Weekly Market Report: May 27, 2022

Equity markets finally bucked an unsavory trend last week, in no uncertain terms, breaking a streak of seven straight down weeks for the S&P 500 by posting a gain of 6.5%, its best showing since the election in November 2020. The idea of falling inflation, adequately tightened financial conditions, and supply side driven growth was reassuring to risk markets. Interest rates settled down across the curve while commodities rallied again thanks to continued upside across the energy complex. The USD settled down 1.44% last week in a notable move based on central bank policy narratives from the FOMC and ECB.

Market Anecdotes

• Equity markets traded higher consistently throughout each of the past five trading days which may signify a FOMO sentiment driven rally (‘fear of missing out’) as one of the drivers.
• Risk assets cheered the release of minutes from the most recent Fed meeting indicating an appetite for less tightening than markets have priced in. BCA highlighted the notion that financial conditions have tightened enough that Fed narratives can be less hawkish.
• The headwind of high and rising bond yields has relented recently giving higher P/E stocks some breathing room and increasing the number of modestly priced stocks, particularly in non-U.S. markets.
• The 2yr UST yield fell 13bps last week, more than longer or shorter maturities, reflecting some renewed dovish sentiment thanks to FOMC narratives last week. The 10yr UST has fallen from 3.12% to 2.74% over the past two weeks.
• Bianco Research updated their ‘nothing is making money’ chart illustrating how unprecedented 2022 has really been with the best 6-month performing financial asset returning -9.2%.
• Negative investor sentiment, a strong contrarian indicator, remains at excessively bearish levels as illustrated by recent AAII sentiment survey data.
• With Democrats facing a likely red wave in the midterms, some pump priming and legislative initiatives to creep back into the fiscal narrative including student loan forgiveness and a Manchin-Schumer BBB deal potentially resurfacing.
• Municipal bonds are looking relatively attractive at this point in the cycle with muni/treasury ratios back above post 2010 averages and credit quality at extremely healthy levels.
• Q1 GDP revision, from -1.4% to -1.5%, came with a strong upward revision to personal consumption spending which was offset by lower private inventory investments. Growth of 3.9% and an upward trend in sales to domestic purchasers signals healthy GDP for Q2.
• ECB President Christine Lagarde made clear the ECB is preparing to remove accommodation by ending net bond purchases in early 3Q and raising rates by 25bps in July and September.
• The EU’s proposed REPowerEU scheme, designed to address reliance on Russian energy sources, stands to direct hundreds of billions in energy infrastructure investments in the coming years.
• China’s weak housing market, zero tolerance Covid policy, and weakening global manufacturing demand has begun to influence policy with the PBoC lowering its 5yr loan rate by 15bps following a rate cut in the mortgage market last week.

This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.

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