Market Overview – 25/05/2022

Global stock markets fell once more last week, extending the run of losses for the MSCI World Index to seven consecutive weeks and ending Friday with a year-to-date fall of almost 17%. Although there was also a small decline for UK stocks, they continued to perform better than their US and continental European counterparts. Inflation and the adverse impact on growth expected from central bank attempts to combat it continue to dominate the narrative and do little for investor sentiment.

The latest inflation data showed a further increase in the UK, driven by surging electricity and gas prices. A 9.0% year-on-year rise for the consumer price index in April was the highest level in 40 years, the increase was marginally less than consensus forecast. Along with higher commodity prices, a tight labour market, that is getting tighter still, is imparting upward pressure on UK prices. The unemployment rate fell to its lowest level since 1974 in the three months to March, coming in at 3.7% and, for the first time on record, job openings exceeded the number jobless.

Bank of England governor Andrew Bailey said the central bank could do little to prevent double-digit inflation later in the year, acknowledging its slowness in recognising building pressures in the very tight labour market. A positive sign for the UK economy came as retail sales showed a surprise increase in April, but enthusiasm around the strength of consumer spending were tempered by a survey showing consumer confidence dropped to its lowest level in nearly half a century in May. Sterling ended a run of four weekly declines against the US dollar, bouncing off recent lows to end back near the 1.25 level.

UK large-cap stocks were little changed on the week, posting a small decline but still holding on to a year-to-date gain that reflects favourably versus most peers. US shares had another week of selling with large-cap benchmarks teetering on the brink of a bear market, defined by a 20% drop, led by further declines in growth stocks. Several of the nation’s major retailers announced poorly received results that fell short of expectations. Target was the worst hit, falling approximately 25% after its earnings missed estimates due to an unenviable mix of reduced sales and higher costs.

Economic data was something of a mixed bag for the US on the week, with retail sales for April and the latest industrial production figures topping estimates, although the Philly Fed manufacturing index, a widely viewed gauge of activity, and initial jobless claims disappointed. Central bank speakers offered little reassurance to those concerned with high inflation and swiftly rising interest rates, with Fed Chair Jerome Powell sticking to his recent hawkish tone on Wednesday – the day that also saw the largest US stock market declines of the week.

The US 10-year Treasury yield fell to its lowest level in nearly a month at 2.77%, down 14 basis points on the week. UK gilts rose, aided by the latest inflation data, with the 10-year ending the week up around 15 basis points at 1.89%. Core euro area government bonds yields ended roughly unchanged despite hawkish rhetoric from a number of European Central Bank officials alluding to an increased probability of a 50 basis point interest rate hike.

As has been the case year-to-date, European stocks were somewhere in between the UK and US in terms of performance last week. Overall, there were modest declines seen in France and to a lesser extent Germany, but Italy managed to end the week higher.

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