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The Long and Short of it, week ending 30 September 2022

Posted: 04 October, 2022

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

Publication Type: Market Commentaries

All 3 major stock indexes moved lower again last week falling between 2.5% and 3% ending lower on the week, month and quarter. Persistent hawkish comments by Fed and other central bank officials combined with stubbornly high levels of inflation in Europe and the U.S. increased fears of a central bank-induced global recession dragging stock and bond prices lower. Sharply higher U.K government bond yields and a plunging British pound (versus the U.S. dollar) precipitated by the UK government’s plans to increase spending while at the same time reducing taxes dragged U.S. markets lower as investors grappled with the possibility of a UK financial crisis. Wednesday’s intervention by the BoE saying they would buy gilts no matter the amount, moved UK government bond yields lower and strengthened the British pound and, in the process, propelled US stock markets markedly higher. US stock indexes, however, fell over the remainder of the week with investors re-focusing on recession concerns. Weaker-than-expected durable goods orders and data showing home prices increasing at a sharply lower rate seemingly substantiated slowing growth while a slightly higher-than-expected core PCE Index release and lower-than-expected jobless claims supported the case for continued aggressive Fed tightening. The 10-year U.S. Treasury rate rose 14bps over the week but with falling 10-year inflation expectations. 10-year inflation expectation fell 11bps to 2.26% while 10-year real rates rose 25bps to 1.57%. The U.S. dollar moved off its recent highs with the DXY Index falling just under 1%. At week’s end, the S&P 500 Index lost 2.9% to close at 3,585.62, the Nasdaq Composite Index fell 2.7% to 10,575.62, the Dow Jones Industrial Average dropped 2.9% to 28,730.12, the 10-year U.S. Treasury rate rose 14bps to 3.82% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) weakened 0.9%.

The FTSE 100 and STOXX 600 Indexes continued their move lower last week, falling 1.8% and and 0.7% respectively. As in the U.S., growing concerns of central bank-induced recessions, persistently elevated inflation levels and soaring energy costs depressed investor sentiment, pressuring stock prices lower. UK Prime Minister Truss’ plans to lower taxes while increasing spending exacerbated inflation concerns pushing the British pound to all-time lows (versus the U.S. dollar) and prompting BoE Governor Baily’s comments that the BoE would raise rates as much as needed. Nonetheless, Wednesday, on the back of sharply higher bond yields, the BoE was forced to suspend its bond selling program and announced it would buy as many long-dated bonds as necessary through October 14 to stabilize markets. Both the STOXX 600 and FTSE 100 Indexes had muted reactions to the UK turmoil through Wednesday but fell sharply Thursday (probably in sympathy to sharp drawdowns in U.S. stock indexes). The STOXX 600 Index recovered most of those losses Friday while the FTSE 100 Index finished Friday only marginally higher. The UK 10-year government rate, up almost 70bps through Tuesday, finished the week 27bps higher while the British pound, down 1.6% Monday, closed the week up almost 3%. At week’s end, the FTSE 100 Index fell 1.8% to 6,893.81 the STOXX 600 Index decreased 0.7% to 387.86, the 10-year UK government rate rose 27bps to 4.09%, the 10-year Bund rate rose 8bps to 2.11% and the British pound and euro strengthened 2.9% and 1.1%, respectively, both versus U.S. dollar.