21 February 2022 - Volatility is here to stay



Yet another week of equity market weakness across the globe. Defensive sectors such as Real Estate, Food & Beverages and Utilities performed relatively well in a down market last week, while the cyclicals (Energy, Financials) were the worst performing ones, but coming off big rallies this yearAs investors are still struggling to forecast how aggressive the FED will be this year with respect to the monetary policy, the Russia-Ukraine situation adds another source of pain to an already fragile market.. Volatility will be high again this week, in both directions, however, as any positive news/signs of avoiding a conflict will lead to strong rebounds, and vice-versa.


Asia managed to perform better, and in particular China, which finished with weekly gains, in a sign that the local market could decouple from the rest of the world this year. Having tightened monetary policy in 2021 to avoid bubbles in the economy and intentionally slowing it down, the Chinese authorities have already taken some initial measures to re-ignite economic activity. We are closely monitoring the credit (loans) growth which showed last week another sign of acceleration, after months of slowdown.


The minutes of the last FED meeting did not reveal any more hawkishness than already priced in the market. On the contrary, the view that the FED should raise rates immediately by 50bps in March and move faster thereafter does not seem to be a consensus (yet) but rather concentrated to a very few members and was not even discussed extensively.


However, the Producers Price Index in the US (PPI) continued to move higher in January at 9.7% vs the expectations for 9.3%, providing more nervousness.


In stark contrast, the Chinese January CPI (consumers inflation index) moved lower to just 0.9% on a yearly basis. China does not have inflation issues which gives the authorities plenty of room to cut interest rates in order to stimulate the economy.


The US January Retail Sales was a strong number, double than forecasted, as it came in at 3.9% on a monthly basis vs expectations for 1.9% As a reminder, retail sales slumped in December, with the explanation back then that consumers had proceeded with their holiday purchases in November to avoid delays. This number signifies that the US consumer remains strong.


Several companies in the US announced increases in their dividends last week, among which were Walmart, Coca Cola and Cisco. We should highlight again that the increase of dividends is one of our investment themes for 2022, offering the possibility to strategies which follow this theme to potentially outperform in this difficult year. Especially in Europe the bulk of the dividend season is about to start and typically lasts until May, a period which provides support to share prices.


Government bonds moved higher (in price) with yields falling globally, for multiple reasons, the most important being the geopolitical tensions, which provide buying interest for the “safe-havens” of German and US bonds. The fact that the FED minutes did not provide any more bad news combined with the previous aggressive move higher of yields have created significant levels of resistance temporarily. The 10-year US Treasury yield dropped to 1.93% from 2.03% and the German equivalent to 0.19% from 0.30%.


The USD was the main beneficiary of the Russia situation, finishing higher against most major currencies. The EURUSD traded all the way down to 1.13, from almost 1.15 at the start of the week.


Oil prices fell from the recent highs, as the WTI Crude seemed ready to approach the 100$ level but retreated towards 91$.


Gold moved significantly higher to almost 1900$, reminding the world that it still exists as a potential hedge for equity market turmoil.



Charts of the Week


Gold has started the year in a volatile manner, as most asset classes. After the run to 2’070$ in the summer of 2020 and the buying-spree by investors who wished to hedge for the upcoming high inflation, it has lost ground since then, even if the inflation numbers did finally rise to the highest levels in 40 years in the US. After falling to a low of almost 1700$ one year later, in the summer of 2021, it has traded in a rather tight range of 1750-1850$. The yellow metal has repeatedly disappointed its investors during the last few years, as it failed to provide protection at times of equity market volatility, while the rise of interest rates adds another negative force for its path. However, this week, Gold managed to attract again buying interest and rose to the highest level since April of last year, thanks to Putin. A break of 1900$ could give confidence that the 2’000 mark could be next.



Nasdaq’s technical picture looks gloomy. The Technology-heavy index is down almost 15% this year and in mid-January it fell below its 200day moving average (green line), which signals a potentially longerterm weakness. Although it managed to rebound impressively when the index approached the 20% drop from its highs (a significant support level) at the end of January, its rally did not manage to bring the index above that technical indicator. Even more impressively, during a week when investors were looking for safe havens within the equity market, Technology did not manage to outperform, as one would have expected, but slumped by more than 2%. Valuations have improved significantly vs the highs of last year, but investors seem to be convinced for now, that the damage done by higher rates will be more lasting.




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