There are times when content for the weekly note can be hard to find. There are other times when the challenge seems to be finding a way to squeeze in all the key points into just a few short paragraphs that can be easily digested on a Friday afternoon. This is definitely one of those busy weeks with subjects such as Russia’s invasion of Ukraine, US and UK interest rate rises and China’s market intervention all needing to be discussed.
While the Russian invasion of Ukraine has continued, with strikes seemingly intensifying, there have been reports of a softening stance towards negotiations and the hope is that some sort of agreement can be reached in the near-term. These rumours of a potential agreement supported European equities, with the Euro Stoxx index up nearly 5% over the course of the week. UK markets were also once again strong this week, with the more domestically focused FTSE 250 index rising around 3.5% since Monday. The oil price has remained volatile throughout the week, at one point falling below $100 a barrel, but rising again on Thursday and Friday.
The US Fed raised interest rates for the first time since 2018, nudging base rates up by 0.25% to 0.5%. Given the recent strength of the US economy, coupled with inflation running at 7.9% currently, it’s staggering to believe policy has been so accommodative. The market, and indeed US Fed, believe they will need to continue to raise rates throughout the year in an effort to combat inflation and excess growth. However, economists have this week downgraded US growth expectations for 2022 and there is a risk of policy error here; that the US Fed raise interest rates too quickly into what is a slowing economy. On the back of the rate hike and hawkish language from Fed chair Powell US government bond yields rose, with the 10-year treasury hitting 2.2%, a post-COVID high. The Bank of England (BoE) followed suit on Thursday, increasing UK interest rates from 0.5% to 0.75%. The BoE struck a much more dovish tone, acknowledging that inflation is likely to be higher in the short-term due to the invasion of Ukraine, but that higher energy prices would be a drag on growth to net energy importing countries, such as the UK. The expectation now is the BoE may be slightly more cautious in raising rates going forward.
Chinese equities came under intense selling pressure early in the week as investors questioned whether China’s links to Russia could lead to Chinese sanctions. This was on top of concerns around regulation and the Chinese property market and was enough to trigger Beijing to intervene. The state council vowed to keep capital markets stable, support overseas stock listings, handle risks for property developers and said regulation for the technology sector would soon end. The news sent Chinese stocks higher, with the Hang Seng Tech Index up an incredible 14% on Wednesday. China and US tensions continue to be a little strained, so all eyes will be on the call between US President Biden and Chinese President Xi Jingping later this afternoon, the first time the two will have spoken since Russia’s invasion.
What appears like a challenging week has actually been positive for global equities, with most major indices advancing throughout the week, and this has fed through to our portfolios. Bond markets have remained challenged with inflationary pressures negatively impacting prices.
Next week’s note is likely to be a busy one once again; Rishi Sunak is due to deliver the Spring Statement on Wednesday, with energy prices and the National Insurance increase in focus. At a portfolio level we will try to assess the longer-term implications of any announcements, instead of trying to make short-term bets, which are often driven by luck as opposed to skill and notoriously hard to get right consistently.
Andy Triggs | Head of Investments, Raymond James, Barbican
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