Week ended May 27th 2022
We’re back! Equity markets rally
After seven consecutive weeks of the S&P 500 ending the week lower than the week before, US equities managed to rally across the board this week, finally ending the dismal streak of weekly declines. Global equities were also well-supported in Europe, with both the FTSE 100 (+2.6% WoW) and the STOXX 600 (+3.0% WoW) recording solid gains. In Asia, equities were mixed – only the Shanghai Composite was negative on the week (for the indices I track – see tables below).
US equities delivered a stellar performance this week as we head towards the end of the month. All four of the US indices I track were deep in positive territory, with the tech-heavy NASDAQ Composite delivering the best WoW return (+6.8%) and the DJIA having the weakest return albeit still significantly positive (+6.2% WoW). The S&P 500 is now positive for May, which – if it holds on to these gains – would be the first positive month of 2022. Volatility, as measured by the VIX, was at its highest on Tuesday (intraday high of 31.07), which was the only day this week that the S&P 500 declined. The sour mood on Tuesday was at least partially tied to revised (downward) forward guidance from #SNAP Monday after the close, although #NVDA’s 1Q23 results steadied markets after the close on Tuesday. Sentiment improved the rest of the week, with the VIX working its way down to end the week at 25.72. The catalysts seemed to be declining inflation (see PCE discussion in “Major events driving markets” below) and comments in the just-released FOMC minutes suggesting that the Fed is conscience of a “too much too fast” approach as its tightens monetary policy.
The US Treasury bond market continued to strengthen this week as PCE data for April suggested that inflation has peaked, setting the stage for what should be further declines in the months ahead. The short end of the UST curve rallied the strongest, with the yield on the 2y UST down 13bps WoW (2.47% yield to close week). The closing yield is well off the highest recent close of 2.78% on May 3rd, just over three weeks ago. The yield on the 10y UST ended the week at 2.78%, down only 4bps WoW as the yield curve steepened.
Corporate bonds (credit) followed equities this week, as improving sentiment brought investors back into the asset class. Both USD-denominated investment grade and high yield bonds rallied strongly on the week, with spreads tightening across investment grade and high yield. Spreads on EUR-denominated high yield bonds were largely unchanged. Primary (new issue) volumes in USD are down significantly YtD, at around $807 bln (source: Moody’s), just over 50% of similar YtD volumes for 2021. New issue volumes in EUR YtD are around 60% of the USD levels – at €402 bln – on pace with 2021 issuance in EUR.
The US Dollar continues to garner a lot of focus as the greenback is coming of its recent highs, generating knock-on effects into other asset classes. (I wrote about FOREX in an article earlier this week that you can find here.) Oil was back on the upswing this week (+1.5% WoW), bringing its total YtD gain to 52.5%. Gold was also slightly better bid this week. With the USD weakening, the Yen strengthened slightly this week, as did the Pound and the Euro. The Euro benefitted from more aggressive comments from the ECB President Christine Lagarde earlier this week, suggesting that the central bank could implement its first interest rate increase as soon as July. Cryptocurrencies remain under pressure, with benchmark BTC down 2% WoW (Friday end of day $28,628).
Major events driving markets last week
US PCE and FOMC minutes: The Fed closely monitors the change in personal consumption expenditures (PCE) month to month, which it considers one of the most reliable indicators of the trend of price increases. PCE data for April was released on Friday, and PCE excluding food & energy fell from 5.2% in March to 4.9% in April, suggesting that inflation has peaked in the States and is now starting to slowly decrease. (See BEA data here.) Earlier in the week on Wednesday, the Federal Reserve released the minutes from its last FOMC meeting held on May 3-4 (here). The Fed articulated its ongoing concerns about inflation and highlighted that the US economy – and particularly the labour market – remains very robust. The minutes suggest that if things continue on this trajectory, the Fed is likely to implement at least two more 50bps increases in the Federal Funds rate during the next two FOMC meetings (the next one of which is June 14-15). In addition, the Fed will start reducing its balance sheet on June 1st by not fully reinvesting the proceeds of maturing USTs and MBS.
Tech disappoints…..again: On Monday after the close, an internal memo from SNAP CEO Evan Spiegel to staff was released to the press in which the company warned of slowing growth, informing employees that the company would not likely reach its 2022 targets for revenue growth and earnings. The company also filed a revised 8-K (here, and it’s short). The CEO highlighted similar issues to those at GOOG, FB and other tech companies that rely on advertising revenues. The market reacted poorly, and although SNAP is far from a significant company, its revised guidance shook markets on Tuesday. SNAP’s earnings are just one more example of the difficulties facing US companies as they moderate their outlook from pandemic-fuelled growth to a more normal path. High valuations make companies like this very vulnerable to downdrafts. SNAP fell 43% on Tuesday following the revision to its 2022 FY outlook. NVDA released its earnings on Tuesday after the close. The company beat top- and bottom-line analysts’ expectations for 1Q23 (ended April 30th 2022), but also moderated its guidance for the rest of the year (NVDA press release here). The company’s stock was down sharply in the after-market. However, unlike SNAP, NVDA is hugely profitable and has had strong and consistent growth for many quarters. Revenues were up 8% in 1Q23 compared to 4Q22 (i.e. the prior quarter), and +46% compared to 1Q22 (ended April 30th 2021). The company is not cheap with a forward P/E of around 29x, but the shares are sharply lower YtD (-45% at Tuesday’s closing price, just before the earnings release) as tech valuations across the board have been beat down aggressively this year. As the week wore on and equities rallied, investors seemed to recognise that the price of NVDA was attractive (relative to historical levels). The company remains a formidable global company with supply-chain and related issues that will eventually subside. Investors piled in, pushing the stock higher by 12.7% on the week. 
We are in an environment where UST yields seem to reflect the Federal Reserve’s likely path of increases in the Federal Fund’s rate, and also current investor thoughts regarding the trajectory of inflation as price increases start to subside from their March peak. This makes US Treasuries a potentially more attractive asset class for the time being, although the risk certainly remains that an inflationary surprise or other supply-shock could occur that would reignite the same concerns regarding inflation that have been affecting markets all year. The US Dollar is also is continuing to drift lower, which makes sense given it has strengthened so sharply since May 2021 and remains well above its long-term average. We have Chinese manufacturing and non-manufacturing data for April, Eurozone retail sales for April, Eurozone preliminary CPI data for May, and some US jobs data for May being released this coming week. Keep in mind that Monday is a holiday in the US, and markets will be closed.
Investors need to ask themselves if we are at an inflection point and risk markets will sustain Friday’s recovery, or if the outlook is so uncertain that Friday was a temporary aberration in a continued spiral downward? It’s a tough call, but Friday’s exceptional performance is as unusual as some of the days this year when the market has been sharply lower. I do not think we are out of the woods, and that volatility will continue to whipsaw sentiment and make markets choppy. This raises the question: “Buy the dip or sell the rip?”
Global equity indices
US equity indices
US Treasuries (yields)
Corporate bond yields
Corporate bond spreads
Safe have and other assets
 For disclosure, I do not own SNAP but I do own NVDA.