Weekly Market Recap – May 16th

Japanese investors sold a record amount of Treasuries in March as
rising currency hedge costs eroded the allure of the securities. Funds in the Asian nation offloaded a net $32.6 billion of U.S. sovereign debt during the month, the most in data from the U.S. Department of Treasury starting since 1977. Currency-hedged U.S. 10-year notes yielded just 16 basis points on Monday, even less than the 25 basis point yields on similar-maturity Japanese bonds.

Inflation in the US and other developed countries is showing few signs of letting up from its torrid pace, but developing countries have been faring even worse. The inflation gap between emerging-market economies and the US has surged to the highest in records going back to 2011.

The jump shows why central banks in emerging markets have generally been more aggressive than their developed-nation counterparts the past several months in taking steps to tackle rising consumer prices.

Investors who were worried about high valuations of European technology stocks may want to give the sector a fresh look after a 26% plunge this year. The Stoxx 600 Technology Index now trades at about 20 times its forward earnings, the lowest in two years, and in line with its 12-year average. The sector has sold off this year after reaching record high valuations, as growth prospects have faltered on the back of soaring inflation and central banks tightening monetary policy.

Valuations of European banks are dropping to such an extent that a lot of bad news may already be priced in. The Stoxx 600 Banks Index forward price-to-earnings ratio has dropped to near 7 times, a level only broken during the Covid pandemic and the sovereign-debt crisis over the past 10 years. European banks have been hit following Russia’s invasion of Ukraine and become a proxy of recession fears, with the index down 24% since hitting a more than three-year high on Feb. 10.

Equities in the U.S. have fallen so much they’re nearly priced for a recession, but the rout may still have more room to run.

In each major selloff — marked by a decline of at least 15% — the portion of S&P 500 stocks trading above their 50-day moving average has dropped to 5% or less, and the 14-day relative strength index has fallen below 30. Those thresholds haven’t been met yet, suggesting that the correction that began at the start of the year likely isn’t complete.

The $27 increase in oil prices this year has two pieces of bad news for the global economy, according to Bloomberg Economics. The demand drag on crude signals a growth slowdown that’s already in motion. And supply shortages, the sole factor behind this year’s price surge, will probably result in a further loss of momentum in the future.