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The Long and Short of it, week ending 23 September 2022

Posted: 27 September, 2022

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

Publication Type: Market Commentaries

Stock markets fell sharply last week with all 3 major indexes falling 4% or more. Prices fell every day last week except Monday with the FOMC’s decision to raise rates 75bps Wednesday and Fed Chairman Powell’s subsequent comments weighing heavily on market sentiment. The as-expected 75bp rate hike Wednesday was overshadowed by Chairman Powell’s statements rate rises would continue, the labour market would likely soften and the chances of a soft landing were increasingly less likely. Reflecting this sentiment, the 10-year U.S. Treasury rate rose 23bps – to its highest level in over 20 years – with the entire increase due to rising real rates and the U.S. dollar (as measured by the DXY index) strengthened 3%. At week’s end, the S&P 500 Index lost 4.7% to close at 3,693.23, the Nasdaq Composite Index fell 5.1% to 10,867.93, the Dow Jones Industrial Average dropped 4.0% to 29,592.85, the 10-year U.S. Treasury rate rose 23bps to 3.68% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 3%.

European stock markets finished lower as well last week with the STOXX 600 Index falling 4.4% and the FTSE 100 Index dropping 3.0%. Central bank-induced recession concerns were the primary factor moving markets lower. Monday’s surprise 100bp Riksbank rate increase, followed by the the Fed’s as-expected 75bp hike Wednesday and the BoE’s 50bp increase Thursday added to recession concerns and was compounded by growing expectations the rate increases would continue well into next year. Inflationary concerns surrounding the UK government’s decision to lower tax rates while increasing stimulus and support spending added negative sentiment, moving stock markets lower and sharply weakening the British pound versus the U.S. dollar. Falling PMI readings in the euro zone, Germany and the UK combined with record low consumer confidence in the UK added to market malaise as did reports of Russia mobilizing reserves and President Putin’s alluding to the nuclear option. The FTSE 100 Index once again outperformed the STOXX 600 Index benefiting from lower exposure to tech stocks and from a markedly weaker British pound. Both the 10-year UK government rate and the 10-year Bund rate rose again with the 10-year UK rating rising a meteoric 67bps. At week’s end, the FTSE 100 Index decreased 3.0% to 7,018.60, the STOXX 600 Index fell 4.4% to 390.40, the 10-year UK government rate jumped 67bps to 3.82%, the 10-year Bund rate rose 26bps to 2.03% and the British pound and euro weakened 4.9% and 3.2%, respectively, both with respect to the U.S. dollar.