Moving closer to the end (?)

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Equity markets fell again last week, with Europe feeling the heat.

Eurozone shares fell on average by 10%, while the Swiss and the UK markets managed to lose “only” 5%-6%. The US markets fell by 1.5% on average, but Nasdaq was weaker again, falling by almost 3%. Asia also performed much better than Europe with 2% drops on average. In terms of sectors Oil companies continued their ascent, while our favorite defensive sectors such as Healthcare and Real Estate finished the week almost unchanged, which is a miracle in such a negative environment.

 

European equities staged a remarkable rebound last week, while US markets slumped.

It seems that there are two themes influencing markets at this stage: a) the hope that the military conflict is probably going to end in the coming days, which is positive for the beaten-down European markets and b) the fact that the central banks appear very willing to continue the tightening of their monetary policies, which hurts primarily the US markets as the FED is about to raise rates. In this environment, China should have behaved as a relatively “safe-haven” given the fact that it does not have an inflation problem and the central bank will actually cut rates. But the performance of its equities markets has deteriorated in the last two weeks, as it is considered an “ally” of Russia and sanctions could come against it too.

 

In terms of sectors, Energy continued to perform well

but fell from its highs as reports are calling for Putin to be ready to make compromises in order to end this tragedy, which has also been hurting Russia immensely. The interest-rate sensitive sectors in the US, such as Consumer Staples (food, household products etc) and Technology fell by almost 4%, because of the rise in bond yields. However, these should do well when the economy potentially slows down in a few months from now. Investors should perhaps take advantage of these dislocations in the markets and add to positions, especially in these defensive sectors.

 

The ECB surprised with its hawkishness. In particular, it announced a faster than anticipated end of its bond buying program, which should end in early summer than towards the end of the year. However, they also changed the wording for the timing for the potential first interest rate increase from “shortly after the end of the program” to an undefined period of time. These two put together show a central bank determined to fight inflation before it becomes a permanent anticipation in the consumers’ minds. Lessons from the 70s have been learned, we hope.

 

The FED will have its own show this week, on Wednesday, when it is expected to raise interest rates by 0.25%. The US is having a much larger inflation issue than the Eurozone at this stage and the FED will chose to go down the path of targeting inflation and engineering an economic slowdown, probably acknowledging that this could have an impact on the markets. Of course, a deep correction in US equity markets is an outcome that the FED will want to avoid. The issue is that many analysts and commentators are making analogies with the 70s, and although there are chaotic differences from that period, one must look back and draw conclusions. Doing this, one sees that to avoid re-living the shock of the 70s, the central banks must prioritize the fight against inflation over the impact on the economy of their tightening the ultraloose monetary policy.

 

The February US inflation rose further but was in-line with expectations. The CPI index moved to a new high of 7.9%, while the core CPI which excludes food and energy rose to 6.4%.

 

Commodity prices fell from their highs, as the negotiations between Russia and Ukraine seem to have intensified and are probably entering their final stage. Oil prices fell to around 105$ from the highs of almost 130$, in two days. Gold reached a high of 2075$, but also fell below 2000$ again.

 

Government bond yields moved significantly higher and to levels seen before the start of the war. The 10-year US yield returned to 2.05%, up from 1.70%, showing that another safe-haven proved to be short-lived.

 

In corporate news, Amazon announced a 20:1 split for its stock. More companies announced an exodus from Russia, albeit temporary. McDonalds, Starbucks, Coca- Cola, Pepsico were among these.