Market Update March Monday 28th 2022

Attention turns back to the US Federal Reserve

Whilst investors remain acutely aware of the situation in Ukraine, movements particularly in the bond market this week were dominated by US Federal Reserve (Fed) comments. Fed Chair, Jay Powell, at a conference on Monday, insisted that the Fed should move quickly to raise interest rates to combat higher inflation. Further comments from Chicago Fed President, Charles Evans, were also hawkish, saying on Thursday the Fed needs to raise interest rates “in a timely fashion” this year and in 2023 to curb high inflation before it is embedded in US psychology and becomes harder to get rid of.

These comments caused US government bonds to sell off with the US government bond market now on track to post its worst month since Donald Trump was elected in 2016, as fixed-income paying securities becoming less attractive due to the prospect of higher interest rates and inflation.

10-year US treasury yields, which move inversely to price, rose a significant 22 basis points to trade at 2.37% as of market close on Thursday. To put these rises into context, at the end of February the 10-year US Treasury yield was trading at just below 2%. Shorter duration government bonds which are more sensitive to Fed action and comments also sold off. The 2-year US Treasury yield rose by 20 basis points over the week to trade at 2.13%. Yields in core government bonds in the UK and Europe followed suit, with the 10-year UK gilt and 10-year bund yield trading at 1.6% and 0.53% respectively.

Equity markets stabilise

Most equity markets are set to finish higher for the week. As of market close on Thursday, the US market is up 1.28%, whilst the UK market rose by 0.5%. Europe drifted slightly lower by -0.34%.

Elsewhere, in Asia the Hong Kong index continued its rally, up another 2.49% after last week’s comments from the Chinese government to pledge support to financial markets. The Japanese stock market also had a strong week rising 3.79% whilst the Australian market was up 1.27%, helped by energy and miners in the index which continue to benefit from elevated commodity prices.

Despite heavy fighting continuing between Ukraine and Russia, a range of factors have been attributed to the overall rise in equities this week, ranging from investors closing out bets on short positions on stocks, to short term asset allocation moves as investors position away from bonds into equities.

Commodity prices remain elevated

The price of gold rose, as it emerged G7 leaders had agreed to crack down on Russia’s ability to sell its gold reserves. As of market close on Thursday, the gold price had risen by a further 1.75% to trade at $1,967 per troy ounce. Elsewhere oil prices climbed sharply again on further supply concerns and the threat of further sanctions on Russia. US president Joe Biden will meet the EU Commission as they are set to further increase pressure on Russia. Reduced crude oil supply in the US also contributed to higher prices, as this week the Energy Information Administration reported US domestic crude inventories fell by 2.5 million barrels over the week. Brent crude oil rallied as high as $123 per barrel before settling at $118 per barrel.