts to regulate the housing market in recent years, affecting how people view housing as an investment. China’s policymakers are trying to strike a balance between supporting first-time homebuyers and discouraging speculation and not offering relief to developers.
Economic data released last week pointed to slowing growth. Retail sales and industrial output data for April lagged estimates amid continued pandemic lockdowns reflecting China’s zero-COVID approach. Fixed asset investment rose 6.8% from January to April from a year ago but also missed the consensus forecast. Home prices in China fell in April for the eighth straight month, declining 0.3% from March, marking the fastest decline in five months.
Australia
Wage growth rose by 2.4% year on year in the first quarter but missed expectations. It is an important indicator to gauge the future pace of the tightening cycle of the Reserve Bank of Australia (RBA). The reading modestly reduces the amount of hikes priced in the markets. At the same time, the job market continues to be tight, with the unemployment rate falling to 3.9% – the lowest since 1974. The drop in the jobless rate, however, was partly driven by a fall in the participation rate.
Markets
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.
Yoram Lustig, CFA
Head of Multi Asset Solutions,
EMEA and LATAM
Michael Walsh, FIA, CFA
Solutions Strategist
Niklas Jeschke, CFA
Solutions Analyst
Eva Wu,
Solutions Analyst
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