Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and Political Backdrop
Arguably, the week’s economic data did little to support worries of an impending recession – particularly one driven by layoffs. On Friday, the Labour Department reported that employers added 390,000 nonfarm jobs in May, well above consensus expectations of around 320,000. Weekly jobless claims, reported the day before, surprised modestly on the downside, while April job openings remained slightly below record highs at 11.4 million. Nevertheless, the Conference Board’s index of consumer confidence fell in May as workers grew somewhat less enthusiastic about their job prospects, with modestly more Americans saying that jobs were “hard to get.”
Much of the rest of the week’s data suggested continued solid economic expansion, at least for now. The gauge of services sector activity of the Institute for Supply Management (ISM) fell more than expected and hit its lowest level in over a year, although it remained well in expansion territory. The ISM’s manufacturing data showed a surprising acceleration in manufacturing activity in May, driven in part by new orders.
Inflation signals were perhaps more difficult to decipher, as were comments from Federal Reserve officials about the future path of rate hikes – remarks watched closely given the Fed’s upcoming “blackout” period ahead of the 14-15 June policy meeting. Some speculation grew that the Fed might pause rate hikes at its September meeting to gauge their impact to date on the economy, and Federal Reserve Vice Chair Lael Brainard remarked on Thursday that financial conditions had already tightened considerably – while warning that policymakers could still raise rates by 0.50% in September. The Conference Board report showed that Americans’ inflation expectations were moderating, and the Labour Department payrolls report brought reassuring news to investors worried about wage pressures, with average hourly earnings rising less than consensus estimates in April (0.3% versus 0.4%).
EU leaders agreed at the end of the month to ban all seaborne Russian oil deliveries, covering about two-thirds of such imports, within months. Hungary, Croatia, Slovakia and the Czech Republic – countries that rely heavily on Russian energy supplied via pipelines – were exempted temporarily from the embargo. Part of the agreement also includes a coordinated ban with the UK on insuring ships carrying Russian oil. Earlier, the European Commission announced a EUR 300 billion plan to end the EU’s dependence on Russian energy imports before 2030.
Meanwhile, Russia’s state-owned energy company Gazprom cut off gas to the Netherlands, the fourth country to be sanctioned for refusing to pay in rubles rather than dollars. Russia stopped supplies to Finland, Poland and Bulgaria earlier in the month.
European Central Bank (ECB) Chief Economist Philip Lane appeared to suggest policymakers could back an end to the asset purchase programme early in the third quarter, followed by a series of gradual 25-basis-point interest rate increases starting in July. His comments echoed those made last week by ECB President Christine Lagarde but were more specific. “Normalisation [of monetary policy] has a natural focus on moving in units of 25 basis points, so increases of 25 basis points in the July and September meetings are a benchmark pace,” Lane said in an interview with Spanish newspaper Cinco Días. He added: “What we see today is that it is appropriate to move out of negative rates by the end of the third quarter and that the process should be gradual.” Many policymakers are now agreed on the need to start raising rates to curb inflation, but they are divided over the pace of tightening, with some calling for an increase of 50 basis points in July. The ECB’s key deposit rate is -0.5% and has been negative since 2014.
Inflation in the 19 countries comprising the euro area accelerated more than expected in May to another record high of 8.1% and spread more broadly across the economy, the Eurostat data agency reported.
UK manufacturing activity expanded in May at the weakest rate since January 2021, as producers of consumer goods struggled against a worsening cost-of-living crunch. The S&P Global UK Manufacturing PMI fell to 54.6 in May from 55.8 in April. It adds to signs that the UK's economy has been struggling for momentum as households face surging energy bills. In the previous week finance minister Rishi Sunak announced 15 billion pounds of aid for households, on top of 22 billion pounds of broader assistance promised earlier this year.
Japanese authorities took further steps toward a wider reopening of the country’s borders after a two-year ban on foreign tourism due to the coronavirus pandemic. From 1 June, the daily cap on the number of visitor arrivals was lifted to 20,000, from 10,000. Starting 10 June, tourists can enter Japan, but with conditions. Packaged tours with guides and fixed itineraries will be allowed in, but individual tourists will still be banned. Prime Minister Fumio Kishida said that the resumption of inbound tourism carried great significance in that the benefits of the weak yen could be felt. A weaker yen gives travellers from overseas more purchasing power.
While short-term inflation expectations in Japan have increased – and the rising prices of daily necessities could hurt household sentiment, according to Bank of Japan (BoJ) Governor Haruhiko Kuroda – medium- to long-term inflation expectations are still low. BoJ Deputy Governor Masazumi Wakatabe said that the central bank did not consider that it had achieved its price stability target of 2.0% in a sustainable and stable manner, despite the core consumer price index (CPI) rising 2.1% in April from a year earlier. The year-on-year rate of increase in the CPI is anticipated to decelerate as the positive contribution of a rise in energy prices wanes. Wakatabe stated that it is necessary for the BoJ to persistently continue with monetary easing and to not rule out taking additional easing measures without hesitation.
Composite Purchasing Managers’ Index (PMI) data showed a moderate rise in private sector activity in May, led by growth in the larger services sector, where an easing of pandemic restrictions helped boost demand. Manufacturers noted a softer improvement in the health of the sector amid sustained supply chain disruption and raw materials price hikes.
China’s government unveiled more details of the stimulus programmes it announced the previous week, with 33 measures covering fiscal, financial, investment and industrial policies. Demand for Chinese bonds – already weakened due to rising US Treasury yields – received a further setback amid reports that the government plans to accelerate the issuance of local government special bonds for funding various projects.
China’s factory activity shrank less sharply in May as virus restrictions eased and some production resumed, according to a private sector survey. The Caixin/Markit Manufacturing PMI rose to a stronger-than-expected 48.1 in May from 46.0 in April, when it hit its lowest level in 26 months. The latest Caixin/Markit reading reflected a similar improvement in the official manufacturing PMI in May, which also beat forecasts and signaled that the worst of the country’s lockdown-related disruptions was over.
Headlines regarding China’s debt-laden property developers turned slightly positive. A private survey showed that new home prices rose slightly in May from April. The May sales data showed a year-on-year decline of 59.4%, slightly worse than the 58.4% drop recorded in April, but sales for the top 100 developers advanced 5.6% month on month. Separately, property data provider CRIC issued data showing that property sales in 30 major cities measured by gross floor area rose 4% month on month. EXM Capital analysts believe that contracted sales in China bottomed from April to May.
China’s central bank requested meetings with banks in several cities to discuss why loans to property developers remain soft despite pleas by regulators to increase lending, Bloomberg reported.
GDP expanded at a solid pace of 0.8% quarter-on-quarter in the first quarter, slightly above consensus despite the Omicron variant of the coronavirus and weather disruptions. However, the most recent data point to a slowdown. The manufacturing PMI was down sharply by six points from the previous month but remained in expansion territory at 52.4. Building approvals were down for the month while an increase was expected. Housing prices also fell in May for the first time since September 2020. Still, home loan approvals were up, mostly driven by investors rather than owner-occupiers.
Last week, MSCI All Country World Index (MSCI ACWI) lost -0.5% (0.2% in May, -13.1% YTD), pulling back from the previous week’s rally.
In the US, the S&P 500 returned -1.2% (0.2% in May, -13.2% YTD). Stocks surrendered a portion of the previous week’s strong gains as investors continued to question whether the Federal Reserve will be able to rein in inflation without causing a recession. Industrials shares outperformed, helped by a rise in Boeing. Consumer discretionary shares also proved resilient, boosted by gains in Amazon.com. Value stocks underperformed their growth counterparts and small-caps outperformed large-caps. Russell 1000 Growth returned -0.9% (-2.3% in May, -22.1% YTD), Russell 1000 Value -1.4% (1.9% in May, -5.0% YTD) and Russell 2000 -0.2% (0.1% in May, -15.5% YTD).
Volatility continued to moderate since its recent peak in mid-May, although warnings from JPMorgan Chase CEO Jamie Dimon that an economic “hurricane” was coming because of rising interest rates and elevated commodity prices seemed to unnerve some investors on Wednesday. A report Friday that Elon Musk had emailed fellow executives that Tesla might have to lay off 10% of its workforce – and that he had a “super bad feeling” about the global economy – also seemed to unsettle investors somewhat. Markets were closed Monday in observance of Memorial Day.
In Europe, the Euro Stoxx 50 fell -0.6% (1.3% in May, -9.6% YTD) in thin volume. Investors continued to struggle with concerns about elevated inflation, slowing economic growth, the pace of central bank policy tightening, and the invasion of Ukraine. Major indexes were generally weaker. France’s CAC 40 fell -0.3% (-7.2% YTD), Germany’s DAX was little changed (-9.0% YTD) and Italy’s FTSE MIB dropped -1.9% (-9.0% YTD). Switzerland’s SMI lost -0.9% (-8.0% YTD). The euro was stable against the US dollar, ending the week at 1.07 USD per EUR.
In the UK, the market closed early to celebrate Queen Elizabeth II’s 70th year on the throne. The FTSE 100 declined -0.6% (1.1% in May, 3.9% YTD) and the FTSE 250 was down -0.4% (-1.1% in May, -12.7% YTD) through Wednesday. The British pound was weaker against the US dollar, ending the week at 1.25 USD per GBP, down from 1.26.
Japan’s stock market returns were positive for the week. The Nikkei 225 gained 3.7% (1.6% in May, -2.6% YTD), the broader TOPIX was up 2.4% (0.7% in May, -1.8% YTD) and the TOPIX Small Index added 2.9% (0.4% in May, -3.1% YTD). A further relaxation of Japan’s strict border controls and Chinese authorities’ decision to allow segments of the economy to reopen following stringent coronavirus lockdowns supported sentiment. The yield on the 10-year Japanese government bond finished the week broadly unchanged at 0.23%. The yen depreciated to JPY 130.9 against the US dollar, from JPY 127.1 at the end of the previous week.
In Australia, the S&P ASX 200 was up 0.8% (-2.5% in May, -0.2% YTD) in a choppy week. The gain was mostly driven by the materials sector with some support coming from China’s stimulus, which boosted Iron ore prices, and international news regarding Lithium. The currency was also well supported ahead of the Reserve Bank of Australia (RBA) meeting this week, with the Aussie dollar advancing by 1.2%. Indeed, the RBA is expected to hike by 30 basis point on Tuesday. This lifted the government bond yield curve higher, with the 10-year yield reversing its recent downward trend and finishing 22 basis points higher for the week.
Emerging Markets and Other Markets
MSCI Emerging Markets Index returned 1.8% last week (0.5% in May, -13.1% YTD), with a positive contribution to performance from the stock markets of China, Taiwan, South Korea and India and a negative contribution from that of Brazil.
Chinese stocks rallied in a holiday-shortened week after Beijing unveiled a raft of support measures to cushion an economic slowdown triggered by the country’s zero-tolerance approach to the coronavirus. The broad, capitalisation-weighted Shanghai Composite Index rose 2.2% (4.8% in May, -11.9% YTD) and the blue chip CSI 300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, climbed 2.4% (2.1% in May, -16.9% YTD). China’s stock and bond markets were closed Friday for the Dragon Boat Festival.
In Colombia, equities have performed remarkably well thus far in 2022, rising 13.4% in US dollar terms in May and 36.1% for the year-to-date period through 31 May, according to RIMES/MSCI data. Thanks, in part, to rising commodity prices, the resource-rich Latin American region has been somewhat insulated from the geopolitical turmoil in emerging Europe. Colombian assets, including the peso, have benefited from the country’s standing as an exporter of petroleum and coal.
Last week, Colombian assets rallied following the first round of the presidential election on Sunday, 29 May. As expected, Gustavo Petro, an economist and former presidential candidate, fared best, winning 40.3% of the vote. However, Rodolfo Hernandez Suarez, a businessman and construction company owner, ended up garnering second place with 28.2% despite Fico Gutierrez (23.9%) seeing greater support in pre-election surveys. With both Petro and Hernandez being from outside the political establishment, EXM Capital emerging markets sovereign analyst Mike Gifford believes that Sunday’s outcome suggests there is strong demand for changes within Colombian society. Petro and Hernandez will face off in the second round of the election on 19 June.
In Hungary, financial assets have been under considerable pressure this year. As measured by MSCI, Hungarian stocks fell about 14% in US dollar terms in May and almost 39% since the end of 2021. Losses to foreign investors have been exacerbated by weakness in the forint, which fell 3% versus the US dollar in May and about 12.5% year to date. The market’s poor performance stems from factors such as elevated inflation and rising interest rates; the country’s proximity to Ukraine, which has been attempting to repel a Russian invasion since late February that has also triggered a humanitarian crisis; controversies regarding the rule of law, which put EU funds for Hungary – both under the structural allocation and from the EU’s Recovery and Resilience Facility – at risk; and sanctions against Russia, on which Hungary depends for oil and natural gas.
At the beginning of last week, following several weeks of negotiations among EU members, the EU agreed – as part of a new package of sanctions – to a partial embargo on Russian oil. Specifically, the EU will ban Russian oil imports by sea by the end of 2022. For now, Russian oil will continue to flow west via pipelines, but Germany and Poland have agreed to stop relying on these imports by the end of the year. However, in order to win support for the embargo from Prime Minister Viktor Orban, who is on generally good terms with Russian President Vladimir Putin, Hungary was granted an exemption and may continue to import Russian oil without penalty. Slovakia and the Czech Republic were also granted exemptions.
Fixed Income Markets
Last week, Bloomberg Global Aggregate Index (hedged to USD) returned -0.9% (-0.1% in May, -7.9% YTD), Bloomberg Global High Yield Index (hedged to USD) -0.3% (-0.4% in May, -9.1% YTD) and Bloomberg Emerging Markets Hard Currency Index -0.4% (flat in May, -13.4% YTD).
Despite the signs of slowing inflation and speculation about a possible Fed pause, US Treasury yields increased substantially during the week. The 10-year rose 20 basis points to 2.94% from 2.74% (143 basis points higher YTD). While the strong payroll gains seemed to play a role, several international developments also contributed to the increase: A jump in eurozone inflation data and news that the EU will ban most Russian oil imports by the end of this year helped push Treasury yields broadly higher at the start of the trading week, while hawkish policy actions by the Bank of Canada added upward pressure to shorter-term US interest rates.
Over the week, the German 10-year bund yield rose 31 basis points to 1.27% from 0.96% (up 145 basis points YTD).
UK gilt yields broadly tracked core markets. The 10-year gilt yield ended the week 24 basis points higher, up from 1.92% to 2.15% (119 basis points higher YTD).
US investment-grade corporate bonds traded lower as US Treasury yields increased amid inflation and growth concerns, but there was some support from an uptick in overnight activity from Asia as well as higher-than-average secondary trading volumes ahead of month-end. Primary issuance exceeded expectations for the week. Meanwhile, the high yield bond market saw slightly higher-than-usual trade volumes as the new month began with strong positive flows and the pricing of several new deals. The new issues were met with solid demand, especially for higher-quality bonds. Banks and exchange-traded funds (ETFs) continued to drive demand in the bank loan market.