22 July, 2022

Market Wrap

The week ended July 22, 2022

U.S. equities posted substantial gains early in the week, aided by a rally in tech stocks. However, reality sunk in on Friday with renewed fears that the global economy is heading for a significant slowdown with broadly disappointing Purchasing Managers Index (PMI) results across the U.S, UK, and Eurozone.?Even with the sell-off on Friday, the Majors closed in positive territory.

Government bond yields have fallen considerably in recent weeks as investors seek safe havens and reassess how aggressive central banks will be with economic activity decelerating. The U.S. 2-year and 10-year both dipped below 3.00%, at 2.98% and 2.79% respectively, the yield curve remaining inverted; for the third week in a row.

The Australian 2-year government bond yield sunk 19bps to 2.67%, while the 10-year fell 12bps to 3.35%. Yields have crunched in an average of 80bps in the last month.

Australian corporate bonds benefited from the rally in government bonds. Spreads tightened and the iTraxx fell over 19 points to 124.97.

In currency, the recent dominance of the USD eased last week, the AUD climbing ~1.80% to 0.691c. While both the EUR and GBP also gained however were more subdued.

News and Data

Australia

Commentary from Governor Lowe’s speech during the week looked to ease market expectations of a 75bps hike in August, although CPI which is set to be released on Wednesday could again shift that expectation.

United States

Business activity in the U.S contracted for the first time in nearly two years as a sharp slowdown in services and a more modest print in manufacturing. The U.S. services PMI fell to a 26-month low of 47 in July from 51.6 in the prior month, while U.S manufacturing fell to 52.3 from 52.7 the month prior.

According to modelling from Bloomberg Economics, the likelihood of a recession in the near term is zero, although that significantly changes heading into the second half of 2023 into 2024. The chart below represents the shifting probability from May 22 to June 22.

Source: Bloomberg

Over 20% of S&P500 companies have now reported Q2 results. The number of companies that have exceeded analyst expectations is smaller than usual. About 68% had exceeded net income expectations as of Friday, trailing the five-year average of 77%, according to FactSet.?

Global

In what was looking unlikely, Gazprom resumed partial flows to Nordstream1 with the pipeline operating at a reported 40% of its overall capacity, which is near where it was reported to be operating before its maintenance period. This provided a small amount of relief for those European countries that largely rely on the gas pipeline. Overnight Gazprom have announced they will reduce output to 20%.

In Europe, both the Services and Manufacturing PMIs in Germany fell below 50. Both PMI prints interesting came out at 49.2. Readings below 50 indicate activity is contracting. The European Composite PMI also declined.

The Week Ahead

Key Events

• Australian Q2 CPI on Wednesday
• The U.S Federal Reserve meet for their policy decision on Wednesday. Markets are pricing another 75bp hike to 2.25%-2.50%
• U.S. Q2 GDP is released on Thursday
• July Eurozone GDP and CPI expected on Friday

The views expressed herein are the personal views of the author and in no way reflect the views of the BGC Group.?Individuals should make investment decisions based on a comprehensive understanding of their own financial position and in consultation with their own financial advisors.?No liability whatsoever shall accrue to the author or the BGC Group as a result of individuals or entities making investment decisions based wholly or partly on this material.