Market Commentary 21st February 2022 from Charlie Hancock

The steel manufacturing company Evraz, which is a constituent of the FTSE 100, saw their share price decline by 36.32% across the week due to the company having significant operations in Russia and Ukraine. Travel related stocks were also impacted, with the parent company of British Airways, IAG, declining by 7.51%.

The UK Consumer Prices Index (CPI) rose by 5.5% in the year to January, with inflation running at a 30-year high. The data appeared to increase expectations of the Bank of England (BoE) raising interest rates at their March policy meeting. Whilst a tight labour market contributed to some wage growth, the Office for National Statistics (ONS) stated that average weekly earnings failed to keep pace with inflation during the final quarter of 2021, rising by 4.3%.

A closely watched measure of Eurozone consumer confidence declined, with analysts suggesting rising levels of inflation are impacting sentiment. The chief economist of the European Central Bank (ECB), Philip Lane, appeared to push back against the views of other key ECB members. Lane stated that inflation was unlikely to fall below the central bank’s 2% target within the next two years, but added that he does not foresee a need for “excessive” monetary tightening.

Newsflow regarding the conflict between Russia and Ukraine appeared to have a significant impact on investor sentiment. Tensions remained throughout the week, with Germany’s foreign minister accusing Russia of making “cold war demands”. NATO stated that Russia had increased the number of troops at the border with Ukraine, contradicting Putin’s claim of a partial withdrawal.

Comments from key Federal Reserve members appeared to contribute to the volatility in equity markets during the week. President of the St. Louis Fed, James Bullard, stated the central bank needed to react to accelerating inflation, with “their credibility on the line”. Bullard has previously stated he would be in favour of raising interest rates by a full percentage point before the end of July. Economic data, which may influence Fed policy, was mixed. New weekly jobless claims rose by more than expected, whilst retail sales during January were stronger than anticipated.

President Biden added to the concerns around Russia and Ukraine during the week, stating on Thursday that he believed Russia was days away from invading.

The Chinese real estate sector’s woes showed little sign of abating. Data showed that aggregate sales by China’s top 100 developers fell by 41% in January in comparison to the same period in 2021. Evergrande continued to make headlines after a court ruled that assets of $100 million held by a subsidiary of the group should be frozen.

The People’s Bank of China (PBOC) maintained a dovish message, stating that supportive monetary policy would remain in place this year. Data showing that both producer and consumer price inflation were lower than expected during January appeared to support the central bank’s accommodative message. The head of China’s Ministry of Finance said that corporate tax rates would be cut and fiscal spending would increase in an effort to stabilise the economy.

Data from Japan showed that economic growth during the final quarter of 2021 was slightly weaker than expected, with the economy expanding at an annualised rate of 5.4%. Prime Minister Fumio Kishida announced that border controls would be eased from the beginning of March, but indicated that domestic restrictions would remain in place for the foreseeable future.

GBP / EUR – Current 1.2003 Previous 1.1946

The Pound experienced strength against both the US Dollar and Euro last week, rising by 0.18% and 0.48% respectively. Better than expected UK retail sales data for January appeared to contribute to the bullish sentiment amongst currency traders.