Company / Analytics

Week 23 in Brief

North America

This week the biggest market-moving economic data arrived on Friday, with the release of the U.S. consumer price index (CPI) inflation reading for the month of May. The inflation data broadly came in hotter than expectations, with the headline figure coming in at 8.6% year-over-year, above expectations of 8.2%, while core CPI (excluding food and energy) came in at 6.0%, slightly above the 5.9% forecast.

How did the major indices perform?

• The Dow Jones Industrial Average lost 1506.91 points, or -4.6%, to close at 31392.79.
• The Nasdaq Composite dropped 672.71 points, or -5.6%, to end at 11340.02.
• For the week, the S&P 500 dropped 5.1%
• the Russell 2000 lost 4.3% or -80.72 points to close the week at 1802.33

What drove the US market?

• Total CPI increased 8.6% year-over-year in May, marking its largest increase since December 1981. Core CPI was up 6.0% year-over-year, down from 6.2% in April but still a long way from the Fed’s longer-run inflation goal of 2.0%. This was a punctuating factor in an otherwise lousy week, as it sparked concerns about the Fed pursuing more aggressive policy actions to get inflation under control. Those concerns showed up in the Treasury market on Friday, as well as in the stock market.
• The 2-yr note yield spiked 22 basis points to 3.04% following the CPI report while the 10-yr note yield jumped 11 basis points to 3.16%. That left the 2s10s spread at just 12 basis points versus 27 basis points when the week began.
• The best-performing sector of the week was energy. It declined 0.9%, having been insulated somewhat from the selling that hit hard elsewhere on account of the rise in energy prices. The next best-performing sector was consumer staples, which fell “only” 2.6%.
• There were pressing doubts that the market provided true value at current levels because forward earnings estimates have yet to come down in any meaningful fashion despite a lot of writing on the wall that suggests the economic climate ahead is going to be much more challenging. The selling, therefore, was widespread, finishing off a week that featured losses for all 11 S&P 500 sectors ranging from 0.9% to 6.8%. The hardest-hit sectors this week were financials (-6.8%), information technology (-6.4%), real estate (-6.2%), consumer discretionary (-6.1%), and materials (-5.8%). Separately, the Dow Jones Transportation Average declined 7.5%.

How did the European markets perform?

• European stocks fell sharply on Thursday in the hours after the decision and ECB President Christine Lagarde’s press conference- and continued to slide on Friday- before U.S. inflation data compounded the losses.
• Italy’s Banco BPM slid 11.8% to end the day at the bottom of the STOXX 600, leading to a broad decline for Europe’s banking sector.
• Credit Suisse closed down 5.7% after State Street dismissed rumors that it is considering a takeover of the embattled Swiss lender.
• Just Eat Takeaway climbed 5.3% after Bloomberg News reported that private equity firm Apollo is interested in acquiring its U.S. unit, GrubHub.
• The pan-European Stoxx 600 ended the day down 2.7%, with banks shedding 4.9% to lead losses as all sectors and major bourses closed in negative territory.
• the Central Bank of Russia on Friday cut its key interest rate by 150 basis points to 9.5%, the level seen prior to Russia’s invasion of Ukraine.

How did Asian markets perform?

• China stocks rose on Friday, ending their strongest week in nearly 16 months on a surge of buying by foreign investors, while tech firms in Hong Kong overcame broader equity market weakness in hopes of easing regulatory pressure.
• At the close, the Shanghai Composite index was up 1.42% at 3,284.83. The blue-chip CSI300 index was also up 1.52%, rising 3.65% for the week – its biggest weekly gain since early February 2021.
• In Hong Kong, the Hang Seng index slipped 62.87 points, or 0.29%, to 21,806.18 amid broad regional weakness ahead of the US inflation data.
• Automotive shares and the new energy vehicles sector were among the biggest A-share winners, rising 4.26% and 4.16%, respectively, on the back of an 8.19% rise in electric vehicle maker BYD Co Ltd and battery giant Contemporary Amperex Technology Co Ltd (CATL) which gained 5.25%.

Bonds and Commodities

• U.S. and European bond funds had net selling of $7.61 billion and $2.66 billion, respectively, but Asian funds had marginal purchases of about $90 million.
• Investors sold $3.18 billion of global government bond funds after six straight weeks of net buying, while short- and medium-term bond funds had outflows of $5.2 billion, the biggest in four weeks.
• It was a non-consequential week for gold as it held in a narrow range near $1,850 per troy ounce level as market players remained non-committal ahead of the Fed decision. Industrial metals came under pressure as optimism about the Chinese economy waned with renewed virus concerns, while major agencies lowered global growth estimates.
• Crude oil jumped to March highs on tightness concerns but struggled to build on the gains amid volatility in the larger financial market.
• Data for commodity funds showed investors withdrew $492 billion out of gold and precious metal funds in a second weekly net selling, but energy funds had small purchases, worth $87 million.

Currencies

• MSCI’s currencies index dropped 1.6% on Friday and 3.1% for the week, marking its worst performance since late September 2020.
• The EUR/USD pair spiked after the press release cementing the July rate rise, hitting an intraday high of 1.078 before falling below the 1.06 level.
• The US Dollar Index (DXY) fell to an intraday low of 102 on Thursday before making a strong comeback, recovering to its current level of 103.1.
• The risk is to further inflame expectations for Federal Reserve interest rate hikes, which might continue to support the dollar’s climb and weigh on low-yielding major rivals, such as the euro (EUR/USD) and Japanese yen (USD/JPY).

Next week

Next week, the spotlight will be on the Federal Reserve’s two-day policy meeting, which kicks off on Tuesday.

Market watchers will be anticipating the Federal Open Market Committee’s key interest rate decision on Wednesday, in which the U.S. central bank is expected to raise its benchmark federal funds rate by 50 basis points.

We can also expect the release of several important economic indicators, including the Producer Price Index and retail sales figures for May.