What is the general market outlook right now?
The markets remain focussed on the war in Ukraine, inflation and central bank measures, and will remain so for the foreseeable future. The main focus now, however, has shifted from the war in Ukraine to the central banks.
Inflation is still not showing signs of deceleration and consumers are struggling. The central bankers recognise that they are hopelessly late in controlling inflation and they are expected to come up with more aggressive action.
The mood on the equity markets is pessimistic; returns are some 5–10% in the red. In the more interest rate sensitive parts of the equity market, such as the technology-driven Nasdaq, the negative reaction has been stronger. The newly begun earnings season is being scanned for signs of companies’ profitability in a volatile environment. Despite the earnings season, the equity markets are now largely driven not by company news, but rather macro-level events.
The rise in interest rates has depressed returns on fixed income investments. Government bonds have shown a historically dramatic plunge this year. The dollar is still strong against the euro and the yen in particular. The rise in raw material prices does not appear to be turning around, which puts more pressure on the central banks to further tighten monetary policy.
The war in Ukraine has already continued for two months. What are the markets focussed on now?
In the short term, the war in Ukraine remains difficult to predict and peace negotiations seem to be becoming more and more difficult.
From a market perspective, the greatest focus is on the possible ban on imports of oil and gas. Otherwise, the markets’ interest has shifted from Ukraine to inflation.
The Fed and the ECB have signalled that monetary policy will tighten further. Are we facing single rate hikes of 75 basis points this year?
Inflation is still not showing signs of deceleration. In the USA, inflation is mostly demand-driven, while in Europe it is more a problem on the supply side. The rhetoric of the Fed, ECB and Sweden’s Riksbanken, which still favoured a looser monetary policy not long ago, has begun leaning increasingly towards interest rate hikes.
The Fed in particular indicated that its main goal is to tighten financing conditions even at the expense of economic growth and financial market support. Last week, the markets began speculating that the Fed might raise interest rates by as much as 75 basis points at a time. Usually interest rates are raised 25 basis points at a time, which would mean that the previously forecast 50-point hikes would be more aggressive than normal. The fact that no 75-point hikes have been made for decades highlights their aggressiveness. Some forecasts have suggested rate hikes of up to 4% at the rate hike cycle’s peak in 2023.
In Europe, inflation has not accelerated at the same rate as in the USA, but every day, a faster interest rate hike rate is priced in for the ECB. The rate hike cycle is expected to start in Europe in July.
Looking at the forecasts, it is worth noting that the situation continues to change at a rapid rate, and it was not too long ago that, for example, these types of hikes were not expected to occur in Europe this year. Still, the direction is clearly upward.
China and Japan are currently easing their monetary policies. What are the consequences?
While the Western markets are experiencing ever-tightening central bank policy, Japan and China are experiencing the opposite. Particularly in China, at the daily and weekly levels, the speculation has not been about tightening measures, but more about how much to ease their monetary policy.
In the current environment, the consequence of a loose monetary policy for Japan has been the dramatic depreciation of the yen. As a result of the falling yen, China’s renminbi is also under devaluation pressure, which has already been seen over the past couple of weeks. As a major raw material importer, the devaluation of the yen exposes Japan to import inflation, so it remains to be seen how long Japan’s central bank is willing to continue its lax monetary policy.
It also remains to be seen what kinds of waves the West’s tightening monetary policy and Asia’s lax monetary policy will generate on the global markets.
Which geographical equity markets have performed best?
Measured in local currencies, excluding currency movements, the major markets have performed almost as a single cluster, that is to say equally poorly. The equity markets have made up the stock market dip following Russia’s attack, but, for example both Europe and the USA are still close to -9% returns for this year (YTD). In fact the only exception is the UK, which benefits from a favourable sector allocation, with returns of ca. +5% (YTD).
In relative terms, the euro zone has suffered the most from the war in Ukraine. Taking Europe into account more broadly (i.e. including the UK, Norway and Switzerland), the negative impact of the war has been slightly milder.
As a whole, the emerging markets have performed the worst. Nevertheless, within the market, Latin America, as a major raw material producer, and somewhat surprisingly India, have performed relatively well, with returns of 6.6% and 0.9% respectively. Cash flows from China may have had a positive impact on India.
Which sector’s stocks have performed best?
Recently, there has been strong volatility in the markets between growth and value companies, as well as, for example, different sectors. It is not so clear to the markets where the winners can be found. Generally speaking, the sentiment on the markets is somewhat pessimistic.
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