Markets shrugged off first rate hike in US

Equity indexes partially bounced back
FED raised interest rate up to 0,5%

After bit more than 10% correction from the peak reached at the start of the year developed market stock index (MSCI World NTR EUR) bounced back during second part of March. Market participants still continued to flock toward more defensive sectors. It is also important to note, that emerging market index (MSCI Emerging market NTR EUR) demonstrated sharp moves down and up and ended March in negative territory. Meanwhile bonds suffered due to selling pressure from increasing probability, that interest rates will be raised numerous times this year and possible balance sheet reduction by the Fed.

World equity sectors in euros 2022-03

Source: Bloomberg L.P.

US Fed chairman Jerome H. Powell voiced worry about inflation and declared, that central bank is ready to do what it takes to control rapid price increases. This signaled to market participants, that soon rates could be raised more aggressively than last month, when the Fed declared its first rate hike since 2018, amounting to quarter point increase.

Selling pressure subsided a lot in Emerging markets after Chinese authorities tried to ease stress in financial markets vowing to be proactive to respond to the need to boost economy. It is planned to introduce new policies to handle property developers’ risks and push forward rectification of major internet companies and support foreign listings. Before this announcement market participants were willing more to sell Chinese IT companies, which were listed on US exchanges fearing further regulatory crackdown and heightened risk of sanctions should China provide aid to Russia for the war in Ukraine. One of the biggest Chinese IT companies Alibaba Holdings share price had lost about 75% from peak reached in 2020 and Tencent declined more than 60% before substantial bounce back in March.

Worry about global supply chains deepened after China was forced to announce new lockdowns in the biggest cities. At the end of the month newly confirmed COVID cases showed no signs of losing momentum and financial and trade hubs like Shanghai and Shenzhen took steps to limit spread of the virus. In some cases “closed loop system” was tested where factory workers are living and working separately from general public.

Commodities prices in 2022 in euros

Source: Bloomberg L.P.

War in Ukraine, new COVID wave and its impact on supply chains wreaked chaos in commodities markets and impacted whole world. Most notably nickel, used in batteries and coins, suffered short-squeeze and London Metal Exchange (LME), which suspended trading for a week and cancelled billions of dollars’ worth of transactions. Price of Nickel hit a record of 101 365 USD a ton on March 8 and forced LME to double the size of its default fund. Exchange came under furious criticism for its handling of this nickel crisis and traders remain wary of threat of another squeeze as there are still large short positions in the market.

“House view” update

In March Luminor Investment management team remained cautious and maintained underweight risky assets and kept heightened exposure to defensive sectors (utilities, healthcare and energy). The investment team continues to monitor already more than month long war in Ukraine, its impact on global economy. Increased political and military tensions, new supply chain disruptions and huge moves in commodity prices could materially impact growth perspectives.

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