Market Update: March 2022
As you will no doubt be aware, it’s been a particularly turbulent start to the year in the markets.
Inflation concerns were dominating the narrative throughout January and most of February, with the market at one stage expecting interest rates in the US to reach 1.875% by the end of the year. The Federal Reserve committee has been meeting on Monday and Tuesday this week and will announce their intentions via press conference later today. There will most likely be a hike of 0.25%, despite the unsettling events occurring in Europe. At the time of writing, the market’s expectations have come back slightly, with a figure of 1.625% now priced in for the year.
As expected during the latter part of last year, early market volatility in 2022 was driven by central banks. This negative sentiment was supplemented by the tail end of the omicron variant causing yet more Covid related disruption and bubbling geopolitical tensions in Eastern Europe. In any ‘normal’ (what is normal anymore?) year these two factors would be at the forefront of investors’ minds, however, they’ve taken a back seat owing to events unfolding in Ukraine.
In terms of volatility, European markets have been more acutely affected by the Russia/Ukraine situation due to their dependence on Russian commodities and the inflationary knock-on effect of possible sanctions. Politicians are walking a tightrope between meaningfully sanctioning Russia and protecting their own interests, economies and re-election campaigns. At the time of writing, the US has stopped oil and gas imports from Russia, however, it’s nigh on impossible that European nations will do the same due to their embedded reliance on Russian commodities. One certainty though is that this situation will accelerate a global movement towards alternate fuels and energy sources.
Inflation numbers will be difficult to interpret due to the ongoing Covid induced rises and the complications from sanctions and/or supply interruptions arising from the Russia/Ukraine crisis. We’ll be watching closely as to how central banks are reacting to the evolving situation in Ukraine and monitoring the potential knock-on effects of these decisions. In terms of inflation, the expectation is that a portion of the headline number will fall away once these (hopefully) shorter-term issues have resolved themselves. It is, however, inevitable that wage increases during the interim period will lead to a portion becoming sticky.
Emerging Asian markets and particularly China have suffered over the past few days due to the continual adoption of zero Covid policies in workplaces. Shenzhen has gone into lockdown and Shanghai is teetering on the edge at the time of writing. This is unwelcome news for global supply chains and inflation. This, combined with US intelligence that China may be assisting Russia in some form or another has led to yet more negative sentiment for the region following a tricky 2021. In a boost to Chinese equity markets, Government officials have responded to the recent sell-off by announcing measures to ‘boost the economy in Q1 and ‘actively introduce policies that benefit markets’.
Whilst we are still very much positive on the long term prospects of the global equity markets, this year has been more volatile than expected and it’s likely to continue whilst there’s so much uncertainty over Putin’s long term strategy.
Things do look slightly better at the time of writing than a week ago but due to the unpredictability of the Russian leadership, we are still taking a cautious view for the time being.
Below markets as at 11:35 GMT 16.03.2022
Source: Bloomberg