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LGT Navigator: Interest rate, inflation and economic fears quickly catch up again

May 19, 2022

Sentiment on Wall Street turned again in midweek, and the major indices again posted heavy losses after the recent recovery rally. Concerns about rapidly rising interest rates once again gained the upper hand and sent the stock markets on a downward slide. Disappointing corporate results and weaker economic data in the US also weighed on stock market sentiment.

Interest rate, inflation and economic fears quickly catch up again

The New York stock market suffered a renewed slump on Wednesday after the recent price recovery collapsed abruptly as interest rate, inflation and economic concerns flared up again. The Dow Jones Industrial lost 1,160 points, or -3.57%, to exited trading at 31,490.07. The broad S&P 500 closed even -4% lower at 3,923.68 points and thus recorded the strongest daily loss since June 2020! Once again, the technology stocks were hit the hardest. Thus, the indices on the Nasdaq had to accept losses of around -5%. The Nasdaq 100 slipped again below the round mark of 12,000 points (closing level: 11,928.31). The mood on the floor was weighed down in particular by disappointing quarterly results, for example, the US retailer Target or also by weaker than expected data from the American housing market.

US retailer Target presented an unexpectedly weak quarterly result and referred to rising costs for gasoline and higher wage expenses. In addition, the group reduced the annual forecast. On Tuesday, retail giant Walmart had already missed market expectations and cited higher energy and labor costs. The bleak outlook for Target and Walmart also weighed on the shares of competitors on Wednesday, including Macy's, Best Buy and Kohl's, which had to accept significant losses.

The number of new homes started, and the number of building permits issued in the US fell amid rising mortgage rates and higher material costs due to supply shortages in March.

In Asia, most stock indices today followed the negative guidance from the US and recorded losses across the board. Prices fell most sharply in Hong Kong, where the Hang Seng slumped by around -2.5%. In Tokyo, the Nikkei 225 traded about -1.7% lower, while the Composite Index on the Shanghai Stock Exchange traded only moderately lower by about -0.2%.

EU wants to accelerate exit from Russian energy

The European Union is stepping up its efforts to reduce its dependence on Russian energy. According to Commission President Ursula von der Leyen, this will require investments of up to EUR 300 billion by 2030. She presented a plan on Wednesday outlining how the energy transition is to succeed. Among other things, the EU is to increase the energy-saving target for 2030 from 9% to 13% and expand the share of renewable energy to 45%, up from 40%. The plan calls for shortening approval procedures for renewable energy projects and introducing a solar roof obligation. In addition, investments are to be made in energy infrastructure. The money is to be made available mainly in the form of loans and grants. However, the measures still must be approved by the EU countries.

Inflation in the eurozone stagnates at a record high

Prices in the euro area continued to rise significantly in April. Compared to the same month last year, the inflation rate rose by +7.4%, as the statistics office Eurostat reported in a second estimate. Inflation thus remained at the record level of March. The price growth was once again fueled by energy prices, which increased by more than 37% compared to the previous year. If volatile energy and food prices are excluded, annual core inflation is +3.5%, after +3.0% in the previous month. The European Central Bank (ECB) recently signaled that it could raise key interest rates as early as this summer. It is aiming for annual inflation of +2% to maintain price stability. Financial markets expect interest rates to rise by a total of +1 percentage point by the end of the year.

Inflationary pressure in the UK continues to increase

UK consumer prices rose by +9.0% in April compared with the same period a year earlier, taking inflation in the Kingdom to its highest level since 1982. Inflation was driven mainly by higher electricity prices, more expensive gas, and petrol. In view of the continuing strong inflationary pressure, the Bank of England is likely to tighten its monetary policy further. Since last fall, the British central bank has already raised its key interest rate four times.

Economic Indicators May 19

MEZ Country Indicator Last period
13:30 EZ ECB Minutes
14:30 US Philly Fed Manufacturing (May) +8.2
14:30 US Initail Jobless Claims (weekly) 203,000
16:00 US Leading Indicator (April) +0.3%
16:00 US Existing Home Sales (April, m/m) -2.7%

 

Earnings Calender May 19

Country Company Period
SZ Julius Baer Q1 Sales
IT Generali Q1
UK Easyjet H1
US Applied Materials Q1

 

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Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Editor: Alessandro Fezzi, E-Mail: lgt.navigator@lgt.com
Source: LGT Bank (Switzerland) Ltd.

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