Market Overview – 05/07/2022

Global stock markets came back under pressure last week, handing back some of the prior week’s sizable gains. Bond yields were broadly lower as investors continue to attach more weight to signs of slowing economic activity, rather than high inflation.

Month- and quarter-end flows were evident as markets passed the midway point of 2022, with US large-cap benchmarks recording their worst first six months of a year since 1970. The index is now back teetering on the brink of bear market territory, having fallen almost 20% since posting all-time highs in early January.

Economic data showed more signs of softening and selling in US equities began in earnest on Tuesday, the worst day of the week for Wall Street, following a much lower than forecast consumer confidence reading from the Conference Board. There were some positive data points though, including an upside surprise in May durable goods orders. Another bright spot was a lower-than-expected core personal consumption expenditures (PCE) reading. The Federal Reserve’s preferred inflation gauge, which excludes food and energy, came in at 4.7% for the 12 months to May. The print was slightly lower than expected and the lowest level since November.

Yet again, UK stocks outperformed their peers across the Atlantic, even though they ended the week down by around 0.5%. The month of June was not kind to UK equities and a monthly loss of around 5.5% means that they are now back in negative territory year-to-date, down by 1.0%. Sterling’s depreciation against the US dollar has played a role in the relative outperformance over the last six months of UK stocks, and the currency fell last week, dipping to the 1.20 level to trade close to its 2022 low.

Bank of England Governor Andrew Bailey did little to help the pound’s plight with fairly pessimistic comments at a European Central Bank conference in Sintra, Portgual. Bailey said the currency’s fall had not surprised him, as it reflected a weak UK economic outlook. He also warned that compared to other countries, Britain’s economy is suffering more from the energy crisis and inflation is likely to stay high for longer. The 10-year gilt yield dropped 22 basis points on the week to end at 2.08%, up 13 basis points for June.

For the fifth consecutive monetary policy meeting the Bank of England (BoE) decided to raise interest rates, meaning the central bank has delivered a 25bp hike at every meeting thus far this year. Three of the nine members of the rate-setting committee voted for a 50bp increase but, unlike the Fed, the majority decided to err on the dovish side with a smaller increase.

Several other prominent central bankers took to the stage in Sintra, including Federal Reserve chair Jerome Powell and European Central Bank president Christine Lagarde. The overall message was pretty clear in that they collectively believe there is a global shift towards a higher inflation regime, with Lagarde stating, “I don’t think we are going to go back to that environment of low inflation.”

In response to Russia’s invasion of Ukraine, NATO has agreed increase its European defences by putting over 300,000 troops on high alert. Sweden and Finland are also set to join the alliance after Turkey dropped its resistance to welcoming the Scandinavian pair. 

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.