Weekly Update – 14 February 2022

Stock markets had another choppy week, with positives on corporate earnings ultimately outweighed by the negatives associated with higher interest rates and tensions between Russia and Ukraine. These will likely remain in focus this week for markets and could well lead to more choppiness as other scheduled data is relatively thin on the ground.

Last Week

• Global stocks fell about 1% although the UK stock market held up very well.
• US inflation came in at its highest level in 40 years and prompted a faster pace of rate hikes to be priced in.
• US 10-year bond yields got above 2% for the first time since summer 2019.
• Gold was a beneficiary of the higher inflation numbers and rose by over 2% on the week.

This Week

• The inflation spotlight is back on the UK this week, with CPI and RPI numbers released first thing on Wednesday morning. UK employment data is released on Tuesday and UK Retail Sales numbers are out on Friday morning.
• There are a fair few companies reporting earnings this week too, with 62 companies in the S&P 500 reporting and 68 in the Euro Stoxx 600. Notable names would be Nvidia and AIG on Wednesday, Standard and Chartered, Nestle and Walmart on Thursday and Allianz and NatWest Group on Friday.
• In the US we get the release of the FOMC minutes on Wednesday along with Retail Sales figures and Housing data (Starts and Sales) on Thursday and Friday.

Last Week’s Highlights​

Stock markets had (yet) another choppy week as concerns about higher interest rates and rising inflation made life tough going. The Global index of shares was down about 1% on the week, with most of the drag coming from the US which was down by 1.8%. The US is now the worst performing of the major markets this year (down by 7.2%), with Information Technology (which accounts for circa 28% of the US index) the biggest drag: down by 10.9%, as the “growth” style continues to lag its “value” counterpart to the tune of over 10% so far this year. The NASDAQ index is now down about 15% from its peak in mid-November last year.

The UK market continues to perform well and is actually the best of the majors so far this year: up by 1.9% year-to-date, which puts it just ahead of Emerging Markets which are up by 1.6%. Within the FTSE All Share, it continues to be the FTSE 100 that leads performance, up a further 1.9% last week to take its returns for the year to 3.8%. This is in contrast to the FTSE 250 which is actually down by about 6% for the year-to-date, although it did bounce by about 1.6% last week. As we’ve noted in recent posts, the outperformance of the 100 index is very much due to its sector composition. It has a 10% weighting to the energy sector which is up by 25.4% year-to-date and an 18% weighting to the financials sector which is up by over 10% year-to-date (with the banking element up by 20%). Last week in the FTSE 100, IAG was the best performing stock (up by 12.6%), closely followed by Antofagasta (up 11.4%) and Informa (up by 10.4%), with Evraz (-8.9%), Ocado (-8.3%) and Spirax-Sarco Engineering (-6.5%) at the other end of the pile.

Despite taking a back seat to what’s been happening on the macro side (particularly regarding interest rates and inflation), corporate earnings continue to be pretty decent. The US is now just over 70% through its earnings season and has seen growth of about 30% for the 4^th quarter of 2021 (vs expectations of 21.3%) and about 45% for 2021 as a whole. However, companies are not beating earnings estimates by as much as they’ve done in the last few years, and 73% of companies that have conducted earnings calls have cited “inflation” during their call; this is the highest reading since 2010 which has put pressure on estimates for net profit margins.

Global stock markets had actually been going along quite nicely last week until they were hit by a higher-than-expected US inflation number on Thursday and the associated pressure on rate rises that that brought with it. Headline US CPI came in at 7.5% last Thursday, which is the highest level since February 1982, with Core prices (which exclude food and energy), rising by 6% – the most since August 1982. Both of these numbers were more than the consensus had been expecting. Added to this, there were some hawkish comments from the St. Louis Federal Reserve President James Bullard, who said he’d like to see 1% of rate hikes by July 1^st. This really got the market’s attention and hit the bond market, not least because Bullard has previously had a much more accommodative view regarding inflation.

The bond market was (once again) where the drama was last week, and it mainly focused around a faster pace of interest rate hikes being priced in for the US economy. There are now six rate hikes priced in for the US this year, with a greater than 50% chance that there is a double hike (i.e. one of 0.5%) at their 16^th March meeting. This is a big change from the start of this year when just three rate hikes were being priced in by the bond markets, and an even bigger change from this time last year, when there wasn’t a rate hike priced in until 2024! This increased pace of rate hikes has put pressure on the bond markets.

Last week saw US 2-year bond yields reach their highest level since January 2020 and the US 10-year bond yield surpass 2% for the first time since the summer of 2019 (it finished the week yielding 1.94%). These moves (notably in the 2-year part of the curve) made for some flattening of the US yield curve such that it was at its flattest (43 basis points of steepness) since August 2020. This is an important watchpoint as the US yield curve has been an excellent predictor of recent recessions (preceding recessionary environments the yield curve has become inverted).

UK Government bonds were down by 1.5% on the week, which takes them down 5.9% for the year-to-date. UK Corporate bonds fared a little better last week but were still down by 0.6%, which sees them down 5.5% year-to-date. Most of the downward pressure has come from the rise in bond yields, but credit spreads have also started to widen. UK investment grade spreads have widened by about 0.2% this year and now are at around 1.34%, whilst US high yield spreads have widened by 90 basis points for the year-to-date and now stand at around 3.67%. Local Currency Emerging Market bonds have been the best amongst the performing areas of the bond markets this year and are up by about 0.9% year-to-date in GBP terms, having risen by about 0.3% last week.

Gold was a beneficiary of the higher inflation numbers last week, with bullion rising by 2.3% on the week, which takes it back into positive territory for the year. It closed out the week at a price of $1858, which is well through its moving average levels and hasn’t been seen since November last year.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

US Inflation data came out higher than expected last week, with CPI at its highest level in 40 years! This hit the bond market as a faster pace of interest rate rises was priced in.