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Investment Market Update - March 2022


The world watched aghast last week as Russia stepped up its onslaught on Ukrainian cities and attacked the largest nuclear power plant in the country. In addition to the civilian casualties and refugee flow, the deeper war took a further toll on financial markets almost without reprieve, with frontline Europe more severely damaged than the US or Asia. 

No major economy has yet registered changes triggered by the Ukraine war and hence the macro data have still been looking very strong, in particular in the US. 

Against that backdrop, market movements were sizeable, with massive drops in Government bond yields, soaring oil and other commodity prices and falling equities across the board. 

Bond yields dropped very sharply, with 10-year German yields down 30 bps on the week, UK gilt yields down 25 bps and US treasury yields down 23 bps, bringing US 2-year yields to pre-pandemic levels. The yield curve (difference between short and long-term bond yields) fell across the board and flattened, with the US 2-year to 10-year yield curve down to 26 bps, from 45 recently. 

Oil surged near US$120/bbl for Brent but the rise was clipped by rumours that the talks to revive a nuclear deal with Iran may soon conclude, which would start to add more supply to the market. In the meantime, however, a significant percentage of Russian oil was not finding any buyers which had the effect of further propping the crude price. Early today the US$130/bbl level for Brent was actually exceeded. The same phenomenon happened for other commodities, as raw materials also surged, with aluminium hitting a record and wheat rallying to the highest since 2008. A gauge of overall commodities rose more than 13% during the week (in US dollars whilst the dollar also surged against developed currencies, 1.3% vs. sterling and 3% vs. the euro). 

With oil prices up more than 50% year to date and natural gas in Europe up 160%, there is an obvious mechanism for the Ukraine war to spread into the global economy, especially in Europe. Equities, therefore, collapsed in Europe and fell sharply in other parts of the world, including hitherto defensive markets like the FTSE and Hong Kong. At the end of the week, equities were down, but the US was more defensive, mostly flat in sterling terms. Europe fell nearly 12%, the UK almost 7% but emerging markets were more resilient, down a little over 1%. The main moving sectors were energy on the upside, whereas financials fell the most, on concerns about the financial implications of sanctions on banks, in particular European banks. 

Despite all of this, it should be noted that normal indicators such as US jobs continue to look positive with the lowest unemployment since 2019. However, market focus will continue to be on events in the Ukraine and will be for some time yet. This means that volatility will continue. Whilst this means that prices will fluctuate, well-diversified portfolios are the best defence as cash deposits will be at the mercy of rising inflation.

Neil Jefferies, Head of Adroit Financial Planning