Today marks the start of April and with it many will be playing pranks on their friends and relatives in reference to April Fools Day. Looking back over this past week, rampant European inflation data has left the European Central Bank (ECB) looking rather foolish.
German inflation came in at 7.6% this week and Spanish inflation surprised at 9.8%, a multi-decade high. So far, the ECB has been behind the curve with regards to inflation, but this week’s data is going to put more pressure on them to act and raise interest rates in an effort to curb inflation. The bond market reaction this week has begun to price in a shifting in ECB policy with bond yields rising across the board. The yield on the 2-year German bund turned positive for the first time since 2014 while the 10-year yield on Italian government bonds is now through 2%. One of the contributors to inflation is the war in Ukraine, which has pushed commodity prices higher. The war has also had the effect of knocking consumer and business confidence which will cause growth to slow. On Wednesday ECB President Lagarde acknowledged these headwinds during a speech and stated the longer the war persists the higher the economic costs would likely be.
Russia-Ukraine peace talks took place in Turkey this week. Initial hopes of progress led to equity markets rallying, although towards the end of the week there was little sign of any meaningful progress on the ground and equities gave up some of the recent gains. Despite this, global equities have rallied strongly over the last three weeks, recovering a significant portion of year-to-date losses. The US equity market has been a bright spot during March, in part due to its distance from the conflict and limited reliance on Russia for energy needs. Apple, the largest share in the S&P 500 rose on Tuesday for the 11th consecutive trading day, the share’s longest winning streak since 2003 and took the market capitalisation of the company close to $3 trillion. Tesla announced a stock-split on Monday and on the back of the news the shares rallied around 8%, adding roughly the value of Volkswagen to Tesla’s market cap.
Putin’s demands that payments for Russian gas from ‘unfriendly’ nations be made in Roubles led to significant volatility in European gas prices. On Thursday morning there were reports that Putin would accept Euros, but then later in the day stories broke that Putin once again demanded payments in Roubles. The gas price fluctuated by a massive 18% at times during Thursday.
It felt like déjà vu in the UK, with a Canadian company approaching a UK business for the second week in a row. After Brookfield’s rumoured pursuit of Homeserve, the market was made aware of Royal Bank of Canada’s £1.6 billion offer for Brewin Dolphin. The news propelled Brewin Dolphin’s share price over 60% on Thursday morning and once again highlights the value foreign entities are seeing in UK listed businesses. Staying with the UK, housing data continued to be very strong, with house prices rising on average by 14.3% year-on-year, the fastest rate in 17 years.
As is customary for the first Friday of the month, US Non-Farm Payroll data is released. The figure showed 431,000 jobs had been added to the economy, highlighting the continued strength in the labour market. Unemployment fell to 3.6%, while average hourly earnings came in ahead of consensus at 5.6%. The underlying strength of the US jobs market is likely to encourage the US Fed to continue on their tightening path.
The first quarter of 2022 has been a challenging one for investors with a wide range of asset classes falling over the period, driven by big shifts in interest rate rise expectations and latterly the Russian invasion of Ukraine. Despite these headwinds, it’s been pleasing to see portfolios rebounding from the lows in early March. We continue to believe that diversification in asset class and style will be important when trying to navigate more volatile conditions. Some of the best performing holdings in portfolios this quarter have been gold and infrastructure, two asset classes that wouldn’t typically be found in a traditional bond/equity multi-asset portfolio. We will continue to do the hard work and consider a wide range of asset classes to dampen portfolio volatility and capture investment opportunities, that going forward, could look a little different to the past.
Andy Triggs | Head of Investments, Raymond James, Barbican
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.