T&IO Weekly Market Updates

5 minutes read
Last updated on 21st Jan 2022

Market and Economic review

Inflation uncertainty and rising bonds yields continued to trouble equity markets in the first half of the week, with increased tensions between the US and Russia adding to volatility late on Thursday. Global stocks fell 2.5%, with notable dispersion between different regions and sectors. UK and EM indices delivered the best performance (roughly flat), while US equities meaningfully lagged (-3.8%). Sector differences between the index constituents played a large part in driving the divergence. Energy stocks outperformed, as the price of oil reached new cycle highs on the back of a report from the International Energy Agency that suggested supply is tighter than they expected, while the Omicron variant had little impact on demand. The Technology sector was the largest underperformer, contributing to the Nasdaq Index’s near 12% retreat from its November peak, with higher bond yields and increased rate hike expectations causing some investors to rotate from ‘growth’ to ‘value’ stocks.

Q4 earnings reporting got off to a strong start. It is still early days (~10% of the S&P500 have reported), but the vast majority of companies have exceeded analysts’ expectations and projections for 2022/2023 are rising across the board. Input cost pressures and supply chain disruptions are important themes, but they appear to have been offset by pricing power and solid consumer demand.

German 10-year bond yields turned positive for a brief period - the first time since 2019 – and US 10-year yields were up over 10bps midweek, briefly hitting 1.9% and setting new cycle high before falling all the way back to 1.8% on Thursday night. The front end of the US treasury curve moved higher as some financial commentators speculated that Federal Reserve could increase interest rates by 0.5% this March, in an attempt to quash inflation. Market pricing suggests four 0.25% rate rises in 2022.

In other central bank news, the Bank of Japan held interest rates steady – as expected – and Governor Kuroda firmly pushed back against suggestions that the BoJ is looking at tightening options. Another central bank distancing itself from the global tightening trend is The People’s Bank of China. It continued a shift towards easier monetary policy this week, by cutting key mortgage lending rates for the first time in two years and pledging to use more policy tools to underpin the economy. Chinese regulators also relaxed some rules for property companies, supporting the sector by allowing them access to cash held in escrow. China’s Q4 2021 GDP came in ahead of expectations (4.0% year-on-year vs 3.3%), with services picking up. Chinese Industrial production positively surprised too, suggesting supply constraints are easing, though Retail Sales data disappointed due to COVID-19 lockdown restrictions.

On Wednesday, the UK Consumer Price Index (CPI) registered yet another surprise, rising to 5.4% for the 12 months to December 2021 - the highest level in 30 years. With the drivers broad-based and unemployment falling to a post-pandemic low of 4.1%, the Monetary Policy Committee of the Bank of England may feel increased pressure to increase interest rates at the February meeting. The interest rate market is now fully pricing in a 25bp rate hike and gilt yields have risen across the curve. UK retail sales for December (excluding fuel) fell by almost 4% month-on-month. The emergence of the Omicron variant and a pullback after an unusually strong November are the likely drivers.

In the US, weekly filings for unemployment benefits jumped to the highest level since mid-October (286,000), as businesses contended with Omicron-related disruptions and adjustments after the holiday season. The data may be noisy in the coming weeks, but labour markets remain fundamentally strong, with high demand for workers. Wages grew by 4.7% in 2021, and the unemployment rate has now dropped to 3.9%. December housing starts and permits came in ahead of consensus. On the negative side, manufacturing sentiment (measured by the Empire State survey) disappointed, with pessimism on new orders.

Electric Vehicles (EVs) sales in Europe outperformed diesel sales for the first time in December. Approximately 176,000 battery EVs were sold in western Europe, a 6% year-on-year increase, while European car makers only sold 160,000 diesel cars. The European Union’s (CO2) emissions standards have helped to drive the shift in behaviour and many European governments have increased subsidy schemes as part of recent stimulus packages.

ExxonMobil announced a goal to cut greenhouse gas emissions at its oil and gas operations to net zero by 2050. This comes after significant investor pressure to address climate change, with European rivals (BP and Shell) much further ahead in implementing ambitious targets to minimise their carbon footprint. ExxonMobil’s roadmap includes using technologies such as carbon capture, biofuels and hydrogen, and taking advantage of government subsidies.

Tactical review & outlook

After a tepid start for equities this year, we took the opportunity to incrementally increase our exposure to the asset class by diversifying into the UK and Europe, funded by the cheapest asset in the portfolio: European credit. We maintain a diversifying overweight to Alternatives and overweight position in US equities, such that the ratio of the equity overweight is 50% US, 25% UK and 25% European equity. We continue to view the underlying macro backdrop as supportive for risk assets and acknowledge central banks’ strong motivation to support economic growth momentum whilst normalising policy from its emergency settings. High inflation, and the risk of it getting out of control, creates a tough balancing act, and several central banks have taken steps to address this risk in a managed way. Rising Omicron cases represent a possible headwind, particularly in Asia, though data so far indicates that the existing crop of vaccines should be sufficient to bring it under control. We will continue to monitor the evolving situation carefully and watch for both opportunities and threats to our positioning.

Dean Cook

T&IO Weekly Market Update Podcast

Dean Cook, Portfolio Analyst in the Multi Asset Portfolio Management Team at T&IO talks through this week’s latest market developments and T&IO’s current outlook.

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