Market Update

The conclusion of the week marked Friday the 13th, a date associated with bad luck for some, but for many key markets, it proved to be a day of recovery from early-week losses.
The S&P 500 narrowly avoided entering bear market territory, defined by a 20% drop from its all-time high. On Thursday, the US index came perilously close to this threshold before rebounding.
On Wednesday, US inflation data for April was released, showing an 8.3% year-on-year rate, which was 0.2% lower than the previous reading. This reinforces our belief that inflationary pressures are stabilizing and beginning to ease. It's important to note that a significant portion of inflation was driven by food and energy prices, pressures that are likely to subside as the year progresses with the redistribution of Russian and Ukrainian agricultural and energy supplies, along with the gradual easing of COVID-19-induced supply chain disruptions.
As mentioned in last week's update, the Federal Reserve raised interest rates by 0.5% in an attempt to counter inflation. It's essential to understand that this rate hike is not yet reflected in the inflation reading, as the 0.5% increase essentially occurred after the reporting period. Furthermore, a 0.5% rate hike was a standard move in pre-financial crisis 2008/9 interest rate adjustments, making the current increase a typical adjustment, neither excessive nor insufficient.
We anticipate that interest rates will continue to rise gradually, with central banks implementing increases and closely monitoring the outcomes. To use an analogy, consider the economy walking a tightrope against strong eastward winds, symbolizing inflationary pressures. At some point, these winds will change, bringing deflationary pressures (e.g., easing supply chains), represented by westward winds. If interest rate hikes are akin to leaning into the wind to maintain balance, too many hikes too quickly could spell economic disaster when the winds shift. Central banks are likely to adopt a cautious approach to avoid precipitating a policy-induced recession.
In the UK, GDP data for March revealed a 0.1% contraction from the previous month, as consumer spending waned and inflation took its toll. However, the UK's economy exhibits low correlation with UK equity investments in the FTSE 100 since around 70% of the FTSE 100's revenue is generated outside of the UK. Moreover, the UK presents an attractive medium-to-long-term investment landscape, with many of the listed corporations in sound financial health.
While China remains under lockdown in some regions, on Friday, the People's Bank of China set the reference rate for the yuan against the dollar at 6.7898, surpassing expectations. This represents one of the many monetary policy levers that China has at its disposal and is willing to utilize to bolster its markets. Additionally, the government has been injecting capital into the market. With a supportive central bank and promising investment opportunities, China holds appeal ahead of the anticipated release of pent-up demand from the world's largest population as cities emerge from lockdown.