03rd May 2022

Good morning,

Stocks struggled once again last week as bond yields rose further – which unfortunately meant there were very few hiding places for investors once again. A theme that has been repeated consistently in 2022. In trading yesterday evening, the US ten-year bond yield briefly broker the 3% level – its highest level since December 2018 and double the level from the start of the year.

As we all know investment markets tend to be forward looking, and the near certain 0.50% interest rate hike from the Federal Reserve this Wednesday has been behind much of the yield rises in the US. The Bank of England look also set to raise rates by 0.25% on Thursday, which would put them at the highest level since 2008. The ECB has also turned more hawkish in their commentary on the back of recent inflation data (more info below).

At Zurich, we maintain our view that the recent geopolitical unrest has resulted in an acceleration of exiting structural trends and that there is a secular shift occurring in monetary policy; triggered by the recent inflation spike. We look on expanding on such thoughts, along with a number of other topics, at our upcoming Investment Conference ‘Active Management Matters’ on Tuesday 24th May. This marks our return to in person events and further information will be circulated this week.

Weekly Investment News
US markets fell to their lowest level of the year on Friday, as an earnings disappointment from Amazon pushed equities to their fourth consecutive week of losses. Tech orientated stocks across a number of sectors fell with the NASDAQ down 3.9% for the week in dollar terms, whilst energy outperformed to the upside on news of further restrictions on the sale of Russian gas.

It was a busy week on the economic data front on both sides of the Atlantic. In the US, Q1 GDP came in at -1.4% QoQ, however the headline figure masked strength in some of the underlying components. Houses prices in the US are now up over 20% in the last 12 months and core PCE inflation (the Fed’s preferred measure) ticked lower to a 5.2% annualised rate for March. House prices were higher as a result of enduring supply chain issues, with housing completion timelines continuing to stretch out. It remains to be seen whether the recent moves higher in bond yields, which feeds into mortgage rates, starts to bite on demand.

In the eurozone, inflation hit another record high at 7.5% YoY in April on the headline measure, up from 7.4% in March, while core inflation also picked up to 3.5% from 2.9%. Although the eurozone economy grew in Q1, the increase in GDP was only 0.2% QoQ. The spike in inflation makes the ECB’s job harder and there was further hawkish rhetoric from policymakers last week including ECB President Christine Lagarde, who said that the ECB would end QE asset purchases early in Q3, ‘probably in July’ and then consider raising interest rates. Finally, the general hawkish tone from major central banks has not yet filtered into the Bank of Japan’s thinking, who last week reinforced its commitment to keep Japanese bond yields at low level and would continue to buy unlimited quantities of bonds as required.

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