Equity market volatility has roared back as bond yields climb, inflation builds, the US reporting season progresses and Putin’s war grinds on.
Hardest hit have been the technology sectors, led by a 50% fall in Netflix, as those bond yields climb, the NASDAQ has sunk 11% since we wrote in March and is now down 20% over the year.
But it has not just been technology, the broader US market is down around 7%, European stocks around 6% and the Shanghai Composite by 9% as they struggle with COVID again. Once again, the FTSE 100 has presented a much calmer appearance, down by just 1%, thanks to its heavy weighting in BP and Shell along with the big mining companies, it certainly hasn’t felt like that. The same is true of Brazil’s Bovespa Index…
Inflation is the key and, for now, the figures just get worse: the US reading for March was 8.5% and 7% for the UK. We are probably at or close to the peak now, it should begin to moderate from here on. The US Federal Reserve has kept up a barrage of hawkish commentary and a series of half-point moves are now expected over the remainder of the year to get the Fed Funds rate up to around 2.5% by the end of the year. Naturally, markets have moved in anticipation taking the US ten-year yield up to 2.8% (it almost reached 3%), the UK ten-year Gilt yield reached 2% (a level not seen since 2015) prior to backing-off to 1.8% - lucky holders of the UK ten-year Gilt have seen more than 10% capital loss since December.
The Bank of England is in quite a bind (as are most central banks) as consumer confidence has slumped in the face of rising prices and terrible news. One has to wonder how far they will be able to raise the Base Rate in the short-term, though (as above) market rates have moved to anticipate a move with the two-year gilt yielding 1.5%. Having kept the base rate too low for too long, it is nearly fourteen years since it was first cut to 0.5%, there are a lot of people who have never experienced increasing mortgage payments, that won’t be a popular addition to fuel prices, National Insurance etc. etc.
The US dollar has gathered momentum again after pausing in March, gaining a further 5% on its DXY Index, notably against the Japanese yen (just look at those interest differentials). Sterling lost the $1.30 level and is now close to $1.25.
As one of the biggest offenders in the recent jump in inflation, the oil price is fascinating to watch at the moment (see below). From a low point of $65 per barrel in early December it had more than doubled by early March, getting close to $140 per barrel. The past eight weeks has seen progressively smaller swings in the price, it feels that this cannot last much longer and that the next move is approaching. A move below $100 per barrel would be nice, see chart, right.
With credit spreads quite elevated and government bond yields significantly higher, there is now value to be found in corporate fixed interest. An unfashionable thought to end this piece with, as corporate credit funds have been being sold aggressively for many months, but…
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