Weekly Update – 9 May 2022

Stock markets had another turbulent week, with stocks rallying hard after the Federal Reserve meeting on Wednesday night, only to give up all the gains on Thursday. The week saw rate rises from both the US Federal Reserve and the Bank of England, which in turn put pressure on the bond markets as yields rose. This week promises to be less eventful in terms of scheduled data, but there’s some key watchpoints nonetheless, with US inflation data out on Wednesday and UK growth data on Thursday. Chinese trade data came out overnight which wasn’t miles away from expectations, but was a big drop from the previous quarters’ levels, which has served to set Asian markets off to a negative start for the week.

Last Week

• Stock markets had a turbulent week, although losses on overseas shares were muted by the weakness in the Pound Sterling
• “Growth” shares continued to strongly underperform “Value” shares as bond yields rose
• Earnings season continued to be fairly positive, although guidance has been cause for concern
• Both the US Federal Reserve and Bank of England put through rate rises, with the signal (notably in the US) that there are plenty more to come
• Bond markets struggled, with Government and Credit areas of the market both being hit
• Commodities continued to climb higher, with Natural Gas driving returns

This Week

• It’s a much quieter week in terms of scheduled data on the economic and corporate side.
• Wednesday is the highlight for economic data, with Inflation data out of the US and China. US CPI is expected to come in at 8.1% (currently at 8.5%) and Chinese CPI is expected to come in at 1.8%.
• Thursday is a bumper day for UK economic data, with the first quarter GDP reading (1% growth expected) likely to set the tone for Sterling’s performance. In addition to this we’ve got trade data, construction output, industrial production, manufacturing production and the trade balance.
• The Corporate calendar is quiet this week, with the highlights being Disney and ITV (both Wednesday; ITV is a trading update) and British Telecom (Thursday).

Last Week’s Highlights

Global stock markets had a very choppy week, but actually finished up by 0.5% for UK investors. This was due entirely to the weakness of the Pound, which fell by 1.8% vs the US Dollar (closing the week at $1.23, which is its lowest level since June 2020) and had the effect of cushioning the overseas losses in the equity markets. In currency hedged terms (i.e. stripping out the dampening effect of the weak Sterling), the Global market was down by 1.3%, making for five consecutive weeks of losses.

Continental European markets were the hardest hit last week, down by 4.3%. This takes them now down just over 15% for the year. The fall came amidst fears that the EU will make an embargo on Russian oil and also that the Central Bank would have to follow others (notably the US and the UK) in raising interest rates.

UK stocks (as measured by the FTSE All Share) fell by 2.4% on the week, which now takes the All Share into negative territory for the year-to-date (YTD): down by 1.7%. We continue to see enormous divergence within the UK market, with the FTSE 100 (very commodity-heavy with c23% in energy and materials) up by 1.5% for the YTD and the FTSE 250 (more domestically focused) down by 14.9% for the YTD. This theme was very much in play last week, with the 100 dropping by 2.1% and the 250 falling by 4.3%. BP was the best performing stock in the 100 index last week (up by 9.95%), with Mondi (+8.6%) and Endeavour Mining (+6.2%) also on the podium. At the other end of the table for the week was Segro (-18.5%), Hikma Pharmaceuticals (-14.5%) and Howden Joinery (-14.1%).

Earnings season in the US is coming to a close now and it has actually been quite good, despite some high-profile misses (Amazon and Netflix) and also the fact that it has been trumped by macro events. 87% of companies in the S&P 500 have now reported and 79% have beaten on EPS estimates (which is above the 5-year average of 77%). However, they have beaten by a smaller degree than in the past and the fact that over 70% of companies have cited “inflation” and “supply chain” on their earnings calls has meant that guidance has generally been revised down. That said, the US is on track for c9% earnings growth in Q1 and for c10% earnings growth for the calendar year 2022. Amazon (due to its c3% weight in the index) has been the biggest detractor to earnings growth and if one were to strip it out of the calculation, the index would actually be posting positive growth for the year.

Last week saw some big movements in “growth” shares, as bond yields continued to sell-off. The global Growth index was down by 2.9% on the week and is now down by over 22% for the YTD; an under-performance of c16% vs the Value index.

Consumer discretionary was the main casualty last week (falling by over 4%), whilst Energy was up over 6%. This reflects the story of the pinched consumer spending their money on what they need and not what they want. At a stock level, this meant for a 6% fall on the week for Amazon and a 30% fall for Under Armour. This year has seen a big rotation in market leadership, with the lockdown winners giving up a lot of ground in favour of energy companies and the more general re-opening trade. As an example, Amazon is down by 25% so far this year, Zoom by 43%, Peloton by c50% and Netflix by c67%, with the “FANG” index down by over 22%.

Interest rate rises from the US and UK Central Banks were the key macro events from last week. The US Federal Reserve met on Wednesday night (UK time) and announced a 0.5% rate rise (the largest single rate rise since 2000) to 1% (upper bound). They also announced that they would start reducing their $9 trillion balance sheet from June at a pace of $47.5 billion a month. The initial market reaction was very positive (stocks rose c3% that evening) as Fed Chair Powell said he was “not actively considering” rate rises of 0.75%, but this rally was short-lived and unwound the next day. Bond futures markets are still pricing in eight further hikes this year in the US.

The Bank of England hiked rates to 1% (the highest level since 2009) and warned that inflation could reach 10% in the back half of this year. This, combined with comments from Governor Bailey that the UK faces a “very sharp slowdown”, saw the Pound have its worst day (falling 2.1% vs the USD) since March 2020. Despite the negative guidance on the economy, the Bank are still signalling higher rates (to control inflation) and the market is pricing in 5.5 more hikes this year, to take the year-end rate to around 2.25%.

The rise in interest rates saw bond yields rise on the week. The US 10-year Treasury yield went through 3% for the first time since 2018 (finishing the week at 3.126%) and the UK 10-year Gilt yield got above 2% during the week, but finished the week yielding 1.995%. This made for further losses in the bond complex, with Gilts losing 1.2% on the week (now down 10.9% for the YTD) and Treasuries losing 1.2%. High Yield markets were the hardest hit last week, with the Global High Yield index down by 1.3% on the week which takes YTD losses to 10% now. Global High Yield spreads are now just shy of 5% (having started the year at 3.8%), whilst US High Yield spreads are around 4% (having started the year at 2.8%). Most of the sell-off in spreads has come over the course of the last month.

Friday saw the release of US Payrolls data which is a very keenly watched data point. Last week it was very much of a side show given the Central Bank action, but it showed that 428,000 new jobs had been created in April which was slightly more than had been expected (380,000). The unemployment rate came in at 3.6% which was the same level as the previous month.

Commodities – as has been the case for so much of this year – were a lone bright spot last week. The Bloomberg Commodity index rose by 2.5% on the week, which takes its YTD returns to a staggering 44.2%. Natural gas (+10.6%) drove a lot of the gains last week; natural gas alone has contributed nearly 10% of the returns so far this year (it is an 8% weighting in the index and is up 123%). Elsewhere, the lion’s share of the gains has come from the energy complex (a c30% index weight that is up 96% in aggregate) and from grains (a c20% index weight that is up by 36% in aggregate).

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.

Bond yields rose last week following the Federal Reserve’s meeting. The US 10-Year Treasury yield went through 3% for the first time since 2018.

The current environment has turned bearish, where even former bulls are now bearish. I do believe we will start bottoming soon, and starting our next bullish phase to 5500 (S&P500), currently around 4123.