Week in Review: Hopes for a “soft landing” fade

U.S. stocks recorded another week of losses as investors are becoming increasingly doubtful that the Federal Reserve will be able to achieve a “soft landing” for the economy by raising rates enough to reel in inflation without causing a recession. Federal Reserve Chair Jerome Powell warned, in a recent interview on US monetary policy, that tightening will include ‘some pain’. The central bank aims to achieve a soft landing, but is aware that it will be quite challenging, Powell pronounced. This comes after Jerome Powell was successfully voted in for a second four-year term as Fed Chair this week.

The U.S. inflation rate slowed in April after seven months of relentless gains but it is still too early to say whether inflation has peaked. Consumer prices rose 8.3% y.o.y in April, slightly higher than economists’ expectations of 8.1%, but below the 8.5% y.o.y surge in March. Shelter, food, airline fares and new vehicles were the largest contributors to the jump last month, leaving many Americans struggling to afford necessitates.

In Europe, Central Bank officials are signalling for an early rate move, and the market now expects the policy rate to rise from -0.5% to above 0% before year-end. European Central Bank (ECB) President Christine Lagarde indicated this week that the ECB may raise rates as early as July.

Signs that the ongoing cost-of-living crisis is impacting growth emerged from the U.K this week. The gross domestic product of the U.K unexpectedly contracted 0.1% in March, mainly due to a drop in service sector activity. Consequently, the economy expanded 0.8% in the first quarter, lower than the 1% expected by economists.

Investment sentiment in China shifted positively as coronavirus cases fell and the securities regulator reassured investors. Although, inflation in the region surprised to the upside with the April rate coming in at 2.1% y.o.y, rising from March’s 1.5% pace. In other economic news, China’s property loan growth declined to the slowest pace in over two decades due to the continued slump in the real-estate market brought on by developer defaults, virus lockdowns and weak consumer confidence.

Crypto-currency markets were rocked this week following the crash of a popular token which wiped out 99% of its value, taking down a “stablecoin” with it. Terra Luna fell from $118 to $0.09 on Thursday, which had a knock-on effect on a linked token, TerraUSD, which is typically stable. As a result, a massive sell-off ensued across the crypto market, wiping out $270 billion of wealth. Major central banks have previously issued warnings on the risk of stablecoins and their links to the traditional financial system.

Major U.S. indices’ ended the week in the red with the S&P 500 Index (-2.41%), Nasdaq (-2.80%) and Dow Jones (-2.14%) all down. Shares in Europe (Euro Stoxx 50) rebounded 2.03% as investors shrugged off inflation and tightening monetary policy concerns, while the FTSE 100 rose 0.41%. Asian indexes were mixed, with the Nikkei 225 down -2.13% and Shanghai Composite up 2.76%. Brent crude dipped -1.77%, while Gold dropped by -3.85%.

Market Moves of the Week

South Africans were hit with gloomy news this week as Eskom’s woes continued and the mining sector, which was one of the few bright spots for the economy last year, showed signs of weakening.

Eskom had to ration electricity again this week after various generation units were closed for repairs or didn’t return to service as expected. South Africa is currently headed for a record year of power cuts if the rate of coal-fuelled plant breakdowns fails to improve.

The government’s General Fuel Levy intervention is expected to come to an end late this month. As a result, economists are warning South African motorists to brace for a massive increase in fuel prices in June. The expected increase could be as much as R3.

In economic news, a recent Reuters poll revealed that economists (16 out of 24) are expecting the South African Reserve Bank to make its first 50 basis point repo rate hike in more than six years next week, moving it to 4.75%.

Mining and manufacturing data for March was released this week, which showed that South African mining production slid 9.3% y.o.y, following a 5.8% decline in February. The explanations for the drop include the Sibanye Stillwater miners’ strike which started on the 9th of March as well as Transnet’s ongoing woes. The decline doesn’t bode well for the country as the wider economy needs the mining industry to retain its traction.

The JSE All-Share Index (+0.99%) outperformed the majority of its global peers this week. Resources dropped (-2.85%) while the remaining indices ended in the green. The rand remained volatile and depreciated over the week to end at R16.16 to the U.S. Dollar.

Chart of the Week

Bloomberg’s estimates of returns that can be attributed to different investment factors within the universe of all U.S. stocks shows that value has dramatically led the field. The wait for the value factor (buying stocks because they’re cheap) to start outperforming the growth factor (buying stocks because their earnings are growing) is finally over. Source: Bloomberg

Investor anxiety has been heightened recently by the war in Ukraine and impending rate rises by the Federal Reserve. As such, we advise investors to maintain a calm stance during the crisis, diversify, and maintain exposure to long-term themes. Investors need to look beyond near-term news and gain exposure to industries benefiting from longer-term growth trends.

The information included above as well as individual companies and/or securities mentioned should not be construed as investment advice, a recommendation to buy or sell or an indication of trading intent on behalf of any Strategiq product. Strategiq Capital is an authorised financial services provider (FSP 46624).