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Market Update March Monday 21st 2022

Equity markets rally on tentative suggestions of ceasefire in Ukraine, leading to a fall in oil prices

Despite the US Federal Reserve (Fed) raising interest rates for the first time since 2018 and indicating that rates could rise at every further Fed meeting this year, equities staged a rally over the week as there were suggestions that Ukraine and Russia had made tentative steps towards a ceasefire proposal.

This helped the oil price to tumble, which in recent weeks had worried markets as to its ability to choke off economic demand on the back of its sharp increase. The oil price was also influenced by news that an additional seventeen million people in the Chinese city of Shenzhen were being put under lockdown to contain a surge in Omicron cases.

This is on top of the nine million already under lockdown in Changchun, with rising case numbers in Shanghai and other large cities, painting a picture of falling economic demand in China as it battles its largest outbreak of Covid19 since the pandemic began two years ago. However, a senior official in the Chinese communist party, Liu He, said Beijing would introduce economic stimulus measures in due course. All of these factors helped global equities stage a recovery, rising 4.8% over the week as of 12pm on Friday, London time. This took global markets above the level they were prior to Russia invading Ukraine on the 24th of February.

US equities rose 4.9% over the week, with the US technology sector posting an increase of 6.0%.
European stocks climbed 4.0%, with the UK market rising 2.7%, suffering from weakness in the commodity sectors, with only energy and mining stocks registering a fall over the week. The Japanese market increased by 6.1%, although from an overseas investor’s perspective, some of the gloss was taken off by Yen weakness, which had up until now benefitted from being a haven currency.

The Yen weakened by 2.2% versus Sterling and 1.5% versus the US dollar. Australian stocks rose by 3.3%. Emerging markets increased by 3.3%, with Asia Pacific rising by 3.7%, whilst Latin America, more correlated to commodity prices, rose by 1.7%. Chinese domestic equities fell 1.8% over the week, suffering from an increase in Covid related lockdowns and concerns that China could face secondary sanctions should it choose to support Russia in its war with the Ukraine. However, although it recorded a loss for the week, the market rallied by over 7% midweek on suggestions of forthcoming economic stimulus.

US interest rates rise for the first time since 2018

Jay Powell, chair of the Fed, said on Wednesday, as US rates were raised by 0.25% to within a range of 0.25% to 0.50%, that the US economy was in strong shape and he did not see the risk of recession as being particularly elevated. The yield on 10-year US Treasuries, which moves inversely to price, momentarily rose to 2.23%, before setting down to 2.16% by midday on Friday.

Similarly, German bund yields rose over the week, now trading at 0.37%, whilst UK gilts yields having touched 1.64% intraweek, are trading back down at 1.52%, only slightly up on last week. On Thursday the Bank of England increased rates by 0.25% to 0.75% and predicted that inflation would hit 8% by the end of June. However, unlike the hawkish response from the Fed, the Bank of England was much more measured in its inflation outlook citing falling consumer confidence and a squeeze on household incomes that is set to become much larger, weakening the outlook for growth.

Brent crude falls to $97 a barrel having hit $132 last week

Brent crude, having touched $132 a barrel last week, traded as low as $97.4 a barrel this week, although it has since rallied to $106.1 as the International Energy Agency said a fall in Russian oil supply threatened to become the “biggest supply crisis in decades”.

Gold also fell over the week, dropping by 2.3% to trade at $1,943 an ounce.

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