Weekly Update – 28 February 2022
It was a very eventful last week for markets which saw Russia launch an invasion of its neighbour Ukraine early on Thursday morning. This remains a deeply distressing and tragic situation. Stock markets initially met the news in firm “risk-off” mode and global equities briefly moved into correction territory (with the US Nasdaq index entering bear market territory) before bouncing sharply to finish the week up by just over 1%. Uncertainty around this situation is likely to remain and we’d expect the markets to remain jittery during this time as events unfold. There is quite a lot of market data this week, but we’d expect the focus to remain very much centred on Russia and Ukraine.
Last Week
- Global stock markets rose last week, with the US leading the way, despite the invasion of Ukraine
- “Growth” areas of the equity market fared best as rate hike expectations were pared back
- The US Dollar performed very well which helped boost UK investors’ returns on US assets
- Commodities rallied, boosted by Russia’s high level of production of certain components within the broad index (namely Natural Gas, Wheat and Aluminium)
- Gold proved to be a good safe haven, rising by c1% on the week
- Bond markets gave up ground in a choppy week of trading
This Week
- There’s quite a bit in the way of economic and corporate data this week, but the overwhelming focus for markets will be on developments between Russia and Ukraine.
- There’s some key European economic data, with Euro Area flash CPI for February on Wednesday and Unemployment data on Thursday.
- Friday sees the US non-farm payrolls, with Bloomberg economists expecting a reading of 400,000 for February. This is the last big data point out of the US before the Federal Reserve’s blackout period ahead of their 16th March meeting.
- There’s also a fair amount of corporate news this week. Tuesday sees FY earnings from abrdn and Travis Perkins. Wednesday sees Aviva, Persimmon and Snowflake report and Thursday sees reports from ITV, LSE group, Gap and Best Buy.
Last Week’s Highlights
Global stock markets finished last week up by about 1.2%, despite all of the volatility associated with Russia invading Ukraine on Thursday. The move higher in global markets was driven by the strength of the US Dollar and the strength of the US market, thus benefitting UK investors. The US Dollar rose by about 1.3% vs the British Pound, with most of the rise coming on Thursday as the oft referred to “dollar smile” theory kicked in. This theory basically says that the US Dollar does well both when the economy is very strong and also when there is a big risk-off event, hence the “smile” shape to it. This, combined with the strength of the US stock market (c70% of the global index), helped boost returns for UK investors.
The moves in the US market deserve some mention as they were both very pronounced and driven by sectors that have generally lagged this year-to-date. The price swing on Thursday mainly came within the technology sector, with the Nasdaq index (which is very tech heavy) swinging by 6.8% intraday; this made for the largest intraday move since March 2020.
At a sector and style level, the biggest gains came from the “growth” areas such as technology, healthcare and parts of consumer discretionary. Part of the reason for the rise in these areas of the market had to do with falls in rate hiking expectations. With Russia invading Ukraine, the prospect of higher inflation (due to sanctions and lack of food and energy being sourced from Russia and Ukraine) rose which in turn weighed on global growth prospects. This caused the bond futures markets to rachet down their pricing for future interest rate hikes, with markets now “only” pricing one interest rate hike by the US Federal Reserve at their 16th March meeting as opposed to the two that had been priced just the week prior. This relieved some pressure on growth stocks, with some of the recent large cap under-performers having a good bounce back. Ones of note would be Mercadolibre (which rose by 20% on the week), Salesforce (which rose by 7% on the week), Microsoft (up by 5% on the week) and Nvidia (up by 3.7% on the week).
Although the FTSE All Share fell by about 0.5% on the week, there was wide divergence across the index, with the FTSE 100 being fairly flat and the FTSE 250 down by just over 2%. Unsurprisingly, the worst performers on the week in the 100 index were those companies with operations largely associated or based in Russia, with Polymetal International down by 32% on the week and Evraz down by 28%. Given Russia’s dominance in providing commodities to the global economy, those companies involved in this industry (but without major ties to Russia) benefitted significantly, with companies such as Anglo American up by 6% on the week and Glencore up by just over 4%.
Given Russia’s dominance in supplying global commodities, it was within areas of these markets that some of the biggest price changes were witnessed. According to figures by JP Morgan and the World Bank, Russia accounts for just over 16% of the total global production of natural gas, 12% of the world’s crude oil, c9% of the world’s gold and wheat and just over 5% of the world’s aluminium. This saw the Bloomberg Commodity Index rise by over 2% on the week, which takes its returns for the year to c15%. Amongst the biggest gainers on the week were Wheat (+5.4%), Aluminium (+3.7%) and Natural Gas (+1.8%).
Gold proved to be a good safe haven, rising by over 1% on the week, having got up to around $1976/Oz by midday on Thursday to close the week at $1889/Oz; it remains up over 4.5% for the year-to-date.
Although all economic data took a backseat to the tragic and unsettling events in the Donbas region, US economic data was fairly decent and helped to push bond yields higher (their having fallen sharply on news of Thursday’s invasion). Also of note, the core PCE deflator (the Fed’s preferred inflation gauge) came in at 5.2% (in line with expectations) and flash survey data (IHS Markitt PMIs) for February showed a faster pace of growth in both the manufacturing and service sectors.
Despite gaining sharply on Thursday, bond markets generally gave up ground on the week. UK government bonds fell by 1.2% and US Treasuries fell by 0.3%. This takes returns for the year for UK government bonds to -5.5%. UK Investment Grade credit markets also struggled, with the index falling by 1.15% on the week as spreads rose to 145 basis points (about 30 bps higher than that which they started the year). Global High Yield markets fell by about 0.7% on the week, with credit spreads also rising in these markets (with the global index closing the week with a spread of 452 basis points).
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.
Commodity markets were a big beneficiary last week, with the Bloomberg Commodity index now up over 14.5% for the year and Gold also bouncing well as safe havens were sought.
