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The Long and Short of it, week ending 13 May 2022

Posted: 17 May, 2022

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

Publication Type: Market Commentaries

U.S. stock markets finished lower last week while experiencing another bout of volatility. Investor trepidation focusing on continued elevated inflation, aggressive Fed tightening, Chinese Covid-related lockdowns and the Russia-Ukraine war combined to push stock markets sharply lower through Thursday with the Nasdaq Composite Index, for example, falling nearly 6.5%. Lower than the previous month’s levels but higher than expected, Wednesday’s CPI release enforced inflation and aggressive Fed tightening concerns causing markets to falter, with the Nasdaq Composite Index reacting the worst, falling over 3%. Stock markets rallied sharply Friday on no new news but perhaps benefiting from investors believing the market was oversold. Interestingly, the 10-year Treasury rate decreased 21bps over the week, with 2/3 of the decline coming from falling 10-year inflation expectations and the remaining 1/3 from falling 10-year real rates. Falling inflation expectations may possibly reflect market sentiment that inflation has peaked. The U.S. dollar continued to strengthen. At week’s end, the S&P 500 Index lost 2.4% to close at 4,023.89, the Nasdaq Composite Index dropped 2.8% to 11,805.00, the Dow Jones Industrial Average fell 2.1% to 32,195.94, the 10-year U.S. Treasury rate decreased 21 bps to 2.93% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 0.9%.

European stock markets began last week on a negative note, with the STOXX 600 Index falling nearly 3% and the FTSE 100 Index dropping almost 2.5%. As in the U.S., concerns surrounding persistently high inflation levels,tightening central bank policies and recession pushed stock prices lower. Markets rebounded Tuesday and Wednesday, supported by decent earnings releases and falling longer-term interest rates. Following Wednesday’s U.S. CPI release showing continued elevated inflation, the FTSE 100 and STOXX 600 Indexes decreased about 1%.Despite a greater-than-expected decline in euro zone industrial production and signs of decreased consumer spending in the UK, stock markets moved markedly higher Friday giving both the STOXX 600 and FTSE 100 Indexes gains on the week. 10-year rates moved lower last week with the 10-year UK government rate falling 28bps and the 10-year Bund rate decreasing 19bps. Both the euro and the British pound weakened. At week’s end, the FTSE 100 Index increased 0.4% to 7,418.15, the STOXX 600 Index increased 0.8% to 433.48, the 10-year UK government rate fell 28bps to 1.75%, the euro and the British pound weakened 1.3% and 0.6%, respectively, both with respect to the U.S. dollar.