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The Long and Short of it, week ending 06 May 2022

Posted: 10 May, 2022

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

Another volatile week with major stock market indexes finishing lower. The volatility last week, however, was concentrated in large offsetting moves Wednesday and Thursday following the FOMC decision to increase the Fed funds target rate by 50bps. The sharp rally Wednesday came as the Fed excluded 75bp rate increases – a possibility the market had considered highly probable – pushing all 3 major stock market indexes 3% higher. Thursday’s sharp selloff occurred on no new news but as investors reassessed their market outlooks given the Fed’s apparent rate-hike path and rising longer-term interest rates. Friday’s better-than-expected Non-farm Payroll Report offered no reprieve from falling stock markets, with some analysts saying it provided evidence the economy remained strong and could withstand aggressive Fed tightening without the risk of recession. Concerns regarding China’s Covid-related lockdowns and the Russia-Ukraine war also weighed on markets. 10-year U.S. Treasury rates rose 20bps to levels not seen in over 3 years. The increase was due entirely to rising real yields (up 27bps to 0.27%) and offset partially by falling 10-year inflation expectations (down 7bps to 2.87%). The U.S. dollar continued to strengthen. At week’s end, the S&P 500 Index decreased 0.2% to 4,123.34, the Nasdaq Composite Index fell 1.5% to 12,144.66, the Dow Jones Industrial Average decreased 0.2% to 32,901.08, the 10-year U.S. Treasury rate rose 20 bps to 3.14% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 0.7%.

European markets moved sharply lower last week but with the FTSE 100 Index markedly outperforming the STOXX 600 Index. Weaker-than-expected German and euro zone retail sales combined with weak Chinese economic data as well as concerns surrounding EU plans to embargo Russian oil all worked to move stock markets lower. Thursday’s BoE decision to raise rates 25bps came as no surprise, but their warning the UK economy risked falling into a recession while experiencing high inflation did, helping push the FTSE 100 Index 1.5% lower Friday. Thursday’s sharp selloff in the US following growing investor concerns regarding U.S. Federal Reserve Bank monetary policy, bled over to European markets Friday, adding downward pressure on stock prices as did growing expectations of an ECB rate hike this summer. The British pound continued to weaken last week, providing support to the FTSE 100 Index with its larger concentration of U.S. dollar-earning constituents. 10-year rates moved higher last week with the 10-year UK government rate increasing 11bps and the 10-year Bund rate rising 19bps to finish above 1%. At week’s end, the FTSE 100 Index decreased 2.1% to 7,387.94, the STOXX 600 Index fell 4.5% to 429.92, the 10-year UK government rate increased 10bps to 2.02%, the Euro strengthened 0.1% and British pound weakened 1.8%, both with respect to the U.S. dollar.