Musings on Markets (Dated 27/05/2022)

Markets were slightly quieter this week, with a shift towards a more positive tone. Broadly speaking the main drivers of markets are the central banks & expectations over the pace of monetary tightening, how the war in Europe evolves & its implication on global commodity supplies, and the pace of any reopening in China.

At the time of writing (Friday Afternoon) the SPX is up 3.64% on the week, while XOVER is c.42bps tighter. The main events of the week were as follows.

Fed minutes from the early May meeting were released on Wednesday. Markets found support from dovish comments revealing that some FOMC members may be willing to slow or even pause monetary tightening should inflation start to recede. Analysts from ING noted on Thursday that “pricing of the Fed tightening cycle has corrected 25-35bp lower since early May”.

We also had PCE (Personal Consumption Expenditures) data from the US (the Fed’s preferred price level gauge). The PCE index grew at 0.2% MoM vs nearly double that for several months before and 0.9% in March, suggesting that inflation may be slowing.

Large retail names also reported in the US this week (Macys, Dollar Tree, Dollar General Corp), issuing positive guidance on profits & sales. Strong guidance from large retail names provides some counterbalance to the negative results reported by Target & Walmart last week.

In the UK the Chancellor announced a £15bn cost of living relief package on Thursday. The package will see UK householders offered between £400 – £1200 via one off payments funded by a tax on energy companies. The proposed stimulus should help stiffen consumer demand, amid warnings from the Bank of England that the economy could enter into recession by the year end, and plummeting consumer confidence. Indeed there are growing signs consumer spending is turning, with the likes of Asda reporting a 9% fall in sales this week, and Pizza Express lowering full year guidance on the back of higher cost inputs & flagging consumer demand.

In Ukraine, Russia has stepped up its gains in the Donbass and its threatening to encircle Severodonetsk & Sloviansk (pre war combined pop c. 200,000). Ukraine continues to resist fiercely, and has extended general mobilization until August 23rd, with Putin seemingly unwilling to mobilize, the balance of power could very slowly start to grind in Ukraine’s favour. Signs continue to point towards a protracted conflict, which should continue to keep energy & agricultural produce, and other commodity prices elevated.

In China, there appears to be a struggle behind the scenes over the country’s zero covid policy. Li Keqiang, China’s premier & 2nd ranking member of the politburo after Xi jinping, said on wednesday that the country needs to achieve “reasonable growth”. While he did not explicitly call for an end to Xi’s zero covid policy, he did underscore the difficulties that the country will have in achieving its Year End growth target of 5.5%. Any material walking back of China’s zero covid policy would be positive for the world economy, albeit greater Chinese demand could further ramp up oil prices over the short term.

In terms of Credit GBP, HY Corporates returned c.-40.56 basis points (bps) on the week, with Financials under-performing Non-Financials each returning c.-46.39 bps. In terms of rating, Double BBs returned -31bps, whilst Single Bs and CCCs returned –66.81bps and 102.17bps respectively.

At time of writing (Fri 27th, Afternoon) The FTSE is up 1% on the week. GBP / USD is up 0.18% on the week at c.1.2611. The spread on the iTraxx Crossover (XOVER) – a proxy for the market’s assessment of credit risk (the greater the spread, the greater the perceived risk) increased by c.42bps over the week to 430.