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Week in Review: Markets End Week Higher

Advice & Comments

30 May 2022

US stocks ended sharply higher for the week supported by stronger corporate earnings and signs of a slight moderation in inflation.

All three major U.S. indices closed the week higher, with each rising higher than 6% to close their best week since November 2020. The S&P 500 and Nasdaq Composite both ended seven consecutive weeks of losses, with both retail earnings and tech counters continuing to drive market action.

Minutes from the early-May meeting of the Federal Open Market Committee (FOMC) were released on Wednesday, with all members voicing support for 50-basis-point rate increases in June and July. The FOMC minutes did not offer any surprises but did allay some investor fears that the Fed may have felt it necessary to increase interest rates at an even greater pace.

The core personal consumption expenditures price index (the Federal Reserve’s preferred inflation measure), which excludes food and energy, edged down to 4.9% year over year in April from 5.2% in March, it was reported on Friday.

The benchmark 10-year U.S. Treasury yield ended the week below 2.75%, falling from a high earlier in the year of above 3%, as the market appeared to focus on signs of slowing growth in the U.S. economy that could lead to a slower pace of rate hikes.

US mortgage rates posted their biggest drop in more than two years, offering homebuyers a slight reprieve from this year’s massive surge in borrowing costs. The average for a 30-year loan declined to 5.10% from 5.25% last week, but rates are still well above the 3.11% level at the end of last year.

Shares in Europe and United Kingdom (UK) rose over the week as confidence grew that inflation may be peaking and as central banks signalled that interest rate increases are likely to be gradual. The pan-European STOXX Europe 50 Index ended the week 4.15% higher, while the UK’s FTSE 100 Index rose 2.65%.

The UK announced a 25 percent windfall tax on oil and gas producers’ profits (an energy profit levy), alongside a 15-billion-pound ($18.9bn) package of support for households struggling to pay soaring energy bills. The move, which will give each household a 400-pound ($500) discount on energy bills and provide more for the lowest-income household.

Ukrainian President Volodymyr Zelensky said the situation in Donbas is "very difficult" as Russia ramps up its firepower. Russian troops are making steady progress in Ukraine’s east on the back of more-concentrated artillery and air power, now controlling almost all of the Luhansk region.

China’s capital Beijing will loosen mobility curbs in several districts from Sunday. The number of new infections has fallen for six straight days in Beijing with no cases outside of quarantine reported on Friday. Other cities like Shanghai, which has been under lockdown since late March, is gradually easing restrictions as officials have started allowing more people out of their homes and businesses to reopen. Under China’s Covid Zero strategy, authorities have taken drastic measures to quarantine all those infected and isolate people exposed to them. Chinese equity markets ended the week weaker with the broad, capitalization-weighted Shanghai Composite Index down 0.5%.

Market Moves of the Week

Transitioning South Africa's coal-dominated economy onto a greener footing will require at least $250 billion over the next three decades, a report released at the World Economic Forum said on Thursday. Around half of the total investment, $125 billion, is needed to ramp up wind and solar power projects as the country mothballs coal-fired plants that currently supply the bulk of its energy needs, said the consultation document. South Africa is the world's 12th biggest emitter of climate warming gases and the biggest in Africa.

The JSE firmed along with global markets, ending the week up 4.31%, with all three of the major sectors including financials (+3.24%), resources (+6.09%) and industrial shares (+4.34%) well supported. By Friday close, the rand was almost one and a half percent stronger for the week at R15.61/$, from around R15.82 at the start of the week. The ZAR has capitalised on broader USD weakness amid signs that the federal reserve may slow its monetary policy tightening in the second half of the year.

Chart of the week

The breakeven inflation rate (comparing the yield of an inflation-based bond (like TIPS) with a nominal bond of the same maturity period) is a measurement that aims to predict the effects of inflation on certain investments. As per the chart above, there has been a sharp drop in forecasts over the last few weeks, both for the next 10 years and for the five years starting five years hence.

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.

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