Financial Markets in the week of 9th May 2022

The S&P 500 closed last week at a forward P/E ratio of 16.1 (CY 2023 EPS: 250.9, source: FactSet). This is the 1st time it has dipped below 18 post Apr 2020 and is below its 5-, 10- and 25-year average forward P/E ratio of 16.5 to 18.

The S&P 500 posts its 6th consecutive weekly loss. However, the silver lining was a 4% rally from the Thursday low of 3859 to the weekly close of 4023. The Euro Stoxx 50 posted a weekly gain of 2% and the Hang Seng closed flat. Gold followed up the -1.5% in the previous week with another weekly loss of -3.78% while wheat posted a second consecutive week of 5% gains.

There were interesting moves in the bond market, with the US10Y yield touching 3.2% and losing 8% post this to close at a 2.92% yield, indicating strong buying interest above a 3% yield. Under normal circumstances, this would make sense since the long-term target Fed fund rate is in the range of 2.5% to 3% but with inflation at 8.3% currently, the buying interest seems out of place. Unless the bond market is seeing a decline in inflation rates over the medium term. The DBIQ Emerging Market bond index posted a stellar 6% gain for the week.

Q1 2022 earnings season update:

445 of S&P 500 companies have reported earnings (as of May 12). According to FactSet, 377 companies have cited the term “inflation” in their conference call transcript, which is well above the 5-year average of 155. Despite this, FactSet has not seen substantial downward revisions to earnings expectations for Q2 2022.

This week we look at recent economic data from China.

Chinese manufacturing PMI data topped out in November 2020 and has been trending lower since, indicating a slow down in manufacturing activity. The Shanghai composite index topped out three months later in February 2021 @ 3731 and is currently -17%. In the US, manufacturing activity continued to trend higher through the first half of 2021 and topped out in July. The S&P500 topped out in Dec 2021 @ 4808 and is currently -16%.

As lockdowns in China eases starting this week and business activity picks up, we expect this will reflect in future Manufacturing PMI data as well. In data announced last week, Trade Balance for April 2022 @ US$ 51.12B was above expectations of 50.65B and higher than the US$ 47.38B for March 2022. CPI for April 2022 @ 2.1% was the first reading above 2% since Nov 2021 and only the second reading above 2% since August 2020, likely indicating an uptick in economic activity.

Improving economic activity in China is likely to lead a stock market rally. The risk to be considered here is a possible recession in the US as the Fed aims for a “soft landing” and the likely impact on stock prices in China / Hong Kong.