Weekly Update – 16 May 2022
Stock markets had another rough week with some very choppy moves on concerns over monetary tightening to combat high inflation and a possible recession. A decent bounce on Friday repaired some of the damage, but share markets still finished down for the week, with government bond markets being one of the few places to hide. There’s a lot to focus on this week on both the economic and corporate front and we’d expect the trajectory of the Pound to remain in focus ahead of some key data points for the UK economy.
Last Week
- Stock markets had another tough week; US and big technology shares weighed. Recent declines have now taken the P/E of the US share market below its 5 and 10 year averages.
- The Pound continued its decline vs the US Dollar – now down over 9% for the year.
- Bond markets improved as yields fell, although credit struggled.
- Gold gave up ground, with mining shares bearing the brunt of losses.
- Economic data was fairly bleak, with continued evidence of persistent inflation and weak growth in the UK and China.
This Week
- There’s a fair amount of UK economic data this week, so we’d expect the Pound to be in focus. Tomorrow sees the release of employment data, Wednesday sees inflation numbers (with CPI expected to rise to 9.1%) and Friday sees the release of Retail Sales data.
- Retail Sales data is also released in the US tomorrow which will be a key data point given the miss last week on some of the big consumer confidence surveys.
- There’s also a fair amount on the corporate calendar. Tuesday sees results from Imperial Brands, Vodafone, Home Depot and Walmart. Wednesday sees results from British Land, Target and Cisco and Thursday sees results from Investec, Royal Mail and EasyJet.
Last Week’s Highlights
Stock markets had another tough week, with the global index dropping by 1.1% in GBP terms. Once again the weak Pound cushioned the losses for UK investors, with Sterling falling by 0.7% against the US Dollar which takes losses to 9.4% for the year, with Sterling closing the week trading at 1.22 vs the US Dollar.
The US market was the biggest drag on the global index last week (falling 2.4%) and it is now down by just over 15% for the year. Last week marked the 6th consecutive weekly decline for the US S&P 500 index and the 7th consecutive weekly decline for the Dow Jones index; the longest stretch of declines since 2001.
On a sector basis, Technology (-3%) and Consumer Discretionary (-2.7%) were amongst the biggest losers and this has very much been the theme of the quarter-to-date (QTD), with Consumer Discretionary down by 17% and Tech down by over 15%. Amongst the high profile losers within these sectors would be names like Amazon which is down by 30% QTD, Tesla (down by 29% QTD) and Netflix (down by 50% QTD). These moves represent the big “style rotation” that we’ve seen this year, with the “growth” style down by 24% year-to-date and the “value” style “only” down by 7.8%.
The UK stock market was up by 0.44% last week, with Continental European markets also doing well; rising by 0.8%. Within the UK market the FTSE 250 was up by 0.6%, with the FTSE 100 up by 0.5%. Coca Cola (+14%), Compass Group (+9.6%) and Next (+8.9%) were the best performers in the 100 index, whilst Harbour Energy (-11.7%), Endeavour Mining (-10.6%) and Antofagasta (-7.5%) occupied the bottom 3 spots.
Earnings season in the US is now pretty much finished for the first quarter. 91% of the S&P 500 companies have reported and the blended growth rate is about 9%. Given the fall we’ve seen in the US index, we now have the forward P/E trading being its 10 year average for the first time since Q2 2020. As at the end of last week, the forward P/E of the S&P 500 was 16.6 which is below the 5 year average of 18.6 and the 10 year average of 16.9. It is still above the 20 year average (15.5) and hence could not be described as “cheap”, but has certainly come back a long way from the 23x forward earnings that it traded on back in the back end of 2020.
Bond markets improved last week, although credit struggled. UK gilts rose by 2.4% on the week and US Treasury bonds rose by 0.9%. This saw 10 year yields in both markets close out the week at 1.74% (UK) and 2.92% (US). Credit spreads did widen however, with Global High Yield spreads closing out the week at 539 bps and US high yield spreads closing out the week at 452 bps; their highest level since November 2020. This made for losses in Global High Yield markets of circa 1% on the week. UK investment grade credit spreads also rose markedly, with the index ending the week with a spread of 177 bps which is its highest level since July 2020. However, despite the rise in spreads, returns were positive for UK IG credit due to the circa 8 years of duration of the index which meant that the move in yields trumped the negative contribution from spreads.
Commodity markets were fairly flat last week, although gold did give up some ground, with bullion dropping by nearly 3%. This made for some pain within some of the mining stocks, with the index of gold mining shares falling by 8.3% on the week.
On the economic data front there was more evidence of inflation being persistently high last week. The US CPI number came in at 8.3% which despite being a drop back from the previous rate of 8.5%, was more than the 8.1% that had been expected. Within this number was a fairly big increase in consumer prices; suggesting that price rises are moving away from supply chains and into the broader economy. Data in the UK was fairly bleak, with the economy shown to have contracted in March and only grow by 0.8% in the first quarter; less than the 1% that had been expected.
Chinese economic data came out early this morning and was much worse than expected. Retail sales came in at -11.1% year-on-year, Industrial production at -2.9% and Property investment at -2.7%. The drop in retail sales and industrial production was the weakest since March 2020.
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.
The Pound is now down at levels not seen since May 2020 vs the US Dollar ahead of a key week for UK economic data.
