WeekWatch -‘Global equity markets surged last week as cautious optimism that a peace deal could be agreed between Ukraine and Russia gathered momentum’ March 22
Global equity markets surged last week as cautious optimism that a peace deal could be agreed between Ukraine and Russia gathered momentum. Gains were broad-based across most major indices.
On the Continent, French and German bourses rose in tandem with both the CAC40 and DAX concluding the week +5.8% higher. Meanwhile in Japan, the Nikkei 225 added +6.6%, helped by the Bank of Japan’s (BoJ) monetary policy meeting which reaffirmed its dovish outlook.
US stocks reversed a two-week losing streak, as the S&P500 rose by +6.2% with the tech sector in particular moving sharply higher.
Other events last week included the Federal Reserve’s Federal Open Market Committee (FOMC) raising interest rates for the first time since 2018. The 0.25% hike came amid spiking inflation with the Fed now seeing pricing pressures beyond those associated with pandemic supply disruptions.
The FOMC also lowered its growth expectations for 2022, whilst increasing inflation projections. Commenting on the FOMC release, BlueBay’s Mark Dowding said: “It would seem that a recession in the next 12-18 months remains very unlikely. We have thought that the Fed could raise rates at every upcoming policy meeting, mirroring the tightening cycle seen in 2004-6. Ultimately, we see rates needing to rise beyond the ‘neutral’ point (which the Fed estimates to be at around 2.5%), as we think that inflation will be more persistent than many currently project.”
In the UK, The FTSE100 and FTSE250 rose by +3.5% and +4.7% respectively, the latter benefitting from some strength in sterling versus the US Dollar.
Last week, the Bank of England’s (BoE) Monetary Policy Committee also increased the base interest rate from 0.50% to 0.75%. This marked the first time since 1997 that the Committee has raised the rate three meetings in a row.
As in the US, the BoE is looking to combat rising inflation, which is widely expected to reach 8% in the coming months. That said, there are a number of factors which may limit their freedom to keep increasing rates as far as they might otherwise wish.
George Brown, Economist at Invesco, said he expected two further rate rises to 1.25% in the coming months before a pause. Explaining his three reasons for this, he said: “First, unless the Chancellor caves into pressure to loosen the purse strings in the Spring Statement, fiscal policy will tighten as pandemic-related spending is reined in and National Insurance contributions are hiked. Second, while much depends on how the conflict in Ukraine develops, higher energy costs will choke off consumer demand and weigh on growth. Third, inflation is set to fall sharply in 2023 as energy prices moderate from elevated levels.”
While both the UK and the US have increased interest rates, they both remain notably below the rate of inflation, and the impact of negative real interest rates will be felt by those with larger amounts of cash held on deposit.
Martin W. Hennecke, Head of Asia Investment Advisory and Communications at St. James’s Place said: “The implications of significantly negative real interest rates for investors are clear, namely that holding too much cash runs the risk of substantial purchasing power erosion. I believe that this risk will linger for some time, if not increase further given that inflationary pressures have been building up well before the Russia-Ukraine crisis, as seen by producer prices (typically a leading inflation indicator) hovering at or above the 10% level in most countries.”
He added: “One of the main reasons for investing therefore, should be as a means of seeking protection form inflation over time.”
Given the heightened economic sensitivity, many will be keeping a close eye on Wednesday’s Spring Statement to see if the Chancellor will take any actions to ease the increasing consumer burden – for example by reducing fuel duties or potentially postponing the upcoming National Insurance Increase.
Invesco and BlueBay are fund managers for St. James’s Place.
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