Market Commentary 3rd March 2022 from Charlie Hancock

Posted by Telford Mann

Market Commentary 3^rd March 2022

Equity Indices

The FTSE 100 declined by 0.32% last week. The large cap index was stable during the first half of the week, before suffering a decline of 3.88% on Thursday. A rally on Friday left the index broadly flat for the week. The FTSE 250 fell by 2.13%, with the mid-cap index having very little exposure to sectors which performed well last week.

Newsflow around Russia’s invasion of Ukraine prompted increased volatility during the week, with investors attempting to understand the implications for the global economy and financial markets. Russian companies saw their London listed shares plummet, with Sberbank shares declining by 68.70% across the week. British steelmaker Evraz, which has extensive operations in Russia, saw their shares decline by 27.72%.

Fears that the conflict would impact the export of materials from Russia and Ukraine prompted an increase in the price of various commodities. Mining stocks benefitted as a result, with Glencore seeing their share price rise by 4.06% and Anglo American PLC gaining 5.93%.

Europe

Major European equity indices suffered steeper declines than most of their global counterparts last week, given the potential impact of the Russia-Ukraine conflict for the wider continent. The broad FTSE All World Index – Europe ex UK fell by 3.39%. Germany’s DAX index moved 3.16% lower.

Germany suspended the approval process for the Nord Stream 2 pipeline, which was built to increase the capacity for gas supply from Russia. The EU, In conjunction with the US and the UK, imposed a wide range of sanctions on Russia, from export controls to penalties for Russian companies and high profile individuals.

An initial reading for a Eurozone composite Purchasing Managers Index (PMI) indicated that the region saw economic activity strengthen during February, with a reduction in coronavirus related restrictions benefitting service industries. A key member of the European Commission said that they will start to instruct member states to withdraw pandemic related fiscal stimulus measures.

Equity indices in the US were mixed last week. The S&P 500 gained 0.82%, the Dow Jones Industrial Average was flat (-0.06%) and the NASDAQ 100 rose by 1.28%. The indices suffered heavy declines during the middle of the week as investors reacted to Russia-Ukraine developments, but recovered during the 2^nd half of the week.

Economic data was mixed during the week. PMI surveys indicated that both the manufacturing and service sectors grew at a faster pace during February. Some of the increase in activity was attributed to a bounce back from the disruption of the Omicron wave in January.

Whilst the Russia-Ukraine conflict had a significant impact on sentiment during the week, investors appeared to pay close attention to the outlook for Federal Reserve policy, with some commentators suggesting that the geo-political uncertainties would see the Fed take a less aggressive approach.

Asia

Asian equity indices declined across the week, resulting in the broad FTSE All World Index – Asia Pacific moving 3.86% lower. Japan’s Nikkei 225 fell by 2.38%, whilst China’s Shanghai Composite Index declined by 1.13%.

The Japanese government moved to implement sanctions on Russia during the week, which included freezing assets held by Russian banks and individuals closely linked to Putin’s government. Prime Minister Kishida stated that Japan holds sufficient reserves to limit the impact of reduced energy supplies from Russia.

The Chinese real estate sector saw some positive developments during the week, with data confirming that house prices rose by 2.3% year-on-year in January. State owned banks reportedly cut interest rates to try and stimulate demand, whilst the deposit requirements for first time buyers in some regions were loosened. The efforts to boost demand are likely to have little impact in the short term for developers experiencing substantial cash flow issues.

The 10-Year UK Gilt Yield rose from 1.38% to 1.46%. The geo-political issues during the week appeared to have little impact on demand for UK government debt, with yields remaining relatively stable.

Europe

The 10-Year German Bund yield climbed from 0.19% to 0.23%, indicating that demand for German government debt fell. Bunds typically benefit from a sell off in risk assets, with investors seeking ‘safe haven’ assets, however, this trend failed to materialise last week.

The 10-Year Treasury yield saw a marginal increase, gaining 3 basis points to reach 1.96%.

The week’s political events appeared to have little impact on Treasuries and with US equity indices rising across the week, demand for risk assets appeared to outweigh the appetite for US government debt.

Currency

GBP / USD – Current 1.3409 Previous 1.3589

GBP / EUR – Current 1.1900 Previous 1.2003

The Pound declined by 1.32% against the US Dollar and 0.86% against the Euro. The main issue impacting currency markets did appear to be the Russia-Ukraine conflict, with demand for ‘safe haven’ US dollars growing during the week.

Commodities

Gold

Gold benefitted from the cautiousness amongst some investors, with the spot price rising by 0.56% to reach $1,908.99 per ounce.

Oil

With Russia providing around 10% of the world’s oil supply, the impact of sanctions and export controls pushed prices higher last week. The Brent Crude spot price gained 4.69% to reach $97.93 per barrel.