Week 20 in Brief
U.S. stocks closed mixed Friday but continued their weekly losses amid growing uncertainty and anxiety about the state of the US economy. Investors worried about whether soaring inflation can be brought under control by the Federal Reserve without derailing the economy.
How did the major indices perform?
- The Dow Jones Industrial Average edged up 8.77 points, or less than 0.1%, to close at 31,261.90.
- The S&P 500 Index added less than 1 point to finish nearly flat at 3,901.36, after earlier trading in bear market territory.
- The Nasdaq Composite fell 33.88 points, or 0.3%, to end at 11,354.62, its lowest closing value since November 3, 2020.
- For the week, the Dow fell 2.9%, the S&P 500 dropped 3.1% and the Nasdaq slid 3.8%, according to Dow Jones Market Data.
What drove the US market?
- Volatility: US stocks erased steep intraday losses to close mixed Friday in a volatile session that saw the S&P 500 hit bear-market territory. The volatility was also tied to the fact that Friday was the final day of trading before the expiration of options linked to stocks and exchange-traded funds. According to analysts, this past week has shown that the risk of economic downturn, fears that high inflation is cutting into corporate performance and rising borrowing costs remain the major worry for markets, particularly after Fed Chairman Jerome Powell said the central bank “won’t hesitate” to lift rates beyond neutral to curb high inflation.
- Monetary Policy: Early Friday, US stocks rose after China’s central bank unleashed additional stimulus in the form of a rate cut, but Wall Street’s gains were short-lived as recession fears weighed. Analysts were concerned that the move by the Chinese central bank underlined concerns. As the rest of the world is thinking of raising rates because of inflation, they’re cutting rates in order to help the economy, interpreting the move as a warning sign since U.S. companies that benefit from demand in China may be hurt by a slowing Chinese economy as well as supply-chain disruptions linked to the country’s lockdowns.
- Meanwhile, the US Federal Reserve signalled it will continue to raise interest rates as it tries to temper the recent inflationary surge. Earlier in the week, Chair Jerome Powell said: “If that involves moving past broadly understood levels of neutral, we won’t hesitate to do that.” The tough stance on monetary policy has stoked concern this week that the Fed’s actions could tip the economy into a recession. On Thursday, Deutsche Bank said the S&P 500 could fall to 3,000 if there is an imminent recession.
- Poor Quarterly earnings from major retailers: Poor quarterly reports and outlooks from Walmart and Target raised concern over companies’ abilities to deal with inflation and consumers’ willingness to pay higher prices — putting even more pressure on the S&P 500. Major retailers this week, such as Walmart and Target reported disappointing profits, against a backdrop of rising expenses and inflation.
Which US stocks were in focus Friday?
- Consumer discretionary was the worst performing sector in the S&P 500 index Friday, falling 1.5%. But investors also continued dumping shares of semiconductor stocks Friday on recession fear. Applied Materials, a manufacturer of chip-making equipment, lost 3.9% while shares of Nvidia and Advanced Micro Devices declined 2.5% and 3.3%, respectively.
- Shares of Ross Stores Inc. slumped 22.5% after the retailer became the latest to report disappointing quarterly results and trim its outlook, blaming higher inflation and rising freight and wage costs.
- Deere & Co. shares dropped 14.1% after the agriculture, construction and forestry equipment maker reported better-than-expected fiscal second-quarter profit and revenue.
- Applied Materials Inc. shares fell 3.9% after the chip-equipment maker reported a miss on profit, revenue and forecast amid continued supply chain woes.
- Foot Locker the athletic footwear and apparel retailer, saw its shares rise 4.1% after it reported a first-quarter profit that beat expectations.
How did the European markets perform?
- European markets closed higher on Friday, tracking global gains as another volatile trading week ended. The pan-European Stoxx 600 added 0.5% by the close, with travel and leisure stocks climbing 2% to lead gains as almost all sectors and major bourses finished in positive territory. Still, European stocks logged a negative week, down 1.3%, having closed sharply lower on Thursday as concerns about inflation and ominous earnings reports from U.S. retailers dented global sentiment.
- Investors continued to monitor the war in Ukraine and its geopolitical implications, which have fed into soaring energy and food prices worldwide. The World Food Programme has said failure to reopen Ukrainian ports would be a declaration of war on global food security. The war is likely to continue throughout the summer and possibly beyond, despite signs that parts of the country are returning to some normalcy, Ukraine’s presidential advisor Oleksii Arestovych said.
- In economic data, German producer prices soared 33.5% year on year in April, a new record annual rise as the war in Ukraine drives energy costs skyward in Europe’s largest economy. Meanwhile, U.K. retail sales jumped unexpectedly in April by 1.4% month-on-month. But economists expect this to be a blip in an otherwise downward trajectory.
- In stocks, Denmark’s Rockwool International climbed 8% to lead the Stoxx 600 after its first-quarter earnings report. On the other hand, Swiss luxury goods company Richemont plunged 13% after its full-year results.
How did Asian markets perform?
- Asian markets closed sharply higher today, with shares in Hong Kong leading the region. The Hang Seng is up 3.05% while China’s Shanghai Composite is up 1.60% and Japan’s Nikkei 225 is up 1.27%.
- China on Friday slashed a key interest rate to rescue its slumping housing market and head off a major downturn in the world’s second-largest economy. The People’s Bank of China cut its five-year loan prime rate (LPR) by 15 basis points to 4.45%, the second reduction this year and the largest on record. Most analysts had expected a cut of five basis points. The Chinese economy could shrink in the second quarter, as Covid lockdowns wreak havoc on activity. Consumer spending and factory output both shrank sharply last month, while unemployment surged to the highest level since the initial coronavirus outbreak in early 2020. The property sector, which accounts for as much as 30% of China’s GDP, is also in a deepening crisis.
Bonds and Commodities
- The yield on the 10-year Treasury note fell 6.9 basis points to 2.785%.
- Oil prices edged up. West Texas Intermediate crude picked up 0.4% at $112.70 per barrel. Brent crude, the international benchmark, rose 0.1% to $112.63.
- Gold turned lower, slipping 10 cents to $1,841.10 per ounce. The 10-year Treasury yield fell 7 basis points to 2.78%.
- The euro neared parity with the U.S. dollar for the first time in 20 years, but currency strategists are divided on whether it will get there and what it will mean for investors and the economy. As of Thursday morning in Europe, the euro was hovering around $1.05, having been in steady decline for almost a year, down from around $1.22 last June. The common currency slid to just above $1.03 earlier this week.
- The ICE U.S. Dollar Index, a measure of the currency against a basket of six major rivals, was up 0.3%.
- In cryptocurrencies, a generally weak risk appetite took its toll on bitcoin, which fell 4.23% to $29,009.94. Meanwhile, stablecoin tether has added more than $250 million in non-US government debt to its reserves.
Investors will review quarterly earnings from companies including Zoom, Best Buy, Nvidia, Costco, and Alibaba as well as economic data from around the world.