The week that was

Markets continued to recover during the first three days of last week, bolstered by an extremely robust US earnings season, at least viewed through the prism of 2021 earnings (the outlook for 2022 from companies has been much more nuanced). Then sentiment deteriorated when an important US inflation reading came in a little higher than already very high expectations. The main news of the week, however, happened as the European market closed. An unequivocal warning by US intelligence that a Russian invasion of Ukraine might be imminent. That sent the US market down sharply and tech stocks were again the lightning rod for risk with the Nasdaq falling 4% and ending the week down around 2% having been up almost 4% at one stage earlier in the week. The S&P 500 was also down around 2% while Dow Jones Industrial average finished down just 1%. Although one might have expected other markets to follow suit, most other markets were actually up, and thus far in Asian trading on Monday (with markets down only about 1% and the Australian market actually up) that does not seem to be the case (US futures are also not yet implying a rapid rebound).

European markets may feel differently but for now asset prices have looked much more resilient in Australia than in the rest of Asia, even in Latin America this year this latest source of risk seems to be no different. The energy laden UK FTSE 100 was actually up on the Ukraine news on Friday and ended the week up 2% while gold prices were up 4%. The banks and Materials sectors were also up globally last week, and Industrials and Consumer Staples were flat while the Consumer Discretionary, Communications and IT sectors were all down. Tech stocks tend to be spread across those sectors and it was generally the large US tech stocks that performed especially well in late 2021 that weighed on markets the most. At the positive end of the ledger were a host of stocks that reported strong earnings and, crucially, at least a reasonable outlook. These included Walt Disney, Taiwan Semiconductor, Siemens, Micron Technology and, closer to home, CBA. The other local banks also followed suit and the miners were also buoyed by the continued rise in iron ore prices, although more modest results are expected this week. The Australian reporting season has got off to a fairly good start but it was the travel stocks like Webjet, Flight Centre and Corporate travel that provided the biggest gains as reopening (hopefully) gains momentum.

Even though bond yields dipped slightly in the US on Friday, government bond yields were up across most markets last week and commodity markets also added to the inflationary theme, especially oil and some of the soft commodities that Ukraine exports in bulk like wheat. Credit spreads also eased again across the credit spectrum, but once more quite incrementally and there were few signs of stress in corporate lending markets. This brings spreads in certain corporate sectors back to where they were pre-COVID and given the uncertainty around what might happen when the Fed stops buying US corporate bonds as part of the quantitive tightening process the powers that be will happy with that aspect of policy normalisation. Investors in medium duration government bonds who have lost 4-5% so far this year may be getting less sanguine.