CMCC Investment markets overview Quarter 1, 2022

Global financial markets experienced some significant movements in the first quarter of 2022. The invasion of Ukraine by Russia began in late February. March was a dramatic month, driven by the events in Ukraine, commodity prices soared. Other influencing factors visible during the first quarter of 2022 were inflation, bond market swings, and rising interest rates and monetary policy shifts by central banks. In March, European inflation hit a new high of 7.5 % per annum and while European economic growth is still strong, it is expected to slow in 2022/2023. The reaction in bond markets has been considerable, with European government bonds down 5.3 percent year to date. Global stock markets, on the other hand, have proven resilient, with markets returning to pre-crisis levels as at the end of March. So investors who have been patient and stayed the course despite the dramatic events occurring around the world have seen their portfolios withstand the short term volatility.

Source: Bloomberg 01.04.22

Ukraine-Russian war dominates headlines

The war in Ukraine continues to dominate headlines adding to the challenges faced by investors in the past month. Its impact on energy prices and food prices has been a significant driver of rising inflation especially in Europe where there is such a high dependency on Russian energy. The indirect effects of the conflict have also been seen in a drop in business and consumer confidence in the past month in both Europe and the US. However, equity markets have bounced back towards the end of the month, partly as US economic growth continues to be strong and partly that at least peace talks have been taking place.

Inflation numbers worse than expected again

It’s all about inflation in Europe right now, which hit a record 7.5% p.a. in March. Headline numbers for Germany, France and Spain all reached levels not seen in decades. German inflation reached 7.6% in the year to March, driven largely by energy costs. Spanish inflation at 9.8% is the highest since 1985 and it too was driven largely by food, fuel and electricity. US inflation reported earlier in the month, showed a headline rate of 7.9% and prompted a significant shift in tone from the US Federal Reserve (“The Fed”). Chairman Powell’s comments made it very clear that US interest rate rises would be accelerated to dampen inflation.

Will commodity prices keep rising?

Oil prices have fluctuated throughout March, reaching a recent high on 08.03.22 at $139 a barrel, to the start of April when West Texas oil briefly fell below $100 a barrel. At least part of the easing in prices is explained by the US announcement that it will release roughly a million barrels per day from its oil reserves. The release of such a volume of oil onto the market should help stabilise prices somewhat, even if the history of these interventions has often given only temporary relief. 

Gas prices have been exceptionally volatile as the market has grappled with Russian demand that payment be made in Rubles. While gas prices are down from their highs earlier this month, the final week of Q1 saw prices rising once again.

Wheat prices, which had also spiked earlier in the month, fell back in late March, although they remain approximately.20% above pre-war levels.  

Chinese economic growth slows

China has seen a resurgence of Covid-19 which has seen a drop in business confidence about the near-term for its economy)[1]. Businesses in some parts of the country have temporarily cut production due to the rising numbers, which is slowing the Chinese economy.

Western economies resilient

The US economy continued to perform well despite the challenges of rising inflation and the conflict in Ukraine. US employment levels by the end of March were within 1.5 million of pre-pandemic levels having added 490,000 in March and 678,000k in February. Expectations of the US manufacturing sector continue to show expansion on the near-term horizon. That said, US consumer sentiment has slipped to its lowest level since August 2011.[2]

In the Euro area, unemployment fell to a record low of 6.8% in February, the lowest since records started in 1998[3]. While there can be little doubt the European economy faces more an impact from the war in Ukraine, it too is still holding up in the near-term

In Summary…

Against this backdrop, the investment environment continues to be uncertain for the weeks ahead. There has been a significant adjustment in the bond market in response to rising inflation pressures and we may have most of this behind us. The equity market, which has proven resilient thus far, may yet see further volatility in the weeks to come.

Economic growth has remained above trend and while it may slow, it is remaining largely supportive for equities when we look out over a slightly longer time horizon. For the year ahead, while the risks have undoubtedly risen our view remains that equities will outperform.            

[1] Source: Xinhua 31.03.22

Sources: 1 Bloomberg 01.04.22 2 Bloomberg 31.03.22 “ECB’s upended inflation views means traders set for hawkish turn”

[2] Source: Trading Economics 01.04.22

[3] Source: Eurostat 01.04.22