March Commentary

GLOBAL MARKETS

Robust macroeconomic indicators have led to investor fears of persistent stickier inflation, and a longer road of monetary tightening ahead.

US MARKETS

Inflation fears continue to linger over the market

US equities declined for the month, led by energy and utilities. The resilience of the economy remains a concern for investors, mostly those who have been pricing in a slowing of rates for later this year. Despite corporate layoffs and lacklustre earnings, consumer confidence and retail spending remain strong. PMI’s shifted into expansionary territory, producer inflation printed hotter than expected, and the labour market remains stubbornly tight. Interest rates were hiked a further 25 bps at the beginning of the month, adding upward pressure on the dollar. The Federal Reserve stated that further increases would be required, to achieve their long-term target rate of 2% for inflation.

Down -2.6% (US 500)

UK MARKETS

UK equities outperform their global counterparts but remain fragile

UK stocks outperformed their global market counterparts, driven by consumer staples and materials. As monetary policy efforts begin to take hold, the economy showed the initial signs of slowing, with GDP growth declining. House prices fell at their fastest rate in a decade. The Bank of England governor Andrew Bailey delivered a more dovish statement following another 50 bp hike early in the month. Despite some positive signals, the outlook remains mixed. While inflation remains at challengingly high levels, owing to prices of soft commodities and wage growth effects, PMI’s have improved but remained in contractionary territory, and consumer confidence has lifted.

Up 1.2% (UK All Share)

EUROPEAN MARKETS

European financials help propel the region

European equities were the best performing region globally, led by Spain (+4.4%), Italy (+3.3%) and Greece (+10.4%). European financials have been a key contributor to positive performance year-to-date. Inflation has declined in recent periods but remains well above trend, as food prices continue to move higher and there is little respite from a tight labour market. On a positive note, falling energy costs have continued to benefit both households and firms in the short term. The ECB has signalled that, despite a looming recession and receding manufacturing figures, they intend to follow through with scheduled rate rises to quell inflationary pressures.

Up 1.7% (Euro 600 Index)

JAPAN MARKETS

Move higher on accommodative Bank of Japan

On the back of the Bank of Japan’s decision to continue their accommodative monetary policy stance, leading to a softness in the Yen, both the Japanese equity and bond markets moved higher. In local currency terms, Japan has outperformed the US and other Asian counterparts this year, due to stronger corporate earnings and a tailwind from increased tourism. However, PMI figures are in negative territory and inflation is now reaching 40-year highs, effecting wage and goods costs, and ultimately impacting profitability. Geopolitical issues are also heating up, as North Korea fired missiles close to, and over, the Japanese mainland.

Up 0.9% (Japan Index)

Key Points

•  The US dollar, driven by a flight to safety, appreciated against most developed and emerging pairs in February, as market consensus seems to believe the Federal Reserve has the appetite for further interest rate hikes.

•  Sterling also strengthened, albeit not versus the greenback, as slowing inflation and a prudent monetary policy approach provided a level of reassurance to global investors.

•  The performance of the Euro was more mixed, appreciating broadly against emerging market currencies, with an outlook of slowing inflation and growth balanced against a fractured political backdrop.

•  The Japanese Yen declined alongside most EM currencies in aggregate terms, as uncertainty in monetary policy clouded the former, while an outlook of slowing economic growth hindered mostly the latter.

Key Points

•  Global bonds performed negatively through the month as yields pushed higher following multiple central bank policy rate rises and resilient inflationary datapoints. The market is beginning to sober up to the idea of higher rates for longer than previously envisioned

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•  The UK witnessed yields on the 10-year move 50 basis-points, close to levels seen at the end of December, while the US charted a similar course, albeit to a less severe extent, seeing 10-year yields shift 41 basis-points.

•  In Europe, bond markets also reversed as borrowing rates were lifted another 50 basis points, with guidance for similar moves at upcoming meetings. The greatest movers were in France and Germany, which rose off a lower base than their southern European counterparts.

•  The exception in February was Japan, where yields moved lower, albeit marginally, on concerns surrounding the direction of monetary policy under the new Bank of Japan governor, Kazuo Ueda.

•  In the global corporate bond sphere, spreads widened on both investment grade and high yield issues as the market digested weakening growth conditions and the consequences of rising borrowing rates.