Market Commentary 25th January 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 25^th January 2022

Equity Indices

The FTSE 100 index held up considerably better than other large cap indices around the globe last week, with a decline of 0.65%. The mid cap FTSE 250 suffered a pullback of 2.11%. A heavy weighting to energy and mining stocks benefitted the FTSE 100 last week, with oil companies flat across the week and major mining stocks recording strong gains. Most other sectors suffered relatively steep declines.

Following the release of data showing that inflation in the UK hit a 30-year high in December, the Bank of England governor, Andrew Bailey, told a parliamentary committee that he was concerned about inflation becoming more stubborn. Mr Bailey acknowledged that supply side issues were difficult to control, stating that the central bank “can’t bring gas prices down”.

The government announced that the ‘plan B’ covid restrictions, including mandatory mask wearing, will be scrapped. Boris Johnson also confirmed that the legal requirement to self-isolate would end on the 24^th March.

Europe

All major equity indices in Europe posted declines last week. The FTSE All World Index – Europe ex UK moved 2.42% lower, whilst Germany’s DAX index declined by 1.76% and France’s CAC 40 lost 1.04%.

Political tensions between the European Union and Russia deteriorated last week due to speculation around Russian troops preparing to invade Ukraine. Concerns around potential conflict added to the risk off mood amongst investors.

The President of the European Central Bank (ECB), Christine Lagarde, signalled that the central bank will not raise interest rates in the near future. Lagarde stated that Europe’s economic recovery will be slower than the recovery experienced in the US and that inflation is likely to be below the bank’s 2% target by the end of the year.

US equities underperformed last week. The S&P 500 index declined by 5.68%, the Dow Jones Industrial Average lost 4.58% and the technology heavy NASDAQ 100 fell by 7.51%.

Concerns that the Federal Reserve may be forced to tighten monetary policy in a more aggressive manner than previously anticipated contributed to the sell off in equities last week. The NASDAQ suffered a steep pullback due to the index’s sensitivity to a reduction in liquidity from tighter monetary policy. A decline of 24.39% for Netflix shares across the week, as a result of a disappointing earnings report, also dented investor confidence on large cap technology companies.

Investors appeared to be somewhat concerned by economic data, with speculation that the Federal Reserve may be tightening monetary policy at the same time as economic growth slows. A closely watched indicator of manufacturing activity declined unexpectedly, whilst weekly jobless claims rose to the highest level recorded since October.

Asia

Equity indices in Asia were mixed last week, with the broad FTSE All World Index – Asia Pacific moving 1.71% lower. China’s Shanghai Composite Index was flat across the week (+0.04%).

Chinese equities performed relatively well last week, with sentiment positively impacted by the People’s Bank of China (PBOC) increasing monetary stimulus measures. The central bank suggested that further stimulus would be introduced to stabilise the economy, whilst specific measures aimed at supporting cash flow for property developers would also be implemented. Data released last week showed that China’s economic growth slowed from 4.9% in the third quarter of 2021 to 4.0% in the final quarter.

Sentiment on Japan was hindered by the government introducing harsher coronavirus related restrictions. Tokyo and other heavily populated areas were placed under a state of emergency, which is expected to last until mid-February. The Bank of Japan kept monetary policy measures unchanged last week, stating that loose monetary conditions are justified given that inflation remains relatively subdued.

The UK 10-Year Gilt yield rose marginally across the week from 1.15% to 1.17%. Whilst there was some evidence of a rotation away from risk assets into government bonds, which would ordinarily suppress yields, speculation around an interest rate hike following December’s inflation data kept upward pressure on Gilt yields last week.

Europe

The 10-Year German Bund yield rose from -0.05% to -0.03% across the week. Whilst the ECB president, Christine Lagarde, stuck to a dovish tone during press interviews last week, minutes from the central bank’s December meeting showed that some members were in favour of tightening monetary policy based on concerns around high inflation.

The 10-Year Treasury yield declined from 1.79% to 1.76% across the week, with a rotation away from equities and into Treasuries providing some downward pressure for yields. Worse than expected data for unemployment claims also appeared to contribute to softening yields.

Currency

GBP / USD – Current 1.3553 Previous 1.3675

GBP / EUR – Current 1.1946 Previous 1.1981

The Pound sold off amidst the risk off sentiment last week, with Sterling typically considered to be a more cyclically exposed currency. Against the US Dollar, the Pound fell by 0.89%. Against the Euro, the Pound moved 0.29% lower.

Commodities

Gold

The Gold spot price briefly asserted its status as a safe haven asset last week, rising by 0.96% to reach $1,835.38 per ounce.

Oil

Oil prices strengthened last week, with geo-political concerns, which could lead to reduced supply, appearing to add to the bullish sentiment. The Brent Crude spot price rose by 2.13% to reach $87.89 per barrel.