Week ended March 25th 2022
The summary is:
Global stocks: range was Nikkei 225 (+4.9% WoW) to Shanghai Composite (-1.2% WoW). Europe and EM more or less flat. S&P 500 (+1.8% WoW) and FTSE 100 (+1.1% WoW) solid.
US stocks: three of the four indices positive, ranging from NASDAQ Comp (+2.0% WoW) to Russell 2000 (-0.4% WoW)
US Treasuries: poor across the board, with 2y and 10y ending week yielding 2.30% (+33bps WoW) and 2.48% (+34bps WoW), respectively. Yield curve about the same
Oil: WTI crude +7.1% WoW, to close $112.60/bbl
Gold and USD: both safe havens stronger on the week
Corporate credit: weaker, as yields increased across the credit spectrum; spreads were tighter (since spreads have time lag vis-à-vis yields)
Bitcoin had another good week, up 6.1% WoW and 13.1% for March, continuing its solid run.
UK CPI for February (last 12 months) was 5.5%, vs 4.9% for the previous month, according to ONS data released mid last week (here), as inflation continues its upwards trajectory in the UK. To ease the burden, especially of higher fuel and food prices, Chancellor of the Exchequer Rishi Sunak released his “spring statement” (i.e. economic update) on Wednesday and presented it before Parliament. You can find a summary and links to various reference sources from the Office for Budget Responsibility here should you wish to dig deeper. In a nutshell, Mr Sunak reduced and deferred certain tax increases (but not the NHS increase) to offset what is expected to be significantly lower growth in the UK this year compared to earlier projections. The culprits seem to be a combination of higher-than-expected inflation, eroding people’s living standards, and effects of the Ukraine-Russia war. GDP growth was revised down to 3.8% for 2022 (vs 6.0% in October 2021), and inflation is now expected to average 7.4% for 2022. Indicative of the slowdown perhaps, retail sales volumes were released by the ONS on Friday (here), and sales volumes for February fell 0.3% for the month (vs growth of 0.7% expected and vs an increase of 1.9% in January). This is beginning to feel very much like the onset of a classic case of stagflation, as the outlook for the UK economy worsens but inflation remains stubbornly high.
In the US – further removed from economic collateral damage of the Ukraine-Russia war – the economic outlook remains more positive as far as growth, although inflation is also accelerating. First-time jobless claims data was released by the DoL on Thursday for the week ended March 19th (here), and claims came in at 187,000, the lowest level since September 1969. Risk markets shook off concerns over both the Ukraine-Russia conflict and inflation. Even as bonds remained under intense pressure as yields drift higher and higher, investors are piling back into risk assets like equities and cryptocurrencies. It’s a bit “too much, too soon” for me, especially seeing the combination of meme / meme-like stocks and cryptos rally so hard this week (discussed further below). Various Federal Reserve regional presidents and Mr Powell presented at conferences and / or spoke to the press this week, reiterating the Fed’s hawkish shift. There is a fairly consistent and focused Fed narrative that there will be up to seven increases in the Federal Funds rate this year, perhaps some increments of 50bps (as opposed to the customary 25bps). Investors hear this loud and clear, and it is increasingly hard to say the path ahead is not being priced in. I feel this is truer in the UST and corporate bond markets than in the equity markets, which continue to increase steadily, clawing back Jan-Feb declines.
Although it has little to do with the economy or global financial markets, the Senate Judicial Committee hearings for Supreme Court associate justice nominee Ketanji Brown Jackson took place this past Tuesday and Wednesday. In my opinion based on a few sound bytes to which I listened, portions of this inquisition bordered on shambolic. I suppose it is the same every time a Supreme Court justice is nominated in the very divided and polarised United States at the moment. Nonetheless, Ms Jackson is expected to be approved before Easter as Democrats control the Senate.
The tables: the week in data
Global equity indices were mixed this past week, with the Nikkei 225 (Japan), FTSE 100 and S&P 500 all turning in positive returns, whilst the SSE Comp (China) was by far the worst performer. YtD, the only index I track with a positive return is the FTSE 100.
US equities ended the week with three of the four indices in the green, led by the NASDAQ Comp, as you can see in the table below.
The S&P 500 index was up six consecutive sessions starting on March 15th, and has been positive eight of the last nine trading days ending Friday. The table below and to the right provides a look at returns
of the indices and various groupings of stocks during the six consecutive days when US equities were climbing – from March 15th (14th close) to March 22nd – and the nine consecutive trading days from March 15th to Friday’s (March 25th) close.
As the table illustrates, the FAMAG names – very influential in both the S&P 500 and NASDAQ Comp as far as market capitalisation – drove the performance of the indices, especially the S&P 500 and the NASDAQ Composite. However, returns on big tech non-FAMAG names (arithmetic average) over these six days were more than double that of the FAMAG stocks, whilst the meme stocks earned nearly three times the returns. This sounds too déjà vu to me, flashing back to the “buy the dip” performance of 2021 that makes me extremely uncomfortable given the backdrop. It is worth noting that the VIX declined over this two week period from 31.77 (close March 14th) to 20.81 last Friday, as volatility in equities settled down and prices moved higher. The question very much is, “are equity markets appropriately pricing in the risks ahead, or is this a bear market rally / dead cat bounce?”
US Treasuries got hammered again this week, with yields 30bps+ wider at both the 2-year and 10-year maturities. The 2-10 yield curve was more or less unchanged. Bond markets continue to signal significant concerns with inflation (near-term) and the Fed’s ability to successfully navigate a soft landing (intermediate-term).
As an aside, yields are also moving higher across the curve in the UK and Eurozone, as both the BoE and ECB are forced (or, in the case of the ECB, will be forced) to tilt hawkish to address rising inflation.
Risk-off assets; other assets: Whilst USTs were sagging under inflationary pressures, gold and the US Dollar – both risk-off assets – gained this week. It is confusing to have mixed signals like this in the financial markets regarding risk, signalling more uncertainty ahead than may be visible in standard volatility indicators like the VIX, which – as mentioned earlier – has settled down throughout the month. The Yen is a risk-off currency that has continued to weaken, in fact reaching its lowest level (vis-à-vis the USD) since 2016. The reason is that the Bank of Japan is very unlikely to turn hawkish like the Federal Reserve. As overnight bank borrowing rates increase in the US but remain anchored at 0% in Japan, investors are moving out of the lower-yielding Yen and into the higher-yielding USD. To tie the relative weakness of the Yen to Japanese equities, a weaker Yen is bullish for many Japanese companies because these companies’ exports become cheaper and more competitive in global markets.
Oil continued to recover from its lows from 7-8 trading sessions ago, with WTI crude closing the week at $112.60 /bbl, a gains of 7.1% WoW. Should high oil prices persist, they will be eventually become a more serious drag on global economic growth. We remain in a complicated situation with the sanctions on Russian oil, and it is far from certain that the market has found the “right” price for oil. Given the dependency of Europe on Russian oil, and the fact that India (and I suppose China) will keep buying Russian oil, the intermediate-term equilibrium is hard to call, but my bet would be for the price of oil to continue to increase as the US finds ways to tighten the sanctions on Russian oil.
As far as cryptocurrencies, an area I do not follow closely, I have been very impressed with the resiliency of Bitcoin. The benchmark cryptocurrency closed the week at $44,349, up 6.1% for the week, and a solid 13.1% for the month of March so far. The supply and demand dynamics of Bitcoin and its brethren are murky to me on a good day, but clearly there is supporting demand coming from somewhere in the market.
Corporate bonds (credit)
As UST yields increase sharply, there is little doubt that corporate credit yields will follow – and they did this past week. (Recall that in the corporate bond tables, I only have levels through Thursday, which means the sharp increase in UST yields on Friday is not reflected.) As I discussed last week, the migration of credit spreads trails the movement in corporate credit yields, meaning that credit spreads actually tightened last week in both investment grade and high yield as yields rose. This is largely a timing issue related to the lag. Investment grade credit remains vulnerable to price deterioration as underlying yields increase, and high yield bonds are not far behind although arguably their higher spreads provide slightly more insulation against rising underlying yields.