Weekly Update – 21 March 2022

Stock markets rebounded strongly last week, with the global index of shares enjoying its best week since November 2020. Optimism about a peace deal in Ukraine, falling oil prices, promises of more stimulus from China and rate hikes that recognised the strength of the economy were all amongst reasons for the rally, but in reality, a lot of it was just bouncing off what were very over-sold levels. We’d expect the focus to remain on the war in Ukraine this week, but would also note UK inflation data and the Spring Statement (the budget) which are both on Wednesday. In addition to that, we have global flash PMI data which is due out on Thursday and will give a good insight into how recent price squeezes have affected corporate confidence.

Last Week

• Global stock markets had their best week since November 2020
• Chinese stocks had a rollercoaster week – including their biggest one-day gain since October 2008
• UK stocks had a good week, driven by the FTSE 250
• Central Banks took centre stage, with hikes from the BoE and the US Federal Reserve
• Bond markets struggled to make headway
• Commodity markets gave up ground after a very strong recent run

This Week

• It’s a much quieter week than last, with less in terms of scheduled events in the calendar. Developments around the war in Ukraine are likely to remain as the key focus for markets this week.
• UK inflation data is out on Wednesday; expectations are for CPI to come in at 6% and RPI to come in at 8.2%. We then have the Chancellor Sunak’s Spring Statement later on Wednesday. UK Retail sales data is due out on Friday.
• Thursday sees the Markit manufacturing & services flash PMIs from the US, UK and Eurozone.

Last Week’s Highlights

Stock markets enjoyed their best week since November 2020, with the global index up by 4.6% and markets such as the US, Japan and Europe all up by over 6% in local currency terms. Stocks were supported by a few factors last week: falling oil prices (WTI down over 4%), news that Russia had avoided a technical default on its sovereign debt, talk of negotiations to end the war in Ukraine and a Federal Reserve meeting which was in line with what the market expected. Specifically, it was the big Consumer Discretionary and Tech stocks which enjoyed the best gains: up 8.8% and 7.7% respectively on the week. These were amongst the most over-sold sectors and still remain the worst performers on a year-to-date basis. This saw the “growth” style rise by over 7.5% on the week, with big gains in names such as Mercadolibre (+31.4% on the week), Nvidia (+18.1%), Salesforce (+9.2%) and Amazon (+9.1%).

Chinese stocks had a particularly volatile week, with the Hang Seng index falling over 10% on Monday and Tuesday (reaching its lowest close in six years), before rising by 15% on Wednesday and Thursday, enjoying its biggest one-day gain since October 2008 (rising by 9% on Wednesday alone). These moves were even more pronounced in the Hang Seng Tech index, which fell by nearly 20% on Monday and Tuesday and then rose by nearly 22% on Wednesday alone. The selling pressure in the early part of the week came on the back of increased regulatory scrutiny from the US Securities and Exchange Commission (demanding detailed audit reports) as well as a heightened COVID outbreak in China. The bounce was then triggered by the Chinese authorities promising measures to “substantially” boost economic growth and keep financial markets stable.

The UK FTSE All Share rose by 3.8% on the week, with the FTSE 250 rising by 4.7% and the FTSE 100 rising by 3.6%. Within the FTSE 100, Smurfit Kappa was the best performing stock on the week (up by 13.8%), with Intermediate Capital Group (+13.4%) and Entain (+12.7%) also posting strong gains. Avast (-11.5%), Glencore (-6.3%) and Anglo American (-5.5%) were amongst the worst performers, with Polymetal in bottom spot, down by 28.6% on the week.

Central Banks took centre stage last week, with the US Federal Reserve, the Bank of England and the Bank of Japan all meeting. The US Fed hiked interest rates by 0.25% to an upper bound of 0.5% and noted that they would begin reducing their near $9 trillion bond holdings as early as May. They also released their famous “dot plot”, which suggests that there’ll be a further six hikes this year, 4 in 2023 and none in 2024: taking the policy rate to 1.9% this year and 2.8% by the end of 2023. The Bank of England rose rates for the third time in as many meetings (to 0.75%) and raised their inflation projection, noting that they expect it to reach around 8% with upside risks in the near-term. However, the tone from Governor Bailey was more dovish than we’ve had previously, noting that “some further modest tightening in monetary policy might be needed in the coming months”. The market now expects about 4.5 more rate hikes from the Bank of England this year, taking the year-end rate to somewhere between 1.75% and 2%. The Bank of Japan retained its dovish stance, keeping short-term policy rates at -0.1% and its target for the 10-year JGB yield at around 0%.

Government bond markets generally struggled last week in the face of higher yields, whilst credit markets rallied. UK gilts gained by 0.05% on the week, with the 10-year bond closing the week with a yield of 1.49%, whilst US Treasuries lost about 0.9% in value as the 10-year Treasury yield rose to 2.15% by the end of the week. Credit rallied, with Sterling Corporate debt up by 0.37% on the week and global high yield markets up by about 0.9%. The US yield curve came under pressure last week on news of the rate hike by the Fed, with the 2s10s spread closing out the week at a spread of just 21 basis points. This is a key watchpoint, as yield curve inversion (when it drops below zero) has been an excellent indicator of recession and is hence something market participants watch very closely indeed!

Commodity markets gave up some ground last week, with the Bloomberg Commodity index falling by 3.5% on the week and Gold falling by 3.4%. That being said, commodity markets do still remain one of the best performing areas of the asset markets, with the broad index still up about 27% for the year-to-date.

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.

Chinese tech stocks are having a wild ride this month, with the Hang Seng tech index enduring a bear market (-20%) already in March and then a 30% bounce off the bottom…