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The Long and Short of it, week ending 20 May 2022

Posted: 24 May, 2022

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

Publication Type: Market Commentaries

Another down week for U.S. stock markets accompanied by continued volatility. Stock prices rose early in the week, with the S&P 500 index increasing 2% Tuesday on stronger-than-expected retail sales as well as on increased risk-on sentiment. That sentiment disappeared Wednesday with all 3 major stock market indexes falling south of 3.5%, precipitated by weaker-than-expected earnings reports from major retailers includeing Walmart and Target. Elevated concerns of decreased consumer spending and lower corporate profits due to high levels of inflation pushed stock prices lower the remainder of week Despite Fed Chairman Powell’s comments Tuesday reiterating the Fed’s resolve to restore price stability, the 10-year U.S. Treasury rate fell 14bps over the week and the U.S. dollar weakened. Interestingly, the decline came entirely from falling 10-year inflation expectations with 10-year real rates remaining unchanged. 10-year inflation expectations closed the week at 2.59%, down from almost 3% a few weeks ago. At week’s end, the S&P 500 Index fell 3.0% to 3,901.36, the Nasdaq Composite Index dropped 3.8% to 11,354.62, the Dow Jones Industrial Average fell 2.9% to 31,260.58, the 10-year U.S. Treasury rate decreased 14 bps to 2.79% and the U.S. dollar (as measured by the ICE U.S. Dollar index - DXY) weakened 1.5%.

European stock markets moved lower but much less so than U.S. stock markets. Both the STOXX 600 and FTSE 100 Indexes experienced some volatility last week with each index recording moves of 1% or more 3 of the 5 trading days last week. Buoyed by reports China would begin easing Covid-related restrictions and strong energy and mining stock performance, European stock markets increased north of 1% through Tuesday. Those gains were erased Wednesday and Thursday following weak retail earnings reports in the US and UK and as UK inflation reached levels not seen in 40 years. Markets rose Friday, supported by reports of renewed Chinese economic stimulus programs and despite German PPI soaring to 33%. The FTSE 100 Index, though slightly outperforming the STOXX 600 Index, also suffered from a stronger British pound. The 10-year UK government rate increased 14bp last week, regaining half of the previous week’s drop while the 10-year Bund rate was unchanged. At week’s end, the FTSE 100 Index decreased 0.4% to 7,389.98, the STOXX 600 Index fell 0.5% to 431.1, the 10-year UK government rate rose 14bps to 1.89%, the euro and the British pound strengthened 1.9% and 1.5%, respectively, both with respect to the U.S. dollar.