It is quite testing to write a coherent commentary in the circumstance of ever more aggression from President Putin.

Clearly he is breaking the terms of the Minsk Protocol and subsequent Minsk II agreement, moving on to an actual Russian invasion of the rest of Ukraine and subsequent war would be a ghastly human tragedy and the biggest threat to global peace since the 1960s. Longer term, the resulting isolation and costs to Russia will almost certainly backfire to their great disadvantage, but that is longer term.

In the short-term this has spurred a further jump in energy prices and yet more inflationary pressures. Central banks had kick-started the raising of rates and the game is now one of guessing quite how many times they might be lifted this year. Even the ECB has blinked and recognised that a move might be in order before the end of 2022.

Bond markets sank again, taking the UK ten-year gilt yield back up to 1.6%, a level not seen since autumn 2018, tension in Ukraine has seen this pull back to 1.4% in a ‘flight to safety’ move, but still a significant move from the levels around 1% at the turn of the year. The pattern was the same in America, where the ten-year yield cleared 2% before pulling back to 1.9%. German yields have also risen again and the gap to the Italian ten-year yield (1.9%) has widened, one to watch…

As we had suggested, the Bank of England did raise base rates in February to 0.5%, a level that allows them to stop re-investing the proceeds of maturing Gilts. They also stated that they would sell their holdings of ‘non-financial’ corporate bonds (rather limply they had not wanted to be seen to be supporting banks), though the timing of this is quite woolly “a programme of corporate bond sales to be completed no earlier than towards the end of 2023”. As above, the question now is how many times the Fed and the Bank of England will raise rates during 2022, the Bank hinted at 1.5% by mid-2023, though, of course, the timing and magnitude of these moves may easily be affected by developments in Ukraine and subsequent uncertainty.

Inflation continues to shock, CPI hit 7.5% in the US and 5.5% in the UK (much worse on the RPI measure, but we’re not supposed to talk about that one any more). All under-scoring quite how ‘behind the curve’ the central banks are, naturally this is beginning to impact wage negotiations, back to the Bank’s Monetary Policy Report projections: “Underlying wage growth is materially stronger than in November over the coming year, given the greater tightening in the labour market than expected…” In passing I would observe that press reports of a ‘cost of living crisis’ are probably overdone, fuel price rises, tax increases and rising rates will hurt, but the recovery is more robust than acknowledged, household finances are strong and the jobs market is booming. We remain of the view that inflation will ease as the year progresses, but not as much or as fast as central banks might wish.

Equity markets have continued to be jumpy and volatile, though the headline indices are not significantly lower over these past four weeks. The quarterly reporting season in the US produced good results in the round but there were a few shockers, most notably from Meta Platforms (Facebook), which collapsed by more than 30% after warning of a loss of users as competition from TikTok grew. Consumer discretionary stocks struggled, though Amazon.Com was a bright spot gaining 9% after good figures. Industrial and technology stocks were generally weaker while the oil majors and mining stocks gained.

Uncertainty continues to rule and volatility is to be an on-going feature of this first quarter. Opportunities are coming into view in the markets, let’s hope for some diplomatic breakthrough with Russia. Beside the poor people of Ukraine, the Taiwanese must be getting increasingly nervous.


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