Week in Review: Market Volatility Persists

Most global financial markets were lower on the week with rate hikes and higher oil prices contributing to market volatility.

On Wednesday the U.S. Federal Reserve hiked its federal funds target rate 50 basis points to between 0.75% and 1%, the first half-point hike since 2000. Officials also announced that the Fed would begin allowing its holdings of Treasuries and agency mortgage-backed securities to decline in June at an initial combined monthly pace of USD 47.5 billion, stepping up over three months to USD 95 billion. The markets’ initial reaction was fairly muted as the rate hike was largely in line with market expectations, at the post-meeting press conference Fed Chairman Powell went on further to add that a hike of 75 basis points was “not something we are actively considering.” In late trade on Wednesday the major indices rallied but what followed on Thursday was an aggressive sell-off with investors reconsidering the prospects of the Fed's tightening cycle needing to be more aggressive to rein in inflation.

Nonfarm payroll employment in the United States rose a solid 428,000 in April, while the unemployment rate held steady at 3.6%. There was some encouragement of some easing labour market pressures with average hourly earnings rising 0.3% in April, down from 0.5% in March and below expectations.

The S&P 500 (-0.21%) and Nasdaq (-1.54%) were both down for a fifth straight week, while the 10-year U.S. Treasury note yield breached 3.00% over the week, climbing as high as 3.1% on Friday as long-term inflation expectations increased.

Shares in Europe also fell over the week with the Ukraine conflict adding to market uncertainty and the Bank of England’s downbeat economic outlook adding to investor concerns. The bank raised rates 0.25% to 1%, their highest level since 2009, seeking to dampen inflation. In local currency terms, the pan-European STOXX Europe 50 Index ended 4.57% lower, while the UK’s FTSE 100 Index slid 2.08%.

Japanese equities rose modestly in a holiday-shortened week with the benchmark Nikkei 225 Index gaining 0.58%. Chinese markets ended the week lower with the Shanghai Composite Index falling 1.5% as economic activity slowed sharply in April as China struggled to contain the spread of COVID-19.  The Omicron outbreak has compounded problems, on the back of a debt crisis in the property sector and a regulatory crackdown in its tech sector in the second half of 2021. Late this week, President Xi Jinping underlined the government’s commitment to its zero-COVID policy, despite increasing social discontent.

With about 87% of the constituents of the S&P 500 Index having reported for Q1 2022, 79% have reported actual EPS above estimates, which is above the five-year average. In terms of revenues, 74% of S&P 500 companies have reported actual revenues above estimates.  The forward 12-month P/E ratio is 17.6, which is below the five-year average (18.6), according to data from FactSet Research.

Market Moves of the Week

Platinum miners and banks led the rout on the JSE on Friday, with the JSE All Share index closing the week over 6% lower as inflation fears gripped world stock markets. All the major sectors were off sharply.

The Absa Purchasing Managers' Index, a key gauge of confidence in the manufacturing sector, slid to 50.7 in April from 60 in March, suggesting a sharp monthly contraction in manufacturing output at the start of the second quarter, in part because of the KwaZulu-Natal floods.

Moody's forecasts South Africa's inflation to hit 8% in 2022, in a report released on Wednesday amid the global impact of the Ukraine conflict and rising U.S. interest rates, higher than the South African Reserve Banks’s 3-6% target range for the year.

The rand was weaker for a third week in a row, by Friday close the rand was trading at R16.02 to the dollar.

WeeklyMovements08May2022

Chart of the Week

This past Wednesday, the Federal Reserve increased its benchmark interest rate by half a percentage point, in line with market expectations. The funds rate target now stands at 0.75%, already ahead of where the markets expected it would be, and up from zero before the rate hikes began in March with a quarter-point increase. Current market pricing has the rate rising to 2.75%-3% by year’s end.

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