Following persistent selling since the start of the year, equity markets saw positive returns in March, regaining a significant proportion of the drawdown. While the key concerns are still very much present, investors have been keen to look though to the impact on corporate earnings, which remain broadly positive, and in aggregate little effected. The Russian invasion of Ukraine, resulting sanctions and ongoing developments have added significant volatility across a number of markets. The clearest impact has been on commodities. The Brent Crude oil price at the end of February was just under $100 per barrel, already up close to 30% from the start of the year. The imposition of sanctions and moves to remove Russian oil from many countries’ supply chains saw the price reach $130 during the month. Daily moves continue to be extreme, influenced by the conflict, political developments as well as more recently by concerns over Chinese demand, with the benchmark price closing the month around $110. Extreme volatility in addition to higher prices will add to inflation, both directly through pump and utility prices for consumers, but also through supply chains, which will be stickier. Energy prices therefore continue to exacerbate the existing issue of inflation.
While some central banks have tempered their guidance for interest rate increases, the outlook remains for tighter monetary policy going forward. The Bank of England and the Federal Reserve both announced rate rises in March and guided for more in the coming months. Interest rate rises have direct implications on fixed income markets, although it is the change in market expectations for monetary policy that will drive movements.
With markets pricing in a significant number of interest rate rises over the coming year, there is the potential for disappointment. Central banks now have the unenviable task of attempting to tame inflationary pressures, driven predominately by external factors, and supporting growth. There are now concerns that, with higher oil prices directly impacting consumers discretionary incomes, interest rate rises may cause a recession. This fear has kept some restraint in the selling of longer dated bonds.
The market risks from COVID have been waning over the last couple of months, driven by looser government regulation, improved healthcare solutions as well as the more favourable traits of the Omicron variant. However, an outbreak in China, where a zero COVID policy remains in place, has driven some selling. The Chinese government continues to use some of the most stringent measures to control the outbreak, with lockdowns in the financial centres of Shanghai and Hong Kong causing particular concern. With the highly infectious nature of the Omicron variant there is a risk that even extreme measures are unable to reduce its spread, and a significant amount of economic damage may be caused in attempting to do so. A sign that the outbreak is getting out of hand and that the Chinese government remain determined in its policy will be a point of particular concern for equity markets, although it could reverse much of the rise in oil prices seen this year.