Europe
Russia – Ukraine Border Dispute
The dominating news last week has been the unfolding crisis along the borders of Ukraine with continued aggression highlighted by Russian armed forces appearing ready to invade Ukraine. The week began with news that the Russian military exercises had concluded, and several thousand Russian troops were to return to their home bases. This was followed by reports from the U.S. and U.K. disputing this case and that tension had increased along the Belarus-Ukraine border.
The week has seen continued attempts to discuss a resolution through diplomatic means, rather than military. Olaf Scholz visited both Volodymyr Zelensky and Vladimir Putin to continue the showcase of western leaders trying to find a peaceful resolution to the ongoing border dispute.
This week has led to vast swings among the financial markets around the world, and most notably within the Major European stock markets and the Russian stock market. Germany’s DAX Index tumbled 2.48%, Italy’s FTSE MIB Index gave up 1.70%, and France’s CAC 40 Index slipped 1.17%. The UK’s FTSE 100 Index pulled back 1.92%. The MOEX in Russia was up over 5% last week on the basis troops were to fall back from the Ukraine border but pulled back around 4.50% on Friday as the Kremlin remained with its stance on Russian troops surrounding Ukraine.
Elsewhere in Europe ECB policymakers talk down rate expectations, but chief economist changes their stance
The European Central Bank (ECB) discussed the potential for a rise in the Eurozone interest rate. There is inflationary pressure building within the eurozone and the ECB policy has been to remain loose with monetary policy. That could be about to change with disagreement appearing among the ranks at the top of the ECB. Christine Lagarde is still pushing for there to be no movement in the interest rate this year and alongside Francois Villeroy, France Central Bank Governor will instead look to end the bond buyback programme in Q3 this year. Philip Lane, the chief economist for the ECB, has shown there is scope that a tightening of the monetary policy instead may be on the way. He remarked “Inflation is expected to settle around 2% in the long term” which points toward the ECB potentially reviewing the interest rates upward in the Eurozone this year.
u.s
U.S. Markets continue to decline
The major indices were down in the U.S. for the second consecutive week as the potential of conflict in Ukraine and the continuing debate around interest rates and inflation harmed investors’ confidence. The potential for conflict in Ukraine saw huge swings again in the U.S. large-cap indices. Meta platforms continued to see a sharp decline in their stock value, and this weighed heavily on the performance of the markets last week. Consumer staples which are defensive stocks performed above average, with Walmart and Proctor & Gamble seeing strong weeks.
Within fixed income, investment-grade corporate bonds moved wider during the week as headlines regarding Russia/Ukraine tensions and an acceleration in U.S. producer price inflation weakened sentiment. The primary calendar was active periodically as sentiment stabilised, and the new deals were generally met with adequate demand.
Mixed Interest Rate Indicators
In terms of the impending interest rate hike in the U.S, there are mixed signals being portrayed. The minutes from the Federal Reserve meeting held in January spoke about the probability of a 25-basis point hike in interest rate which is below the 50-point hike in March. The St Louis Federal Reserve President, James Bullard, disclosed his opinion that the interest rate in the U.S. will increase by a full 100 basis points by July this year. This follows on from mixed economic data witnessed across the U.S. with weekly jobless claims rising for the first time in a month, whereas the retail sales in the U.S. rose 3.8% in January fueled by inflation in prices with a 1.0% increase seen in the producer price index for suppliers. The highest rise in eight months.
U.S Home sales
The U.S housing market is witnessing a further boom in sales with the impending rise in interest rates fueling the desire to purchase property before interest rates rise. Existing home sales were 6.70% higher in January 2022 than in December 2021 and home sales would be even higher if there had not been a 15.4% rise in house prices year on year. However, there is the lowest level of existing homes on sale now in the U.S since records began in 1999. Investors now own a fifth of U.S homes which will contribute further to higher prices and a tighter supply of housing. The average mortgage in the U.S now stands at a record size of $453,000 per household.
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| In Local Currency | In Sterling Pound | ||
| Index | Last week | YTD | Last week | YTD |
| U.K. |
|
|
|
|
| FTSE 100 Index | -1.49% | 2.22% | -1.49% | 2.20% |
| U.S. |
|
|
|
|
| S&P 500 Index | -1.54% | -8.63% | -1.40% | -8.89% |
| Europe |
|
|
|
|
| Euro Stoxx 50 Index | -1.01% | -4.14% | -1.44% | -4.70% |
| Asia |
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|
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| Nikkei 225 Index | -2.07% | -5.80% | -1.14% | -6.39% |
| Hang Seng Index | -2.32% | 3.98% | -2.20% | 3.63% |
| MSCI Emerging Markets Index | -0.89% | -0.30% | -0.53% | -0.21% |
U.K.
Inflation data for January 2022 reached a 30-year high, while economic data points towards a tighter labour market
The Consumer Price Index (CPI) in the UK was announced as a 5.5% increase year on year for January 2022 up from 5.4% CPI in December 2021. This is a 30-year high for CPI and the result is a now likely third interest rate hike in March by the Bank of England. The rise in January was driven by predominantly clothing and footwear.
Meanwhile, the number of workers on payroll increased by 108,000 to a record of 29.5 million in January. The unemployment rate decreased to 4.1% in the final three months of 2021. However, there are still extensive labour shortages with the number of open positions in the UK rising to a record 1.3 million in the three months up to January 2022. Alongside this, the new that average weekly wages increased by 4.30% in the final quarter of 2021 showcased that the time is now to increase interest rates.
JAPAN
Japan’s stock markets generated a negative return for the week, with sentiment weighed down by geopolitical tensions in Ukraine and concerns about more aggressive monetary policy tightening by the Fed. The Nikkei 225 Index fell 2.07% and the broader TOPIX Index was down 1.95%. The Bank of Japan’s fixed–rate Japanese government bond (JGB) purchase operation, which saw no offers with market yields remaining lower, was successful in capping long-term interest rates, with the yield on the 10-year JGB unchanged at 0.22%. The yen strengthened to around JPY 115.18 against the U.S. dollar, from the previous week’s JPY 115.45, on safe-haven demand amid geopolitical tensions.
Japanese Economy posted strong Q4 results
Japan’s economy responded to the contraction of the economy in Q3 2021 by growing at an annualised rate of 5.4% quarter by quarter in the final three months of 2021. The recovery in growth was buoyed by the strong private consumption of consumers as Covid cases dropped and restrictions were lifted. In line with this, the ban against non-resident foreigners entering Japan is to begin being lifted from March 1st.
In comparison, the economic data for the Japanese exports displayed a lower-than-expected rise in trade with China, as exports rose 9.6% year on year but car exports and shipments to China both fell. On the other hand, imports to Japan were up 39.6% heightened by an increase in the cost of importing energy. This has resulted in Japan having an 8-year high trade deficit. The outlook for the Japanese economy has been revised by the Cabinet office due to higher raw material costs, continued supply-side constraints and Covid continuing.
cHINA
Inflation in China was lower than expected with the Producer Price Index down to 9.10% year on year compared to 10.3% in December year on year. This points to a reduction in the cost of produce globally as China is the predominant exporter of produce in the world. The CPI in China was measured at 0.9% down from 1.5% in December. These inflation results bring more support to the People Bank of China (PBOC) current easing of monetary policy with the current interest rate in China holding steady at 3.7%. The inversion of the interest rate policy of the U.S and China is likely to continue well into 2022 and beyond.
Gold rises and Oil drops
The price of gold saw a steady increase last week off the back of continued unease within the marketplace and investors seeking the haven of gold. The price was $1,875/oz and is nearing a value of $1,900/oz. Oil had a yo-yo like week, with Brent Crude falling sharply on Monday with the news an invasion of Ukraine was imminent and for the rest of the week was up and down and closed at $91.58bbl for the week.
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