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The Long and Short of it, week ending 17 June 2022

Posted: 21 June, 2022

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

Publication Type: Market Commentaries

Yet another volatile week for U.S. stock markets with steep declines in all 3 major indexes. The Nasdaq Composite Index dropped more than 4% on Tuesday and Thursday, the S&P 500 Index fell south of 3% on those same days and the Dow Jones Industrial Average, following suit, lost 2.5% or more. Fears of a Fed-induced recession, reinforced by the previous Friday’s CPI release, pushed stock prices lower throughout the week. Wednesday’s FOMC decision to raise the Fed funds target rate 75bps moved stock market indexes higher, rallying on Fed Chair Powell’s comments the increase was unusually large and would not become common. However, investor optimism faded sharply Thursday pushing stock prices markedly lower with growing expectations Fed tightening was likely to lead to a recession. Thursday also saw the BoE raise rates 25bps while the ECB held an unscheduled meeting Wednesday in an effort to provide assistance to struggling euro zone economies due to surging interest rates. The Nasdaq Composite Index rose just under 1.5% Friday on no real news, allowing it outperform the S&P 500 Index on the week by almost 1%. The 10-year Treasury rate rose 7bps over the week with a 26bp increase in 10-year real rates to 0.64% offset by a 19bps decline in 10-year inflation expectations to 2.59%. The 10-year Treasury rate closed well off its Tuesday’s high of 3.49% as did 10-year real rates which closed Tuesday at 83bps.At week’s end, the S&P 500 Index fell 5.8% to 3,674.84, the Nasdaq Composite Index lost 4.8% to close at 10,798.35, the Dow Jones Industrial Average decreased 4.8% to 29,885.08, the 10-year U.S. Treasury rate rose 7 bps to 3.23% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 0.5%.

A volatile week for European stock markets as well with the STOXX 600 Index falling almost 2.5% Monday and Thursday and rising and falling almost 1.5% Tuesday and Wednesday, respectively. As in the U.S., expectations of a central bank-induced recession predominated market sentiment pushing both the STOXX 600 and FTSE 100 Indexes lower on the week. A higher-than-expected U.S. CPI reading from the previous Friday combined with a 5- decade high German CPI release Tuesday added to the market’s malaise, reinforcing expectations of aggressive central bank tightening and a consequent recession. Wednesday’s FOMC decision to raise the Fed funds target rate 75bps followed by Thursday’s BoE decision to raise rates 25bps even as UK GDP contracted also added to bearish sentiment. The ECB held an emergency meeting Wednesday in an effort to address surging interest rates in weaker euro zone countries, again, adding to negative market sentiment. 10-year interest rates moved higher in the UK and Germany with the 10-year UK government rate increasing 6bps and the 10-year Bund rate rising 16bps. At week’s end, the FTSE 100 Index fell 4.1% to 7,016.25, the STOXX 600 Index dropped 4.6% to 403.25, the 10-year UK government rate rose 6bps to 2.51%, and the euro and the British pound weakened 0.2% and 0.7%, respectively, both with respect to the U.S. dollar.