Market Commentary 14th March 2022 from Charlie Hancock

The UK economy recovered from the Omicron induced weakness experienced in December, growing by 0.8% in January. Service businesses experienced a strong recovery, with activity in the food and drink sector rising by 6.8%.

Chancellor Rishi Sunak warned that the UK could face significant economic uncertainty due to the Russia-Ukraine conflict. The Chancellor’s comments came days after the UK government announced it will phase out imports of Russian oil by the end of 2022, whilst considering the options for natural gas imported from Russia.

The European Union (EU) introduced further sanctions on Russia and shut their airspace for Russian planes. The EU also revealed plans to cut Russian gas imports by two thirds within the next 12 months, although Germany pushed for a slower reduction in imports to avoid a significant increase to consumer energy bills. Russia currently supplies around 40% of the EU’s natural gas.

The European Central Bank (ECB) kept interest rates unchanged following their policy meeting, but signalled that their asset purchase programme could end sooner than expected, potentially during the third quarter of 2022 if economic data supports the move. The ECB President, Christine Lagarde, suggested that interest rates will not rise until some time after the central bank’s asset purchase programme ends.

Consumer Price Inflation rose at the fastest rate for 40 years, with a year-on-year increase of 7.9% during February. Inflation concerns continued to impact consumer attitudes, with a closely watched consumer sentiment index falling to the lowest level recorded since 2011.

Several large consumer businesses chose to close stores in Russia, which impacted their share prices. Coca Cola saw their share price fall by 7.42% across the week, whilst Starbucks declined by 8.11%.

Data showed that consumer spending in Japan declined during January, with the re-introduction of some coronavirus related restrictions hindering activity. Input costs for manufacturers, measured by the Producer Price Index (PPI), rose at the fastest pace ever recorded, with a year-on-year increase of 9.3% in February. The governor of the Bank of Japan (BoJ) stated that it would be inappropriate to withdraw monetary stimulus or raise interest rates, with consumer price inflation still below the bank’s 2% target.

Concerns around the US financial regulator’s approach to Chinese companies listed in the US prompted volatility for Chinese equities during the week. The US Securities and Exchange Commission (SEC) is pushing for more stringent audit requirements, whist authorities in Beijing have reportedly told Chinese companies to comply with local accounting rules only. A resurgence in Coronavirus cases in some regions also appeared to impact investor sentiment, with concerns that Chinese authorities will implement strict control measures in pursuit of a ‘zero covid’ policy.

The positive investor sentiment for UK risk assets also appeared to prompt some rotation away from government debt and into equities.

The ECB appeared to surprise markets by signalling that their quantitative easing programme may end during the third quarter, with hawkish comments contributing to the rise in government bond yields.

GBP / EUR – Current 1.1948 Previous 1.2108

The Pound lost ground against the US Dollar, falling by 1.46% as demand for the US currency continued to increase. Since mid-January, the Pound has declined by 5% against the US Dollar. The Euro recovered from some of its recent weakness, resulting in the Pound declining by 1.32% against the Eurozone currency.