Weekly Update – 07 March 2022
Uncertainty over the war in Ukraine made for another very choppy week in markets, with UK and Continental European stocks bearing the brunt of the selling. Commodity markets were the main beneficiary, as prices squeezed higher, with the Bloomberg Commodity Index returning its best week ever. This theme is very much in play this morning, with energy prices continuing to spike and risky assets in depressed mode. Although there’s some fairly key data points this week, we’d expect these to be overshadowed by the war in Ukraine and any developments to that end.
Last Week
- Stock markets fell last week, with UK and Continental European shares bearing the brunt of the selling.
- Commodity markets benefitted, enjoying their best week ever.
- Gold closed the week at its highest level since August 2020.
- Government bonds performed well as yields fell.
- Economic data was decent but was overshadowed by the crisis in Ukraine.
This Week
- It’s a busy week for financial markets, but the main focus will remain on the Ukraine.
- The European Central Bank are meeting on Thursday, following a flash CPI reading last week which saw the measure at its highest level recorded (5.8%).
- Thursday also sees the release of US Consumer Price Inflation, with prices expected to rise to a rate of 7.8% year-over-year. This will be the last big data point before the Federal Reserve have their meeting on the following Wednesday.
- Alongside this, there’s a host of UK companies reporting results this week: Ashtead on Tuesday, Legal & General on Wednesday, National Express and Savills on Thursday and a trading update from Berkeley Group on Friday.
Last Week’s Highlights
It was another extremely choppy week in markets, with the crisis in Ukraine weighing heavy on asset prices. Global stock markets fell by 1.7% on the week. The UK stock market (having held up very well indeed up till now) was one of the biggest fallers, dropping by some 6.7%. This takes the FTSE All Share down by 7.3% for the year now, with the large cap FTSE 100 down by 4.9% and the FTSE 250 down by 17.2%.
Within the FTSE 100, any stocks with Russian exposure were hardest hit, with Polymetal down by 79% on the week and Evraz down by 71%. ITV was also a big faller, down by 33.5% on the week following the announcement that they’d be investing more in a new streaming service, ITVX. London Stock Exchange was the best performer in the FTSE 100 on the week (up by 12%), with Rio Tinto (+6.4%) and BAE Systems (+5.9%) in 2nd and 3rd spots respectively.
European stocks in particular have been casualties of the crisis, with the Continental European index (which has a fair amount of exposure to Banks) down by 9% on the week and by 17.7% on the year. This was the worst-performing region of the week within the global benchmark and is the worst-performing region for the year-to-date.
From a sector perspective (within the global market), Energy and Materials were the only areas to post gains on the week, with Banks (-5%) and Financials (-3.4%) hardest hit. Despite this pull-back in Banks, the “Value” sector still remains comfortably ahead of its “Growth” counterpart for the year-to-date (ahead by about 11%) and was also ahead by about 2% last week.
As has been the case for much of this year, the biggest upside moves last week came from the Commodity markets. WTI Crude Oil gained by 26% on the week, which sees it up by over 50% for the year-to-date. This has made for a 31% rise in the broad-based Bloomberg Commodity index, with the index back at 2011 levels in GBP terms now. The Bloomberg Commodity Index rose by 14.4% last week in GBP terms, its biggest weekly gain ever. Energy has clearly been a big driver of the gains here, but the spike in food prices has also been key: “Grains” account for circa 23% of the Bloomberg Commodity index, and Russia and Ukraine account for circa 25% of global wheat exports. Wheat has risen in price by about 50% this year, with other grains such as Soybeans and Corn up by over 20%.
Gold performed very strongly last week, with Bullion up by 5.5% in GBP terms and Gold Miners up by 6.9% on the week. This move now takes Gold Bullion up by over 10% so far this year (in GBP terms), with gold mining shares up over 12%. The Gold price closed out the week at a level of $1970, which is the highest level we’ve seen since August 2020 and not too far off the all-time-high of $2063/Oz that we saw on 6th August 2020.
Some of the measures taken against Russia which have created these extreme moves in prices include the exclusion of several Russian lenders from the SWIFT international banking network, the removal of Russian securities (by MSCI) from certain indices and the blacklisting of the Russian Central Bank, thus making it impossible for Western Banks to transact with the Central Bank of Russia and effectively writing off Russia’s $640bn of foreign exchange reserves. These measures have led to a collapse in the Russian Ruble, with the Pound now 50% stronger than the Ruble for the year-to-date. The Ruble is now trading at record lows against most major currencies.
The government bond market acted as a “risk-off” asset last week, with UK gilts up by 2.3% on the week and US Treasuries up by 1.2%. Chair of the Federal Reserve Jerome Powell gave a Congressional Testimony on Wednesday and Thursday (with the Fed now in blackout period ahead of their 16th March meeting). He said it was “too early to say” if Russia’s invasion would change the Fed’s policy, but did note that policymakers should “move carefully”. He noted he was inclined to favour a 0.25% rate hike in March as opposed to the 0.5% increase that markets had been pricing in just three weeks ago. Despite the shift in outlook, the bond futures markets are still pricing in five rate hikes by the Fed this year (it was seven in extremis). This has put pressure on the yield curve, with the 2s10s part of the curve now at its flattest level (about 26 basis points) since March 2020. This is clearly something to watch as it has been an excellent omen at predicting recession.
Elsewhere in bond markets, Sterling Corporates were fairly strong (up by 1.2%), whilst High Yield (-1.3%) and Emerging Market debt sold off. High yield spreads are now back at levels not seen since Autumn 2020, with global high yield spreads at 513 bps and US high yield spreads at 375 bps, with both having risen by about 100 basis points so far this year.
Economic data massively took a back seat last week to the crisis in Ukraine. However, the US jobs data on Friday was actually pretty encouraging. 678,000 new jobs were seen to be added in February which was sizeably more than the 423,000 that Bloomberg economists had been expecting. Also, wages were shown to have declined (AHE down from 5.7% in January to 5.1% in February) as more workers returned to the labour force; the participation rate ticked up to 62.3% from 62.2%.
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.
Gold bounced strongly last week and closed at its highest level since August 2020, and is now very close to its all-time-high
