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The Long and Short of it, week ending 22 July 2022

Posted: 26 July, 2022

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

Publication Type: Market Commentaries

U.S. stock markets ended the week higher with all 3 major indexes increasing 2% or more and with the tech-heavy Nasdaq Composite Index outperforming. Better-than-expected earnings reports were the primary driver for higher stock prices, assisted by a weaker U.S. dollar and falling Treasury rates. Stock markets moved lower Friday, however, following a batch of weaker-than-expected earnings reports. The Nasdaq Composite Index, for example, up over 5% through Thursday, fell almost almost 2% Friday to end the week up 3.3%. The 10-year Treasury rate fell again last week, decreasing 18bps with 10-year real yields responsible for almost the entire move lower. 10- year real yields ended the week at 41bps, down 14bps from the previous week’s close of 55bps. At week’s end, the S&P 500 Index gained 2.5% to close at 3,961.63, the Nasdaq Composite Index climbed 3.3% to 11,834.11, the Dow Jones Industrial Average increased 2.0% to 31,900.61, the 10-year U.S. Treasury rate fell 18 bps to 2.75% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) weakened 1.3%.

European stock markets also moved higher last week with the tech heavier STOXX 600 Index strongly outperforming the FTSE 100 Index. Gains in both indexes came despite weak economic data both in the euro zone and UK and as the ECB increased rates – for the first time in over a decade – by a greater-than-originally-indicated 50bps. Expectations of a 50bp BoE rate increase next month climbed after Wednesday’s release showed UK inflation reached another 40-year high. The UK’s unemployment rate surprisingly held at 3.8%, supporting stock markets. Real wages in the UK, however, fell by almost 3% indicating subdued wage pressures in the face of rising inflation. Weaker-than-expected Composite PMIs in the euro zone, Germany and France showed services and manufacturing activity contracted, pushing interest rates lower and increasing expectations of less-aggressive ECB tightening going forward. The 10-year UK government rate and the 10-year Bund rate both fell again last week, falling 17bps and 9bps, respectively. At week’s end, the FTSE 100 Index increased 1.6% to 7,276.37, the STOXX 600 Index rose 2.9% to 425.71, the 10-year UK government rate fell 17bp bps to 1.94%, and the euro and the British pound both strengthened 1.2% with respect to the U.S. dollar.