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

Posted: 02 August, 2022

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

Publication Type: Market Commentaries

Stock prices moved higher last week, struggling before Wednesday’s FOMC announcement and then rallying afterwards. Concerns of slower growth and weak earnings reports (accentuated by Walmart’s worse-than expected report after hours Monday) in front of Wednesday’s FOMC announcement pressured prices lower through Tuesday. Wednesday’s as-expected 75bp rate hike, combined with announcement wording suggesting the Fed would be less aggressive going forward, spurred stock prices higher. This risk-on sentiment continued through Friday despite Thursday’s report showing GDP contracted 0.9% in June, the second contraction in a row. Strong earnings reports from Alphabet, Microsoft and Amazon were responsible for stock markets moving higher as well. The 10-year Treasury rate, reacting to expectations of a less aggressive Fed, decreased 10bps. Interestingly, the decline resulted from a 30bp decrease in 10-year real rates offset by a 20bp increase in 10-year inflation expectations. Similarly, the U.S. dollar weakened, also reacting to prospects of less aggressive Fed tightening visà-vis other central banks. At week’s end, the S&P 500 Index rose 4.3% to 4,130.29, the Nasdaq Composite Index climbed 4.7% to 12,390.69, the Dow Jones Industrial Average increased 3.0% to 32,846.45, the 10-year U.S. Treasury rate fell 10 bps to 2.65% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) weakened 0.7%.

European stock markets were higher on the week as well. Rising oil and base metal prices pushed mining and energy stocks higher and, as a result, helped both the STOXX 600 and FTSE 100 Indexes move higher over the week. A slew of earnings reports last week overall beat expectations supporting stock prices as well though falling business climate sentiment (Germany), lower industrial output (UK), and an IMF reduction in global growth projections capped gains. Wednesday’s FOMC announcement of an as-expected 75bp rate hike accompanied by less-hawkish future rate-hike guidance bolstered European stock markets as well. The British pound, however, strengthened last week, hurting the FTSE 100 Index more than the STOXX 600 Index due to the FTSE’s larger U.S.dollar revenue exposure. Expectations of a 50bp BoE rate increase this week combined with expectations of a less aggressive Fed weakened the U.S. dollar versus the British Pound. The 10-year UK government rate and the 10-year Bund rate continued to fall, dropping 7bps and 20bps, respectively, last week. At week’s end, the FTSE 100 Index increased 2.0% to 7,423.43, the STOXX 600 Index rose 3.0% to 438.29, the 10-year UK government rate fell 7bps to 1.87%, the British pound both strengthened 1.4% and the euro was unchanged both with respect to the U.S. dollar.