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WeekWatch -‘Last week once again saw financial markets grapple with uncertainty’ March 22

WeekWatch -‘Last week once again saw financial markets grapple with uncertainty’ March 22

Last week once again saw financial markets grapple with uncertainty, as ongoing military conflict in Ukraine and the prospect of rising interest rates and inflation continued to concern investors.

At the start of the week, it was reported that Russia was open to the idea of Ukraine joining the European Union, on the condition that Ukraine pledge not to join NATO. This apparent progress resulted in a strong start to the week for the leading US equity indices, which by Tuesday had managed to recover the losses they had experienced since the invasion started in February.

However, Wednesday and Thursday reversed most of this progress, as the peace talks made no breakthroughs and Russia escalated its efforts to take over the eastern Donbas region. Overall, the week saw little change in US equities, with the S&P500 looking flat over the period.

Meanwhile, tensions rose between Russia and Europe, as President Putin decreed that Russian gas must be paid for in roubles by “unfriendly” foreign purchasers. The list of countries required to pay in roubles extends to those who have imposed sanctions on Russia and includes US, EU member states, the UK, Japan, Canada, Norway, Singapore, South Korea, Switzerland, and Ukraine.

The G7 decided to call Putin’s bluff, with the German finance minister, Christian Lindner, telling Bloomberg: “We cannot accept any blackmail.”  In preparation for a potential supply emergency, Germany and Austria have begun rationing gas.

Despite these tensions, European markets fared well, with the German DAX rising by 1.0% over the course of the week. As for the UK, despite a relatively sharp fall in Sterling last week, the FTSE 100 rose by 0.7% and the mid-cap FTSE 250 rose by 1.3%.

Bond markets had a more challenging week. Central banks are trying to manage inflation by increasing interest rates, and in turn, investors are becoming more pessimistic about the outlook for the asset class.

The Federal Reserve (the US central bank) has committed to a series of rapid interest rate rises over the course of this year. This has led investors to sell US government bonds, causing a rise in the yield on a two-year bond, which moves inversely to its price.

Last week, parts of the US treasury yield curve inverted for the first time since 2019, spooking investors. In normal times, investors holding longer-duration bonds would expect to be rewarded with higher yields for taking on more risk over a longer-time period.

When the yield curve inverts, it suggests investors are pessimistic about the outlook for the global economy. However, while a yield curve inversion can be a sign of recession, this has – so far – only been a brief adjustment and commentators would look over an extended period for a more reliable indicator of a future recession.

The Federal Reserve is set to release minutes from its latest policy meeting this Wednesday with each word set to be scrutinised for any hints regarding the future path of interest rates.

Rising energy prices, paired with 30-year-high inflation, have UK households facing a cost-of-living crisis. On Friday, the energy price cap rose from about £1,300 to nearly £2,000. Official forecasts suggest it will rise to £2,800 in October.

Data issued last week by the Office for National Statistics reported that the household saving ratio fell by 0.7%, to 6.8%, between the third and fourth quarters of 2021. “It shows that households are willing to adjust their saving behaviour to carry on spending,” commented Paul Dales, chief UK economist at Capital Economics. “A continuation of this trend is the key reason why we suspect that the economy will probably avoid a recession this year, even as real incomes fall further.”

While the near-term outlook can appear bleak – with both equities and bonds having their fair share of struggles so far this year, along with rising inflation affecting the daily lives of many – investing in a diverse portfolio for the long term remains the best way for many investors to achieve their goals and objectives.

“One lesson that we have yet again from the opening months of this year is how difficult it is to predict financial markets,” says Joseph Wiggins, Director of Liquid Markets at St. James’s Place. “It’s impossible and dangerous to try to predict with any confidence what will happen over short-term periods.”

BlackRock and TwentyFour Asset Management are fund managers for St. James’s Place.

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