Last Week In Review – March 25 2022

Last Week In Review

Last week the major indexes ended higher, with the large-cap S&P 500 Index reaching its highest level since February 10. Information technology stocks outperformed, helped by gains in Apple following news of analyst expectations for strong sales of the iPhone 13. A continued rise in commodity prices boosted the energy and materials sectors, while health care shares underperformed, dragged lower in part by a decline in Pfizer. Traders I spoke with observed that market activity was generally subdued but a notable “buy on the close” trend through much of the week (thank you, Plunge Protection Team). Bloomberg reported Monday that the S&P 500 had gained one-third of one percent in the last hour of trading for five consecutive days—the longest streak in two decades.

Worries about an increasingly hawkish turn by the Federal Reserve seemed to weigh on equity sentiment early in the week while prompting a sell-off in the bond market. On Monday, Fed Chair Jerome Powell repeated in a speech to the National Association for Business Economics that the central bank could deliver rate increases of larger than 25 basis points (0.25 percentage points) at future meetings if policymakers deem it necessary to control inflation. However, earlier in the day, Atlanta Fed President Raphael Bostic said that “elevated levels of uncertainty” have tempered his confidence that an “extremely aggressive rate path” is appropriate for the Fed.

Developments in Russia’s war against Ukraine also remained on investors’ radars. Heavy fighting continued north of Kyiv, and Ukrainian officials rejected a Russian demand that their forces in Mariupol surrender. While concerns that Russia might deploy lower-yield nuclear weapons if its advance remained stalled, hampered sentiment, our traders noted that stocks seemed to gain some footing Thursday afternoon after an advisor to Ukrainian President Volodymyr Zelenskyy voiced “cautious optimism” on ceasefire talks.

US – Markets & Economy

Last week’s economic data had a mixed and arguably puzzling tone, with some data seeming to improve since the Russian invasion. Durable goods orders fell 2.2% in February, the first decline in five months and much more than the consensus expected fall of around 0.5%. On Wednesday morning, stocks also appeared to react negatively to the news that February’s new home sales declined 2.0% despite a rise in inventories to their highest levels since 2008. February pending home sales, reported Friday, fell 4.1%, defying expectations for a roughly 1% gain.

Conversely, IHS Markit’s gauge of manufacturing activity rose much more than expected in March. It hit its highest level since September 2020, while its services gauge indicated the most activity since July 2021. Meanwhile, weekly jobless claims fell much more than expected and hit levels last seen in September 1969.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

Last week, the yield on the benchmark 10-year U.S. Treasury note jumped by roughly 35 basis points, mirroring a sharp drop in Treasury prices. (Bond prices and yields move in opposite directions.) The broad tax-exempt municipal bond market sold off in line with Treasuries. Municipal traders reported that new deals had to reprice to higher yields to clear the primary market.

Traders also observed volatility in the investment-grade corporate bond market amid the moves in the equities and Treasuries markets, hawkish comments from Fed Chair Powell, and technical conditions hampered by thin liquidity. However, the primary market showed strength, as new issues were generally oversubscribed. The high yield bond market also experienced weakness, but the segment was supported somewhat by the performance of energy issuers, which account for a relatively large proportion of the market. Traders noted that the new issuance volume was exceedingly light, but a few other deals appeared ready to price if the market showed signs of stabilizing.

The jump in bond yields impacted the bank loan market less, where coupon payments move higher alongside interest rates. The technical backdrop for loans was broadly positive, with healthy inflows to mutual funds and exchange-traded funds amid investors’ expectations for multiple Fed rate hikes as the year progresses.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Shares in Europe weakened amid the ongoing Russian invasion of Ukraine and the prospect of tighter monetary policy. The pan-European STOXX Europe 600 Index ended 0.23% lower in local currency terms. The main market indexes were mixed. Germany’s Xetra DAX Index eased 0.74%, while France’s CAC 40 Index lost 1.01%. Italy’s FTSE MIB Index gained 1.39%, and the UK’s FTSE 100 Index added 1.06%.

Core euro zone bond yields rose, following U.S. Treasuries higher after hawkish comments from Fed Chair Jerome Powell raised expectations for more aggressive rate hikes. Stronger-than-expected eurozone purchasing managers’ surveys also pressured yields higher. Against this backdrop, the yield on the German 10-year bund reached its highest level since 2018. Peripheral eurozone bond yields broadly tracked core markets. UK gilt yields mostly ended higher, generally in tandem with U.S. Treasuries. However, news of lower gilt supply for the next fiscal year appeared to temper this increase in yields.

Western countries agreed to provide more military support for Ukraine, reinforce troops on European borders, and extend sanctions on Russian institutions, companies, and individuals. The economic measures included preventing the Russian central bank from selling its gold reserves to bolster the currency and pay for the invasion of Ukraine. European Union (EU) leaders focused on tightening existing sanctions and cracking down on evasion but stopped short of imposing additional curbs on Russian energy imports. The U.S. agreed to supply the EU with an additional 15 billion cubic meters of liquified natural gas this year to reduce the bloc’s dependence on Russia.
Lastly, Chinese markets fell amid delisting fears for U.S.-listed Chinese companies arising from a simmering bilateral dispute over auditing standards. The large-cap CSI 300 Index fell 2.1% for the week, and the Shanghai Composite Index shed 1.2%, according to Reuters.

Concerns about the fate of dual-listed Chinese stocks continued to dampen sentiment. Chinese regulators instructed some of the country’s U.S.-listed companies to prepare audit documents for the 2021 financial year, Reuters reported, citing unnamed sources. The companies reportedly included China’s top search engine Baidu, e-commerce platforms Alibaba and JD.com, and social media company Weibo. News of the Chinese regulators’ instruction to dual-listed companies appeared to signal some willingness by Beijing to capitulate to Washington’s demands to resolve a longstanding standoff over auditing standards.

However, analysts noted that it remained unclear if the talks between regulators on both sides would materialize into anything concrete. The uncertainty was underscored last Thursday when the U.S. audit watchdog said it was still meeting with its Chinese counterparts and called speculation about an agreement “premature.” In a statement, the Public Company Accounting Oversight Board added that it “remains unclear” whether China would permit U.S. regulators to review the audits of U.S.-listed Chinese companies.

For years, the U.S. has demanded access to the books of U.S.-listed companies, but Beijing has refused to give access to corporate audits citing national security reasons. Earlier in March, the U.S. Securities and Exchange Commission (SEC) named five Chinese companies that could face delisting under the Holding Foreign Companies Accountable Act. This law compels the SEC to delist stocks of companies if U.S. regulators can’t review their audits for three straight years.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com