Bad news is good news once again. Equities rally on weak macro data

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27/06/2022
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Bad news is good news once again. Equities rally on weak macro data.

Global equity markets sparked back into life last week as disappointing economic data prompted investors to pare back their future interest rate expectations. In Europe, Purchasing Manager Index (PMI) figures retreated with supply chain issues and falling demand hitting the Manufacturing sector in particular [1]. Meanwhile in the US, consumer confidence as measured by the University of Michigan’s sentiment indicator slumped to its lowest ever level [2], largely due to surging inflation which has placed a considerable squeeze on disposable income.

Despite the increasingly negative macro backdrop, most major equity indices concluded last week’s trading in positive territory. The S&P500 rose by +6.5% with all sectors bar energy gaining [3] whilst in Europe, the MSCI Europe ex UK index climbed +2.4%; the latter had fallen in each of the three previous weeks. In the UK, the FTSE100 and FTSE250 increased by +2.7% and +1.1% respectively despite headline inflation hitting yet another high. Meanwhile in Asia, Chinese stocks rose on fresh stimulus hopes with the Shanghai Composite rising by +1.0%, taking its 3 month gains to +9.1%. Japanese equities also enjoyed a positive week, the Nikkei 225 advancing by +2.0% with the Bank of Japan reaffirming its commitment to ultra-loose monetary policy.

Those concerns regarding the economic outlook prompted a retreat in sovereign yields which fell on both sides of the Atlantic. The US 10-year Treasury briefly fell towards 3.00% before ultimately settling at 3.12%, a decline of 12 basis points (bps) over the prior week. Eurozone and UK yields tracked their American counterparts, with the 10-years from both regions falling by more than 20bps; the UK Gilt finished the week at 2.30% with the equivalent benchmark on the Continent closing at 1.44%.

As for commodities, oil prices were largely unchanged with Brent remaining at $113 a barrel whilst copper slumped by a further -6.5% to $8,381 a tonne. The metal has now entered bear market territory having fallen by more than -20.0% from its peak last May, reflective of increasing recession expectations. [4]

Week Ahead

The Bank of England publishes its latest round of consumer borrowing statistics on Friday, covering off various indicators including mortgage approvals and credit card lending. Both figures are particularly pertinent given the ongoing cost of living crisis that is gripping the nation. The final calculation of Q1’21 GDP is also due this week, as it is in the United States where the quarterly contraction is expected to be revised modestly lower. Other US data to keep an eye on includes PMI equivalents from the institute for Supply Management and durable goods orders covering last month. Meanwhile in both Europe and Japan, CPI inflation and unemployment data for May are amongst the standout figures due this week. PMI figures, both official and private, are released in China on Friday. [5]

 

[1] ING, 27/06/22

[2] University of Michigan, 27/06/22

[3] T. Rowe Price, 27/06/22

[4] Refinitiv, 27/06/22

[5] Forex Factory, 27/06/22

 

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