The week that was

For the second week in a row, markets looked through the current horrors of the Ukraine war and were up between 2% (Australia) and some 6% (for the S&P 500). That leaves European markets down slightly since the war started on 24th February, the US level pegging, and the resource rich Australian economy up almost 5%. There was little in the talks late last week between that Biden and Xi Jing Ping to sponsor that much optimism but then over the weekend more concrete progress seemed to be forthcoming in talks mediated by Turkey and Israel. On the other hand, with inflation expectations still rising steeply and long-term interest rates rising but by less maybe an implicit softening of expected real rates also helped. This would also help explain the even greater rebound in tech stocks, with the Nasdaq up almost 10% last week.

Apple, Microsoft, and amazon made the strongest contribution while Nvidia, Tesla, Facebook were also made double digit gains during the week. Energy stocks were the biggest negative contributors even though oil prices were up for the week. In any other scenario a double-digit oil price rise during the week would have been positive for oil stocks but having been up and down 30% in the last 30 days investors maybe starting to look through the noise and seeing prices settle around $100 over the next few months. Futures markets have oil back down to the eighties by next year. Similarly iron ore prices were up again but iron ore producer share prices detracted from the local market’s performance. Almost all of the gains came from the local banks and other financial service providers which were all up 5-10%, with the increasing probability of rate rises in the not-so-distant future seen as a positive for banks, as long as the economy and especially the housing market remain robust.

Emerging markets, and especially China tech, were also volatile, down 6% mid-week before bouncing 10% in the last three days of the week after the Chinese authorities intimated that their regulatory purge on listed stocks might be coming to an end and that overseas capital did perhaps have its uses after all. This followed a surge in outflows by jittery Western investors who started to envisage the potential for Chinese holdings to vaporise in value as many Russian holdings might have.

The biggest news of the week was supposed to be the Federal Reserve’s much heralded first rate rise in the 2 years since COVID although the cautious 0.25% rise was so anticipated that on the day both bond and equity markets were largely unchanged. There was some volatility around the time of the announcement as the so-called ‘dot-plot’ of committee member forecasts implied a stronger consensus around another 2% of rises during the rest of the year. Within minutes the market appeared to reflect that it ‘is never going to happen’ and markets rebounded back to where they had been.

Corporate bond markets also breathed a small sigh of relief as credit spreads narrowed for the first time this year and the US Dollar was also weaker against most currencies (another sign that risk appetites were returning). For now, at least, markets seem to be hoping that the situation in Ukraine will improve and that the Fed is not going to be forced to choke off the recovery in the face of stagflationary threats.