Market Commentary 14th February 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 14^th February 2022

Equity Indices

UK equities outperformed most regions around the globe last week, with the FTSE 100 index gaining 1.92% and the mid-cap FTSE 250 rising by 1.55%.

Data showing that UK Gross Domestic Product (GDP) fell by 0.2% in December confirmed that the economy grew by 7.5% in 2021. The growth was the fastest rate experienced since the second world war, following a contraction of 9.4% in 2020.

Travel related stocks surged last week, with hopes for a rebound in tourism this summer growing after changes to rules for those entering the UK came into force. Fully vaccinated travellers will no longer need to take Covid-19 tests on arrival. The parent company of British Airways, IAG PLC, saw their share price rise by 12.61%. Intercontinental Hotels Group gained 6.11%.

Europe

European equities continued to experience volatility, but most of the major indices finished the week in positive territory. The broad FTSE All World Index – Europe ex UK gained 0.92%. Germany’s DAX index gained 2.16%.

Data for German industrial production showed that output shrank by 0.3% in December, defying expectations for growth of 0.5%. Construction activity was particularly weak, with material shortages hindering growth. A survey from manufacturers during January suggested that supply chain issues may be easing, with business sentiment improving.

Key figures at the European Central Bank (ECB) appeared to be divided on key monetary policy issues. The ECB president, Christine Lagarde, told reporters that there is no evidence inflation will be much higher than the central bank’s 2% target over the medium term and as a result there is no need for “measurable tightening”. Germany’s central bank chief, Joachim Nagel, who sits on the ECB policy committee, stated that if inflation remains high in March, he will be in favour of tapering off the central bank’s asset purchase programme and hiking interest rates this year.

US equity indices underperformed their global counterparts, with most of the rally experienced during the first half of the week being reversed on Thursday and Friday. The S&P 500 declined by 1.82% across the week, whilst the Dow Jones Industrial Average lost 1.00%. Rising expectations for tighter Federal Reserve policy continued to have a greater impact on the technology heavy NASDAQ 100, with the index falling by 3.00%.

Data showing that Consumer Price Inflation rose to a 40-year high of 7.5% in January impacted sentiment in the second half of the week. A closely watched consumer sentiment index declined to the lowest level recorded since 2011, with inflation concerns appearing to be the main driver for the deterioration in confidence amongst consumers.

Asia

Asian equity indices were generally positive across the week, resulting in a gain of 1.39% for the broad FTSE All World Index – Asia Pacific. China’s Shanghai Composite Index gained 0.97%, whilst Japan’s Nikkei 225 rose by 0.93%.

A rise in bond yields prompted Japan’s central bank to announce they will purchase increased amounts of government debt in order to maintain their policy of yield curve control, which seeks to keep the 10-Year bond yield in the region of 0%. The central bank believes ultra-dovish monetary policy remains appropriate with Japanese Consumer Price Inflation relatively muted at 0.5%.

An unofficial Purchasing Managers Index (PMI) for the Chinese services sector declined to a five-month low in January, but remained in expansionary territory. Analysts believe that monetary policy in China will continue to be loosened in the coming months given that growth remains on a slowing trajectory.

UK government bond yields continued to rise at a relatively sharp pace last week, with the 10-Year Gilt yield rising from 1.41% to 1.54%. Data confirming that the UK economy contracted by less than expected in December appeared to contribute to growing expectations for further interest rate hikes by the Bank of England (BoE).

Europe

The 10-Year German Bund yield rose from 0.20% to 0.29%. Yields for bonds issued by heavily indebted periphery nations also climbed, with the Italian 10-Year rising from 1.74% to 1.96%. Whilst ECB policymakers appeared divided, markets priced in an increased chance of interest rate hikes this year.

The 10-Year Treasury yield climbed to 2.03% by Thursday, before a risk off mood amongst investors resulted in the yield falling back as demand for Treasuries rose. Across the week, the 10-Year saw a marginal increase from 1.91% to 1.94%.

Currency

GBP / USD – Current 1.3564 Previous 1.3531

GBP / EUR – Current 1.1946 Previous 1.1815

The Pound rose by 0.24% against the US Dollar as the Greenback experienced strength against most major currencies. Against the Euro, Sterling rose by 1.11%.

Commodities

Gold

The Gold spot price rose by 2.79% across the week, with analysts speculating that uncertainty around the Russia-Ukraine situation prompted support for the precious metal amongst investors.

Oil

Oil prices reached the highest level seen since Autumn 2014, with the Brent Crude spot price rising by 1.25% to $94.44 per barrel. Concerns around potential sanctions for Russian exports of oil appeared to add to the upward pressure on prices.