The Long and Short of it, week ending 05 May 2023
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A week defined by banking system concerns and uncertainty regarding the Fed’s future monetary policy. Monday’s seizure and sale of First Republic Bank barely moved markets with banking system concerns allayed by the swift and cauterizing move of the FDIC. Banking system concerns, however, resurfaced Tuesday (in front of Wednesday’s FOMC announcement) driving regional bank stock prices markedly lower and significantly contributing to the decline of all 3 major stock market indexes. Signs of economic weakness, starkly illustrated by falling job openings and sharply lower oil prices, also pressured index levels lower as did growing expectations of a 25bp rate hike. Wednesday’s FOMC announcement of a 25bp rate hike, along with language strongly suggesting the Fed would be “pausing”, initially moved stock prices higher. Fed Chair Jerome Powell’s comments denying the Fed was pausing, reversed sentiment and sent index levels sharply lower. Banking stocks again took center stage Thursday with stock prices of PacWest, Western Alliance Bancorp and First Horizon falling sharply on liquidity concerns. The ensuing risk-off sentiment once again sent major stock market index levels lower. Stock markets rallied sharply Friday, spurred by a much better-than-expected Apple earnings report, a significantly stronger-thanexpected jobs report and noticeably lessened banking system concerns. All 3 major stock market indexes, down over 2% through Thursday, finished the week well off their lows with the Nasdaq Composite Index eking out a small gain. The 10-year Treasury rate had a volatile week but finished unchanged as did the 10-year real rate and 10-year inflation expectations. For the week, the S&P 500 Index decreased 0.8% to 4,136.25, the Nasdaq Composite Index increased 0.1% to 12,235.41, the Dow Jones Industrial Average fell 1.2% to 33,674.31, the 10-year U.S. Treasury rate was unchanged at 3.43% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) weakened 0.4%.
European stock indexes moved lower last week as well with the STOXX 600 Index outperforming the FTSE 100 Index. Both indexes suffered from underperforming energy and mining stocks, influenced by lower oil prices, fears of a U.S. recession and weak Chinese economic activity. European markets were also affected by falling U.S. markets on the back of uncertainty surrounding future Fed monetary policy (i.e., uncertainty regarding a Fed pause) and U.S. banking system concerns. The ECB raised rates an as-expected 25bps Thursday but adamantly denied the central bank would pause increases despite real concerns of banks tightening credit. Friday saw both indexes rise, benefiting from a sharp rise in oil prices and a stronger-than-expected U.S. jobs report ameliorating U.S. recession concerns. A stronger British pound detracted from the U.S. dollar-revenue-heavy FTSE 100 Index. For the week, the STOXX 600 Index decreased 0.3% to 465.30, the FTSE 100 Index declined 1.2% to 7,778.36, the 10-year Gilt rate increased 6bps to 3.78%, the 10-year Bund rate fell 5bps to 2.37%, the British pound strengthened 0.5% and the euro was unchanged, both with respect to the U.S. dollar.
Top performing ETPs over the week
| . | 3x Long ETPs | 3x Short ETPs | ||
|---|---|---|---|---|
| UK | +3x Vodafone (3LVO) | +9.6% | -3x BP (3SBP) | +19.9% |
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The Long and Short of it, week ending 05 May 2023
