Rising rates and slowing growth, can't have one without the other
The week that was
The volatility that had been brewing under the surface last week came to the fore and most markets were down 2-3% with the US Nasdaq down almost 5% having been up 2% earlier in week. Federal Reserve Chair Jerome Powell reiterated in no uncertain terms the Fed’s commitment to act decisively to head off inflation concerns and the market has now discounted to 0.5% interest rises at the next two Fed meetings. This would already have been a headwind for tech stocks in particular but then Netflix surprised the market with an earnings miss and, perhaps importantly, even weaker guidance for the next quarter as cash strapped consumers start to dial down the subscriptions that were such a big part of lockdowns. The third or so of US companies that reported earnings actually surprised on the upside, but guidance has been generally weaker than the market would have liked. Tesla bucked the trend with a 74% earnings surprise to the upside but gave back most of the gains after news that its mercurial founder is set to buy Twitter amid worries that it may divert his focus from producing cars.
Emerging markets were also dragged down by China which was down by 6% as the Communist party doubled down on their zero COVID policy, something which is increasingly being factored into weaker growth projections for the global economy. This seems to have also seeped into weaker sentiment in Latin America which was also down by 5% having been such more resilient earlier in the year. Eastern European markets were relatively steady in a potential sign that the market thinks it has discounted much of the economic fallout from the Ukrainian war and is switching its focus to global rates and earnings. An increasingly politically popular oil and gas embargo on Russian exports would obviously change that calculus.
Slowing growth and rising rates also proved to be a strong headwind to local Materials and IT stocks respectively with both sectors down 5%. However, the rest of the market was fairly steady and most sectors were up a percent or so last week leaving the market down only .7% (although it was down another couple of percent at the time of writing). The stand-pout performer was Ramsay Healthcare which was up 30% after a bid from private equity giant KKR.
Government bond rates around the world continued to rise as inflationary challenges are being seen as increasingly common threat around the world and even in Germany where the 10-year yield briefly approached 1%, the highest it has been since 2014. Perhaps more ominously for equity investors and macro allocators corporate bond spreads continued to ease upwards, up another 0.08% for high-yield bonds, bringing month-to-date and year-to-date increases to 0.25% and 0.6% respectively. This doesn’t indicate much stress never mind distress but cumulatively brings credit spreads back to where they were just before the 2018 mini credit crisis.