Markets continue to be blown about by the aggressive actions of the ghastly Putin and renewed concerns about inflation.
Over this particular four weeks, some of the volatility has come out of equity markets but it has picked up again in the fixed interest and commodity markets. The price of oil has shot up, by around 20% this month and 50% higher over the year to date, adding dramatically to inflation fears.
The US Federal Reserve finally hiked rates by 25bp and the accompanying commentary from Chairman Powell has been notably hawkish, talking of seven more increases this year and the possibility of some being 50bp moves (egged-on, as ever, by James Bullard, President of the St Louis Fed). The Bank of England also increased the base rate by a further 25bp, though the voting and commentary were rather more cautious than the Federal Reserve. US Treasuries and UK Gilts have reacted strongly to reflect the change in outlook and inflation, taking the US ten-year yield up to 2.4% and the UK to 1.7%. That UK move takes rates back to the peak of 2018, one has to go back to 2015 to see higher levels.
European rates are now (finally) positive at five and ten-year maturities, a number are still negative down at the two-year end. Credit spreads have also widened in this environment but, in general, have not been as volatile as might have been expected. Sterling credit indices have only moved back to levels seen in September 2020, although euro area spreads have widened out to early 2019 levels. All of this is also being reflected in foreign exchange markets, where the US dollar has gained around 3% on its broad index and by a similar amount against sterling and the euro.
Having borne the brunt of the initial volatility, equity markets are somewhat calmer at the index level. Slightly more rationally, US markets are up around 4% over this period while most of the European markets have fallen around 2%. The storm has moved across to Chinese markets, Shanghai stocks have fallen 6%, having been down around 13% earlier in the month worried about possible sanctions and further regulation. Hong Kong suffered a 25% fall before recovering some of the losses.
Individual stock volatility does not show much sign of easing. Banks have been on a wild ride, having moved up strongly over the first six weeks of the year on the back of rising rates, they collapsed into early March, but are now recovering back to start of the year levels. Weakness has been evident in consumer facing stocks and many of the inflation-facing staple goods companies while the pharmaceuticals have rallied along with the major technology companies. The oil majors have been quite mixed in the circumstances, Exxon Mobil and Chevron (particularly) are comfortably ahead and Shell has gained around 4% but Total Energies and BP are both down. Both BP and Shell have announced their withdrawal from Russian joint ventures (accompanied by huge write-offs), Total’s position seems to be rather more ambivalent at present.
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