The year started with yet more poor inflation figures and multiple comments from the Federal Reserve of “we really mean it”, as yields rose the stock markets switched from six months of hammering non-profitable tech to a much broader sell-off that dragged in big (profitable) tech. A warning from Netflix of slowing subscriber growth provided a further spur and a near 40% fall in their stock price to start the year.

Bond markets sank, the UK 10-year gilt has fallen around 5% since early December and the 30-year by 12%, taking the yield on the 10-year back up to 1.2%. Similarly, in America, the 10-year yield has risen to 1.8% while, in Germany, the 10-year Bund briefly made it back to a positive yield for the first time since early 2019. Possibly it will be a shock for the German treasury to have to pay their bondholders for the privilege of owning Bunds.

The Bank of England raised base rates in December, our best guess is for them to raise again in February (to 0.5%), a level that would allow them to stop re-investing the proceeds of maturing Gilts. Market expectations for moves by the Federal Reserve have moved on, four increases over the year are now being discussed widely (possibly it might be more pertinent to consider the quantum of these moves rather than the number). We still expect to see inflation easing next year, but not as much as central banks might wish. An easing in inflation can’t come soon enough for the UK Treasury, interest payments for December are estimated to have risen to more than £8 billion from less than £3 billion last year, thanks to those index-linked payments.

Rising tensions in Ukraine are only adding to the febrile conditions in markets. We have nothing useful to add to the analysis of what President Putin may or may not be up to, only to observe that with this much notice (round 1 was in March 2014), Russia must expect to pay a high price for an actual invasion. Of course, this is also having an impact on the price of oil, more inflation pressures…

The reaction in equity markets has been rough for ‘growth’ companies, notably in the tech sectors, while ‘value’ sectors, particularly oil companies, have rallied hard. From the start of the year to yesterday’s lows, the NASDAQ fell 16% while the S&P 500 was down 11. As above, NASDAQ has been ‘re-pricing’ many of the ‘non-profitable’ tech stocks for the past six months now (before the recent move, Berenberg were observing that around 40% of NASDAQ stocks had now fallen 50% from their highs), what has changed this year is the shift to the profitable companies. Alphabet, Amazon, Apple and Microsoft have fallen 10% to 14%, there is a whiff of capitulation in the air, along with some pain.

Yields do need to rise, we have been going on about this for some while now. Ultimately this should be seen as a positive, in the meantime we must expect more volatility as the reality of higher rates meets geo-political problems, inflation and some turmoil amongst holders of equity.

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