The week that was

The US S&P 500 was down for the 5th week in a row last week but only by 0.6%, a margin that belied what was in fact an incredibly volatile week. The Nasdaq was up by over 5% on Wednesday only to fall by even more on Thursday. The takeaway for investors is that, while the damage was limited, the market behaviour is indicative of heightened uncertainty - markets really don’t know where inflation and interests are headed and even if they did they are struggling with how to price the kind of potential scenarios we have not seen for half a century. To put this in context, the last time we saw this degree of daily volatility was in mid-March 2020, right in the middle of the market panic at the onset of the COVID crisis. Then central banks were doing all they could to calm markets whereas this time, despite their best efforts, they were at the heart of the market’s indecisiveness. On Tuesday there was much speculation surrounding the RBA’s ‘will they, won’t they’, start to the local hiking cycle but in the end the local market took a politically even handed 0.25% rise in its stride. The 0.5% rise that the Fed enacted the following day had been widely telegraphed but the reaction to Chairman Powell’s comments straight afterwards was another matter. As a measure of the current sensitivity of markets to interest rates both the RBA and the Fed took the slightly unusual step of accompanying their decisions with an ad-hoc press conference. In the latter case the extra effort appeared to be dividends as markets leapt as soon as Chair Powell intimated that an even bigger rise next month of 0.75% was off the table. Then the next day markets appeared to have digested the news and decided that the Fed and the US economy are still stuck between a rock and a hard place - if inflation is allowed to continue it will be more difficult to rein in later, but if rates are pushed up in order to rein in inflation earlier then a recession will probably ensue.

As has been the case most of the year the focus has been on US rates and US markets and the rest of the world moved within a 2% range, ending around 2% down with China down a bit more as concerns mounted over the extent of the lockdowns becoming necessary to maintain a COVID-Zero policy.   Global sectors moved more or less in unison with the exception of oil companies that were up almost another 8%. Some of the worst performing large stocks included consumer discretionary companies like Amazon and Nike in the US and Alibaba and Meituan (a Chinese food delivery company) while many normally defensive consumer staples were also deeply in the red. In the latter case the latest earnings announcements have made investors question whether companies like Costco, Walmart, Nestle and Lindt have the pricing power that many had assumed would serve them well in an inflationary environment. Real Estate stocks, were however, the biggest losers from this combination of concerns over weaker growth and higher inflation and local REITs were down more than 10% last week as was Prologis the biggest REIT in the world.

Underlying all of this was the overall trend or interest rates rising (influential 10-year yields were up by another 0.15-0.2% in unison across the world) and rising recession fears (with many forecasting models indicating a 50% chance of a US recession by the end of the year). The members of the European Union are under increasing public pressure to boycott Russian oil sooner rather later which only adds to these so-called stagflationary pressures and meant that most industrial and soft commodities were down last week while oil prices were up again.

Yields on investment grade and high yield bonds also slipped by another 0.2-0.3% although for now at least there are few signs of illiquidity or stress in corporate bond markets.