Weekly View - Mayday Mayday
The tech-dominated Nasdaq has been posting its worst performance since the 2008 financial crisis, with its top five companies losing a total of USD1.2 trn in market value last week. Markets faced yet another tough week to conclude an unusually difficult month for risk assets in particular. As a (sound overall) Q1 earnings season progresses, markets continue to penalise disappointers more than reward outperformers, substantiating further our preference for pricing power companies.
First quarter US GDP growth surprised to the downside significantly, falling -1.4% over the previous quarter, annualised. However, this was mostly driven by inventories, reduced public spending and a surge in imports, while ever-important personal consumption was on the weak side but not dramatically so. Elsewhere, preliminary Q1 GDP in the euro area came in slightly weaker than expected, boding ill for the second quarter and compounding the European Central Bank’s (ECB) difficult policy task of balancing inflation and growth. Meanwhile, the Chinese renminbi’s plummet against the US dollar continued as covid restrictions in China hamper growth activity and destabilise markets. The official Chinese manufacturing purchasing manager index fell further into contraction territory to 47.4 in April, while the non-manufacturing equivalent dropped to 41.9. Chinese authorities met this with a strong signal implying a ‘whatever it takes’ willingness to stabilise the economy and markets. We remain positive on Chinese government bonds.
Sunday marked Labour Day in many European countries as rising costs of living put downward pressure on income. The Bank of Japan (BoJ) stuck to its policy to keep Japanese government bonds (JGBs) stable, sending the yen past the USD130 mark for the first time in years. In a similar display of resoluteness, we expect the Federal Reserve to push ahead with a 50-basis point interest rate rise at its meeting this week, despite the economic slowdown in the US and high market volatility. For its part, the ECB sent out more hawkish rhetoric last week, with some Governing Council members talking about two to three interest rate hikes by year end. Chief ECB economist Philip Lane said that the weaker euro would also drive staff projections in June, implying higher inflation. Risks are certainly mounting for a first ECB rate hike in July, two months ahead of our baseline, in September. We have reduced euro-area equities in favour of Swiss equities as well as cash to be redeployed later.