Market Commentary 8th February 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 8^th February 2022

Equity Indices

During another volatile week for risk assets around the globe, the FTSE 100 index rose by 0.67%. The FTSE 250 rallied during the first half of the week, before fading to finish the week with a slight gain of 0.32%.

The Bank of England (BoE) voted to raise the base rate from 0.25% to 0.50% last week, whilst also announcing they intend to sell some of the assets acquired via their quantitative easing programme. The central bank said that inflation could rise to 7% in the coming months and would likely remain above 5% at the end of 2022.

A UK manufacturing Purchasing Managers’ Index (PMI) indicated that growth in the sector strengthened during January. Manufacturing businesses continued to recruit at a fast pace, whilst input costs showed some signs of easing, despite raw material shortages remaining an issue.

Europe

European equity indices were mixed, with the broad FTSE All World Index – Europe ex UK rising by 1.89%. Germany’s DAX index declined by 1.43% and France’s CAC 40 moved 0.21% lower, whilst headline Italian, Dutch and Swiss indices recorded gains for the week.

Investors paid close attention to the European Central Bank (ECB) last week, with the ECB keeping monetary policy unchanged. During the post meeting press conference, the central bank’s President, Christine Lagarde, stated that it was very unlikely the central bank would raise interest rates in 2022, however, Lagarde said that ECB members were “unanimously concerned” about current inflation data. Financial markets priced in higher short-term borrowing costs as a result, with Lagarde’s comments regarding inflation leading to rising expectations for tighter monetary policy.

Data for Eurozone economic growth confirmed that the pace of expansion slowed during the final quarter of 2021, with Gross Domestic Product (GDP) growing by 0.3%. Much of the slowdown from the third quarter, when GDP expanded by 2.3%, was attributed to the Omicron wave.

US equity indices remained volatile, but managed to post gains for the week, with the S&P 500 rising by 1.55% and the Dow Jones Industrial Average gaining 1.05%. After rallying during the first half of the week by nearly 5%, the NASDAQ 100 declined heavily during Thursday’s session to finish the week with a gain of 1.66%.

Corporate earnings results impacted sentiment during the week. Meta Platforms (formerly Facebook) reported lower user activity and stated that revenue growth will slow, with their share price declining by 21.42% across the week as a result.

A jobs report released on Friday showed that US non-farm payrolls added 467,000 jobs during January, which was significantly more than the median estimate of 150,000. The strong employment data appeared to cement expectations for tightening Federal Reserve policy in the coming months.

Asia

The broad FTSE All World Index – Asia Pacific gained 2.72% across the week and Japan’s Nikkei 225 index experienced a similar gain (+2.71%). Chinese stock exchanges were closed for the week due to the Lunar New Year market holiday.

Speculation around Japan removing some coronavirus related restrictions helped to boost investor sentiment. The Bank of Japan (BoJ) re-iterated they will keep monetary policy loose, with senior figures at the bank stating that it is too early for the bank to remove stimulus measures, given that inflation is well below their 2% target. Despite the dovish comments, Japanese government bond yields rose as some traders speculated that the BoJ will be forced to follow other central banks in raising interest rates.

PMI readings for China showed that growth weakened in both the services and manufacturing sectors. Data showing a sharp slowdown in the number of properties sold by Chinese developers pointed to continued weakness for the real estate sector.

UK government bond yields rose sharply last week. The 10-Year Gilt yield climbed from 1.24% to 1.41%. The BoE voting to hike interest rates, whilst signalling further rate rises would be necessary, appeared to drive up yields across the week. The BoE governor, Andrew Bailey, caused some controversy after stating that firms granting pay rises could lead to inflation spiralling out of control.

Europe

The 10-Year German Bund yield moved into positive territory, rising from -0.03% to 0.20% across the week. Yields for debt issued by peripheral nations spiked, with the 10-Year Italian government bond yield moving from 1.28% to 1.74%.

The ECB attempted to calm the recent rise in yields by sticking to the message that inflation would fade to 1.8% in 2023, but financial markets continued to price in rising expectations for tighter monetary policy in the near future.

The 10-Year Treasury yield climbed from 1.77% to 1.91% across the week.

There was little newsflow regarding Federal Reserve policy during the week, with no key members delivering speeches or conducting press interviews, however, the strong US employment data appeared to contribute to yields spiking on Friday.

Currency

GBP / USD – Current 1.3531 Previous 1.3401

GBP / EUR – Current 1.1815 Previous 1.2017

The Pound reversed the previous week’s decline against the US Dollar, gaining 0.97%. Against the Euro, the Pound fell by 1.68%, with rising expectations a surprise Eurozone interest rate hike resulting in Euro strength.

Commodities

Gold

The Gold spot price gained 0.93% last week, with a weakening US Dollar appearing to support the precious metal. Rising yields and interest rates have hindered Gold recently, with non-yielding assets such as Gold typically becoming more favourable in low-yield environments, however, the spot price has remained relatively stable, despite other asset classes experiencing increased volatility.

Oil

Oil prices continued to rise, with no sign of slowing demand in the coming months. The Brent Crude spot price rose by 3.60% to reach $93.27 per barrel. Oil major Shell reported profits of $19 billion for 2021, with rising prices last year boosting margins.