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The Long and Short of it, week ending 01 July 2022

Posted: 05 July, 2022

Topic: Telecoms , Financials , Basic Materials , Energy , Healthcare , Industrials , Technology

Publication Type: Market Commentaries

U.S. stock markets ended the week lower with the S&P 500 Index recording its worst first-half performance since 1970 (the first half ended Thursday). Weak consumer confidence levels combined with earnings misses, unexpected lowering of earnings and revenue guidance and hawkish comments by Fed Chairman Powell helped pushed the S&P 500 Index over 3% lower and the Nasdaq Composite Index 5% lower through Thursday. Concerns of slowing growth and recession, however, receded Friday with all three Indexes increasing close to 1%. A slightly lower increase in the PCE price index compared to the previous month (Thursday release) combined with lower than-expected Chicago PMI and ISM Manufacturing levels as well as falling household spending helped support stock prices on hopes of peaking inflation and sooner-than-expected Fed easing. Supporting this sentiment, the 10-year Treasury rate fell 25bps last week, this time with almost all the decline coming from falling inflation expectations. 10-year real yields climbed as high as 70bps through Wednesday, but ended the week 3bps lower at 53bps. At week’s end, the S&P 500 Index fell 2.2% to 3,825.33, the Nasdaq Composite Index dropped 4.1% to 11,127.84, the Dow Jones Industrial Average decreased 1.3% to 31,0977.46, the 10-year U.S. Treasury rate fell 25 bps to 2.89% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 0.9%.

European stock markets were also lower last week with most of the losses occurring late in the week on Thursday. Bolstered by China’s easing of Covid-related restrictions, commodity and mining stocks moved markedly higher >through Wednesday, supporting both the STOXX 600 and FTSE 100 indexes but especially the commodity-heavy FTSE 100 Index. Both indexes, up through Wednesday, sold off sharply Thursday in part following U.S. stock markets but also on renewed concerns of aggressive central bank tightening following higher-than-expected inflation levels in the euro zone and in Spain. Base metal and oil prices moved sharply lower Thursday, moving commodity and mining stocks concomitantly lower. The euro and the British pound, significantly weaker through Wednesday, both strengthened noticeably on Thursday, perhaps as a result of increased expectations of aggressive ECB tightening following the higher-than-expected euro zone inflation, adding to index losses. 10-year interest rates moved lower again both in the UK and Germany with the 10-year UK government rate falling 20bps and the 10-year Bund rate dropping 21bps. Both 10-year rates were higher through Thursday but finished the week well off mid-week highs. At week’s end, the FTSE 100 Index decreased 0.6% to 7,168.65, the STOXX 600 Index fell 1.4% to 407.13, the 10-year UK government rate fell 20bps to 2.11%, and the euro and the British pound weakened 1.2% and 1.4%, respectively, both with respect to the U.S. dollar.