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The Long and Short of it, week ending 29 April 2022

Posted: 03 May, 2022

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

Dow Jones Industrial Average. Stock markets were battered by a combination of investor concerns including continued elevated inflation levels, this Tuesday’s FOMC meeting and expectations of an aggressively tightening Fed, slowing Chinese economic growth and weaker-than-expected earnings reports. These concerns, more or less, translate into fears of weaker U.S. economic growth or recession pressuring stock valuations (especially for tech stocks) lower. Thursday’s surprise Q1 GDP contraction along with Friday’s elevated PCE Price Index release seemed to support these concerns as did earnings misses from Alphabet, Microsoft and Amazon. 10-year U.S. Treasury rates rose slightly last week but the increase came as real rates rose and inflation expectations fell, perhaps reflecting expectations inflation levels may have peaked. 10-year real rates closed the week at 0% while 10-year inflation expectations finished at 2.94%. The U.S. dollar sharply increased last week mirroring the rise in 10-year real rates. At week’s end, the S&P 500 Index decreased 3.2% to 4,131.93, the Nasdaq Composite Index fell 3.9% to 12,334.64, the Dow Jones Industrial Average dropped 2.5% to 32,978.52, the 10-year U.S. Treasury rate rose 3 bps to 2.94% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) strengthened 2.0%.

A much calmer week for European stock markets with the FTSE 100 Index finishing slightly higher and the STOXX 600 Index falling less than 1%. Both indexes fell early in the week reacting to Covid-related curbs in China and uncertainty surrounding upcoming earnings reports. Both indexes moved higher the remainder of the week supported by decent earnings reports and strong finance and energy stock performance. Russia’s intent to halt natural gas deliveries to Bulgaria and Poland moved natural gas prices higher but seemingly had little effect on stock markets while increased expectations of Chinese stimulus (as announced by the Politburo Thursday) helped move markets higher. Record high eurozone inflation and smaller-than-expected GDP growth, both released Friday, while adding uncertainty to the ECB’s future monetary policy, appeared to have little effect on markets as well. Both the Euro and the British pound weakened significantly last week benefiting the FTSE 100 Index that contains more U.S. dollar-earning constituents. 10-year rates moved slightly lower last week with the 10-year UK government rate decreasing 5bps and the 10-year Bund rate decreasing 3bps. At week’s end, the FTSE 100 Index increased 0.3% to 7,544.55, the STOXX 600 Index decreased 0.6% to 450.39, the 10-year UK government rate fell 5bps to 1.92% and the Euro and British pound weakened 2.3% and 2.1%, respectively, both with respect to the U.S. dollar.