Russian invasion of Ukraine sees investors flight to safety
February saw Russian president Vladimir Putin launch a full-scale military invasion of Ukraine at the cost of real humanitarian consequences. The move came despite threats from the major economies of the EU, US and UK warning of their intention to impose economic sanctions in retaliation.
The invasion has shocked investors, causing a flight to safety, with global financial markets increasingly rattled by significant single-day movements as a result. Investors should be prepared to expect much more volatility going forward, due to the rapidly changing situation.
Russian ruble plunges
The MOEX Russia Index has fallen by as much as 45%. As sanctions by western leaders and organisations have increased against Russian oil, banks, oligarchs and leaders, including the removal of Russian banks from the SWIFT network and trading boycotts, the ruble continues to plummet; losing up to a third of its value in-year as at the end of February.
UK inflation and less than aggressive interest rate hike
The UK Consumer Prices Index (CPI) reached 5.5% in January and remains considerably above the Bank of England’s (BoE) 2% inflation target, with the BoE predicting inflation will rise to above 7% in April this year. While some economists predicted that high inflation, together with a strong labour market, would increase the likelihood of the BoE raising rates aggressively, on the 2nd February, the Monetary Policy Committee voted five to four to increase rates by just 0.25 percentage points to 0.5%.
Slow and steady monetary policy approach, or ineffectual?
The difficult position for central banks seems to be that they are effectively trying to influence expectations for inflation, rather than inflation itself. The current inflationary period was triggered more than 12 months ago in the recovery from initial COVID-19 lockdowns, which means that action by central banks now will not have any real effect on inflation for another 12 to 24 months.
Market expectation of higher rates remains
Although markets were in expectation of a more aggressive approach from the BoE at this point in the year, the news that four out of the nine Monetary Policy Committee members were in favour of a higher 0.5 percentage points still surprised investors. Market interest rate expectations consequently increased, reaching 1.5% by the end of 2022, with UK government bond prices falling, following the announcement, and 10-year bond yields up to 1.36%.
European Central Bank’s unchanged rate fuels fear for changes later
The European Central Bank (ECB), despite leaving interest rates unchanged, contributes to the concerns regarding future rate rises. President Christine Lagarde said they did not rule out the possibility of rate hikes in 2022, with several members of the ECB also saying they expect to tighten interest rates this year as rising prices push Eurozone inflation up to 5.1%. Current sentiment has thus shifted to the expectation of potentially four rate hikes during 2022.
US markets similarly bracing for anticipated rate rises
In the US, consumer price inflation increased at its fastest rate in 40 years as it hit 7.5% in January. Speculation of interest rate hikes went into overdrive as a consequence, causing the yield on 10-year treasuries to rise to the highest level since mid-2019. Morgan Stanley say they now expect rates to be raised six times during 2022. Equity markets have also had a bumpy ride and US tech stocks experience elevated volatility yet again.
UK growth stronger than expected
Prime minister Boris Johnson announced an end to all remaining legal COVID-19 restrictions in England. Since the start of the easing of the restrictions, economic activity has steadily increased. Now, retail footfall is at around 82% of what it was pre-pandemic, while debit and credit card transactions are at around 90% of what they were in February 2020. Coupled with a stronger-than-expected final quarter, we saw GDP growth for 2021 hit 7.5%, which compares well with the likes of other developed economies, such as France, with a recorded annual growth of 7%, and the US with 5.7%.
International trade recovery fuels UK recovery
The recovery in international trade has helped fuel the UK’s recovery. Over the course of 2021, imports of goods rose by 8.4% and exports increased by 4.9%. Although these figures remain below 2018 levels, global trade looks set to recover further in 2022, with global shipping firm, Maersk’s CEO, predicting most supply chain disruptions will have cleared by the second half of the year.
UK consumer confidence lowest in 13 months
While businesses remain optimistic about continued growth, the rising costs of living are hitting consumer confidence, reported to be at its lowest in 13 months, resulting in a reluctance to spend amidst price rises in food, fuel and utilities.
Lack of confidence continues to evade the housing market however, which still shows strong growth and an increase of almost 10% over the last 12 months in average house prices, despite the end of the COVID-19 stamp duty holiday and phasing out of Help to Buy.
Reports of Opec+ nuclear deal steadies oil prices
Oil prices have remained volatile due to the ongoing concern over Russia and Ukraine, driving prices up, with Brent Crude rising to $96 per barrel, its highest since 2014. However, prices then started to decline following reports that Opec+ is working to shape a deal that will revive the 2015 Iran nuclear deal that could, potentially, bring one million barrels of oil a day back into the market.
US “metaverse bubble bursts”
US tech stocks are never too far from the headlines. This time dominated by Facebook parent company Meta’s tumbling share prices falling more than 25%, the biggest one-day loss for a US company. Falling behind rivals such as TikTok, Facebook says profits have fallen due to its “investment in the metaverse”.
PayPal and Spotify prices also fell sharply, falling short of investor expectations. However, these losses have been balanced somewhat by some equally big moves the other way, with Google’s parent, Alphabet, beating expectations by announcing increased revenue, and Amazon reporting strong earnings on the back of an increase in its annual fee for Amazon Prime. Despite these, overall, positive earnings there is no masking the big change in market sentiment for US tech stocks that sees investors revising down growth expectations and bracing for further volatility.
|Cash||UT Cash/Money Market||00.00%||-00.03%||-00.05%||-00.03%|
|Gilts||FTSE Gilts All Stocks||-01.51%||-07.37%||-06.75%||-03.58%|
|UK Corporate Bonds||UT UK Fixed Interest||-01.83%||-08.24%||-03.61%||-02.73%|
|Intl Bonds||UT Intl Fixed Interest||-01.43%||-03.54%||-03.61%||-01.57%|
|UK Equity||UT UK Equities||-04.46%||-04.09%||-08.28%||07.13%|
|European Equities||MSCI Europe ex UK||-04.82%||-07.08%||-08.45%||06.93%|
|US Equities||S&P 500||-03.15%||-03.80%||-00.66%||16.45%|
|Japanese Equities||MSCI Japan||-00.87%||-05.96%||-05.73%||-03.12%|
|Emerging Markets Equities||MSCI Emerging Markets||-02.80%||-04.89%||-07.60%||-08.80%|
Data Sourced from FE Analytics, and Bloomberg Finance LP.
*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice