Market Overview – 03/05/2022

Global stock markets had a challenging time of it last week, with some of the strongest selling seen in US equities. Concerns surrounding aggressive monetary policy tightening, particularly from the Federal Reserve, continued to weigh on stocks and bonds, while an unexpected contraction in US economic growth did little to alleviate fears that achieving a soft landing will be a tall ask for central banks. The advance US GDP reading came in at an annualised -1.4% for the first quarter of 2022, significantly lower than the +1.1% consensus forecast and the first quarterly contraction since mid-2020.

US Treasuries enjoyed some relief early in the week, rallying on fears surrounding global growth as Chinese Covid restrictions continue to inhibit activity, but sellers stepped back in as the week wore on and, like US equities, ended the week close to their recent lows. Renewed expectations for aggressive Federal Reserve rate hikes returned as the prevalent market theme and the ten-year Treasury yields moved back above the 2.9% level on Friday, after plunging as low as 2.71% on Wednesday. The forthcoming May policy decision is now widely expected to see the first 0.5% rate hike since 2000 and will likely also contain more information regarding the trimming of the Fed’s US$9tn balance sheet. The Bank of England will also shortly be announcing the outcome of its May meeting and the spectre of these events delivering strong hawkish signals has loomed over investor sentiment in recent trade.

In contrast, the Bank of Japan stuck to its guns last Thursday, avoiding the global shift towards higher rates by reaffirming its commitment to keeping bond yields at zero. The dovish stance and policy divergence caused a sharp currency depreciation as the Yen fell to a new multi-decade low. With the Federal Reserve positioning itself as the most hawkish of the major central banks the US dollar has enjoyed a strong run higher, and the USD/JPY rate rose above 130 at the end of last week. Both sterling and the euro have also depreciated versus the greenback, albeit to a lesser extent than the yen, as the central bank policy divergence is, presently, not so stark.

Large-cap US tech was the focus of earnings season last week, with Facebook parent Meta enjoying a strong move higher despite posting its slowest revenue growth since going public. Excessive pessimism going into the release can likely explain the post-announcement price action as profits held up better than expected in the face of several much-discussed headwinds – slowing economic growth, rising inflation and the Russian invasion of Ukraine to name but three. Although profit for the quarter of US$7.5bn was down 21% compared to the same period last year, it still comfortably beat Wall Street forecasts of US$7.1bn.

Apple also posted a decent set of figures, setting a new quarterly revenue record for the firm of US$123.9bn as well as announcing a sizable increase in net profit. There was more good news on the supply chain front as a hit of around US$6bn, comparable to the prior quarter, was less than the US$10bn some expected. Amazon took the gloss of what was shaping up to be a very fine set of results, flagging several warning signs in its update. Revenue growth slowed in the first quarter to its slowest ever level while a drop in online retail sales, heavy costs and a US$7.6bn loss relating to its stake in electric vehicle maker Rivian meant a net loss of US$3.8bn in the quarter.

This is a marketing communication and is not independent investment research. Financial Instruments referred to are not subject to a prohibition on dealing ahead of the dissemination marketing communications. Any reference to any securities or instruments is not a personal recommendation and it should not be regarded as a solicitation or an offer to buy or sell any securities or instruments mentioned in it.