Weekly View - NATO +2

Geopolitical tensions in Europe ticked up a notch as both Sweden and Finland confirmed intentions to apply for NATO membership last week. Over the weekend, Finland said it was a few days away from officially applying for membership. Accession of the two Nordic countries to the military alliance would double today’s NATO-Russia border. Current NATO member, Turkey, stated it would block both countries’ applications, while Russia responded that such moves would require it to substantially increase its defences along its border with both countries.

In the US, consumer prices continued their ascent in April, with the CPI print higher than expected on the back of increased airfares. Worryingly, the University of Michigan’s US consumer sentiment survey hit a decade low, well below analyst expectations, as Americans contend with rising prices. Markets met the 8.3% CPI gain with calm, enabling US 10-year government bond yields to close the week below the psychological 3% threshold. Long-dated bonds were able to have a positive week as a result. Nevertheless, the S&P500 declined for the sixth consecutive week, with the tech-heavy Nasdaq underperforming the broader market. SoftBank’s Vision Fund posted an historic USD27 bn loss for the year so far, leading its founder to announce a defensive positioning for the fund going forward. Meanwhile, Elon Musk put his bid for Twitter on hold over questions about inflated user account numbers. Small-capitalisation stocks also retreated, as investors begin evaluating the consequences of tighter monetary conditions on growth. On this front, high-yield bond spreads in both the US and Europe have started to widen over the last weeks, driving high-yield to underperform investment-grade bonds, after having initially outperformed them. We are negative on high-yield bonds.

Within Asia, signs of declining covid cases in Shanghai have enabled a rebound in Chinese equities. This recovery remains fragile however, in the absence of any concrete measures to resolve the property sector crisis and the lack of credit demand. Of interesting note, the high-yield real estate sector declined last week on the back of yet another default. Further indication of the Chinese economy’s current delicate situation came from the decline in the Chinese renminbi, whose spot rate fell by 1.8% last week. The Chinese currency’s decline now amounts to more than 6% from the start of the year.