25th May 2022

Share markets had another choppy week, with worries that rate hikes, cost pressures and supply chain disruptions would further weigh on the Consumer – particularly in the US where we saw some profit downgrades from two of the big retailers. This led to the US share market having its 7th consecutive weekly fall and dragging the global share market down with it too. UK inflation also grabbed the headlines (highest print in 40 years) but was actually a touch less than expected, and Asian share markets bounced on the back of stimulus from the Chinese authorities. There are some fairly big names reporting earnings this week as well as some key survey data for markets to focus on as we look towards the end of the month.

Last Week

  • Global stock markets fell about 3%, mainly driven by the US market
  • US Consumer stocks were hardest hit, with some heavy falls from the household retailers
  • Asian stock markets bounced and the UK market was fairly flat
  • Bond markets generally struggled following Fed Chair Powell’s tough talk on inflation
  • UK inflation came in at its highest rate since 1982
  • The Chinese Authorities looked to boost the economy by cutting certain interest rates

This Week

  • There’s a fair amount of data to look out for this week. Tuesday sees the release of survey data (S&P Global Manufacturing and Services) for the UK, US and Eurozone. Wednesday sees the Gfk German consumer confidence number and also the release of the FOMC minutes from their last meeting. Friday then sees the release of US PCE inflation, which is important as this is the number that the Federal Reserve look most closely at.
  • In terms of corporate activity, we have Zoom reporting earnings today, Topps Tiles and Best Buy tomorrow and then Marks & Spencer and NVIDIA on Wednesday. Thursday sees Costco, Gap and Dell reporting earnings.

Last Week’s Highlights

Stock markets had another down week, with the US S&P 500 falling by 3% on the week and tipping into bear market territory (a 20% fall) on an intra-day basis. Wednesday was a particularly unsettling day for markets, with the US index falling by 4.04% on the day and having its biggest daily fall since June 2020. As a whole, the global index fell by about 3.1% on the week, with most of this coming from the drag of the US market and the added drag of a weak Dollar; the Pound bounced by about 1.8% on the week to close out Friday at 1.248 vs the USD.

Asian markets were pretty strong last week, thanks largely to interest rate cuts from the Chinese central bank to boost their property sector. This helped Emerging markets return 1.1% on the week, Asian ex-Japan markets return 1.3% on the week and Japanese stock markets return 1.2% on the week. Japan’s market was also boosted by a relaxation of the strict border controls that had been in play and also by inflation that came in a bit hotter than expected; core CPI (which excludes food and energy) rose by 2.1% and exceeded the Bank of Japan target of 2%, but consumer prices weakened which supported the case for continued easing.

On a sector basis, there were signs of cracks in the US. Growth underperformed Value by over 2% (and is now lagging by c17% YTD). The Consumer Staples sector was down by 5.6%, whilst Consumer Discretionary was off by 4%. There was a high-profile earnings miss by Target in the US, which saw its shares fall by 24.9% in a single day (Wednesday) which made for its biggest one-day decline since Black Monday in 1987. This came after Target warned that rising costs (inflation) would hit their profits and came on the back of Walmart also suffering its biggest one-day drop since 1987 after they cut their earnings guidance; Walmart dropped by 19.5% on the week.

The UK market was once again one of the better performers on the week, falling by 0.2%. Performance was pretty similar across the cap scales, with the FTSE 100 down by 0.17% on the week and the FTSE 250 down by 0.36%. There still remains a big difference year-to-date however, with the FTSE 100 up by 1.75% and the FTSE 250 down by 14.6%. Within the 100 index, it was the mining companies that fared best last week, with Fresnillo up by 8.4%, Glencore up by 7.8% and Anglo American up by 6.6%. At the bottom of the pile was Aviva (down by 23.3%), B&M Value Retail (-9.6%) and Scottish Mortgage Investment Trust (-8.54%) – this fall took Scottish Mortgage down by more than 50% from the highs that it clocked in early November 2021.

Bond markets were patchy last week, with UK gilts dropping by 1.4% (taking returns for the year to -10%) and US Treasuries rising by 0.7%. Credit spreads continued to widen, with Global High Yield spreads closing out the week at 560 bps and US High Yield spreads closing out the week at 482 bps. Yields on each of these areas of the market are now 8.1% and 7.8% respectively; about 3.5% higher than where they began the year. High Yield bonds lost about 0.6% over the week, whilst UK investment grade bonds lost about 1.1% over the week. UK IG bonds closed out the week yielding 3.6% and with a credit spread of about 176 bps.

Commodity markets actually gave up a little ground last week, with the Bloomberg Commodity Index returning -0.2%. This was mainly due to the strength in the Pound (these assets are US Dollar denominated) and also a pull-back in some of the agricultural and energy commodities. The index still remains up over 40% for the year and is amongst the best performing assets YTD.

Part of the reason for the continued choppiness in markets came from the continued evidence of high inflation and the attitude of the Central Banks towards it. Federal Reserve Chair Jerome Powell said on Wednesday that taming inflation was “an unconditional need” and that they’d be raising rates even if it meant that “some pain was involved”.

UK economic data last week included an inflation number which was the highest since 1982, with CPI coming in at 9% and RPI coming in at 11.1%. The Unemployment rate also came in at its lowest level since 1974, coming in with a reading of 3.7%. This, along with a consumer confidence survey (by GfK) that showed confidence at its lowest level in nearly 50 years, suggested that the UK is in a tough position, with a fragile consumer and a Central Bank that is forced to act to quell inflation – there are still five more rate hikes being priced in by the Bond futures markets this year.

The Chinese Central Bank (PBoC) cut interest rates to boost the property sector (and the economy), cutting the five-year loan prime rate by more than expected: by 0.15% to 4.45%. This followed a cut for first-time buyers earlier in the week. This comes as the PBoC are trying to shore up the housing market and also helps keep the uptick in the credit impulse in China, which, although still negative, has started to accelerate since February. Despite challenges, China is showing a serious commitment to hitting its growth target (5.5%) this year and it is worth noting that since establishing growth targets in 1994 that the biggest missed target has been by -0.5% (in 2019), and that there has been no precedent in history for them to change their growth target.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

UK CPI came in at 9% last week – its highest rate since 1982 but actually a touch less than had been expected!

Source: Psigma / Bloomberg

Rory McPherson, CFA
Head of Investment Strategy