Weekly Market Wrap 06/05/2022

The US Federal Reserve and the Bank of England raised interest rates this week as markets had anticipated, concerns about the outlook for economic growth and the potential for a recession have on the back of central bank action troubled investors, sparking a strong negative reaction in major markets. The European Commission has launched a new wave of sanctions on Russia that aim to further the divide between Putin and the west as fighting continues in Ukraine. The UK local elections showed weakening support for the Prime Minister Boris Johnson, as the conservative party lost control of the key Westminster council. The cost-of-living crisis that is affecting millions of people in the UK, persistent high levels of inflation as well as numerous scandals around covid-19 rule breaches is showing to have filtered through to voter action. US job growth increased in April, strengthening the Fed’s case that the economy is capable of withstanding further rate hikes, whilst unemployment was unchanged at 3.6%. 

US Markets 

The S&P 500 ended the week up 0.36% at 4,146 whilst the NASDAQ ending flat at 12,838. US markets sold off rapidly on Thursday, with the tech-heavy NASDAQ falling by 4.99% as investors began to fear that the Federal Reserve will deliver a number of rapid rates increases in the upcoming meetings, which could significantly damage US economic growth and devalue companies’ future earnings. On Wednesday, the Federal Reserve raised rates by 0.50%, the largest increase since 2000. Chairman Jerome Powell’s comments that a 0.75% increase at future meetings is “not something the committee is actively considering” failed to calm investors nerves. The market is pricing in further rate increases in the June and July Fed meetings.  

UK Market   

The UK market ended the week lower. The Bank of England raised interest rates by 0.25 to 1.00% on Thursday as markets anticipated, reaching the highest level seen in the UK since 2009. However, the central bank warned of a potential recession in the UK and cut its growth forecast for 2023 from an estimate of 1.25% growth to a contraction of 0.25%. Additionally, the BoE estimates inflation to peak at more than 10% in 2022, up for the previous peak forecast of 8%. The UK local elections showed support for Boris Johnson and the conservative party weakening, with the conservatives losing control of the Westminster council, which had been held since 1964. 

European Markets   

The Euro Stoxx 50 ended the week down 4.34% at 3,639, the DAX lost 2.63% to 13,720 whilst the CAC 40 fell 3.99% to 6,267. European markets have felt pressure from a number of angles this week, the European Commission’s new package of sanctions look to further exclude Russia from the west, with a number of Russian state-run TV channels to be banned from being shown in Europe in order to reduce Putin’s audience. There was also the announcement of a gradual phasing out of Russian oil imports, which could cause significant energy cost increases for the EU, which would threaten to push the already damaging levels of inflation even higher. Data released on Friday from Germany showed a reduction in industrial production in March, as input cost inflation and effects of the Ukraine war dampened output.  

Fixed Income  

Yields on the US 10-Year Treasury have risen 0.30% to 3.11% after the Federal Reserve raised interest rates by 0.50% on Wednesday, the largest increase since 2000. The Fed is expected to continue raising rates as the year progresses, with markets pricing in a significant rate increase at the Fed’s meeting in June, despite Chairman Jerome Powell telling investors that a 0.75% hike was not being considered. 

Commodities 

Brent Crude gained 3.05% this week, reaching $112 per barrel after the European Commission proposed a gradual ban on imports of Russian oil to countries within the EU, raising supply concerns. Demand for oil could also be on the rise after the US announced it will seek to replenish its oil reserves later in 2022 after releasing a record number of barrels earlier this year in an attempt to tame rising energy prices. 

Gold prices fell this week by 0.60% to $1,875, as rising treasury bond yields and a stronger dollar weaken the attraction to gold as a non-income yielding asset. 

The Week Ahead  

Monday – UK Retail Sales 

Tuesday – China Direct Foreign Investment 

Wednesday – US CPI, China CPI 

Thursday – UK GDP, US Initial Jobless Claims 

Friday – US Consumer Sentiment  

*Price changes as of last week’s close unless stated otherwise.