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- One of the most anticipated events during the last week was the interest rate decision by the US Federal Reserve, which did not disappoint the markets. Rates were increased by 25 points, and the outlook for further increases remains positive. Some investors were expecting a more significant rise, so stocks were not negatively affected in the end, and there were no significant movements caused in the currency markets either.
- However, investors could see more significant growth at the next FOMC meetings. According to Fed officials, we can expect up to 7 more rate hikes this year, with rates expected to be as high as 2.8% by the end of 2023 (up from 1.6% at the previous meeting).
- Much more influential was the Bank of England’s decision on the British pound, which, while raising rates by an expected 0.25%, signaled that in the near term, we probably will not see increments as frequent as the markets would like to see and priced in.
- The ongoing war in Ukraine did not significantly impact equity investors last week, but the nervousness in commodity markets is still present due to continued uncertainty.
- And while restrictions on COVID-19 are being relaxed in most countries, localized outbreaks are re-emerging in China, leading the government to introduce new measures to limit further spread.
Indices
Equity markets had a very good week, despite the US Federal Reserve raising interest rates for the first time since 2018. The rate hike was widely expected, whereas a 0.50% increase was expected just two weeks ago. As a result, Wall Street stocks had their best weekly performance since last November. Investors were buying the dip on oversold markets, also appreciating Fed’s relatively restrained commentary on the balance-sheet drawdown, which is not currently on the agenda. The tech sector was the biggest gainer.
However, not only US equities did well during the week, with Asia-Pacific equities in particular posting solid gains, with growth helped by the news that China is maintaining its restrained stance and is unwilling to take Russia’s side in the conflict in Ukraine.
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US30 +5,5% |
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US100 +8,6% |
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US500 +6,2% |
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GER40 +5,8% |
Commodities
Commodity markets remained extremely volatile last week.The war in Ukraine and the growing number of Covid-19 cases in China are affecting the mood on both the demand and supply side. Concerns of market participants are having a negative impact on liquidity in the markets. We can expect similar developments in the week ahead, with the war in Ukraine and the virus situation in China continuing to be the main factors influencing the markets.
Although oil rose slightly at the end of the week and got above the USD 100 per barrel mark, it still recorded a second consecutive week of decline. The price fell from an all-time high two weeks ago as concerns about reduced demand from China arose, but supply constraints due to traders’ reluctance to buy oil from Russia supported the price again. According to the International Energy Agency, the market may be short of up to 3 million barrels of oil per day from April.
Gold lost its battle with the US Fed last week, posting its biggest weekly drop since November. The US central bank’s actions will continue to matter as gold investors are still a bit uncertain about how hard the Fed will fight the looming inflation. The $1,900 per ounce level has so far proved to be strong support.
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Gold -3,24% |
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Silver -3,29% |
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BRENT -3,83% |
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NATGAS +3,62% |
Forex
The British pound picked up after initial losses after the BoE raised interest rates again. The initial fall was of very short duration and the pound gained against the USD over the week. However, from a technical perspective, the GBPUSD is in a long-term downtrend that started in the middle of last year.
The Canadian dollar strengthened during the week after an initial weakening, even though the oil price ended in the red.
The Australian dollar did well, adding over 1.5% against the USD over the week. The PBoC interest rate decision as well as comments from the head of the Reserve Bank of Australia may help the Aussie next week.
The Japanese Yen was the worst performer of the week, suffering from the central bank’s dovish and extremely expansive policy. This is because the BoJ is still clinging to its stimulative approach, despite inflationary pressures around the world, which is forcing other banks to tighten their monetary policy rather more.
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EUR/USD +1,29% |
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USD/JPY +1,55% |
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GBP/USD +1,08% |
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USD/CAD -1,10% |
Macro
The Fed raised the key interest rate to 0.5%, and further increases are expected at other FOMC meetings. Richmond Fed President Thomas Barkin expressed that he could see a 50 point rate hike if inflation continues to rise.
Bond market investors are nervous about the flattening yield curve and, in particular, an inverted 2s-10s curve, which has often been a sign of an impending recession in the past.
The Bank of England has also raised its rates to 0.75%, the third time in a row, but bankers are unlikely to continue at the current pace.
At Friday’s meeting between the US and Chinese presidents, while no specific demands were made from the US side, Biden stressed to Xi that any material assistance to Russia could lead to consequences from the US and the wider world.
While the Ukrainian president Zelenskyy confirmed on Saturday that he would be willing to hold talks directly with Putin, according to the New York Times, a Turkish official claims that Putin is not ready for negotiations with Ukraine’s president face to face.
What to watch out for this week
- Next week, we will be treated to commentary from Chair Jerome Powell right at the start of the week, but ECB chief Lagarde and BoE chief Bailey will also be speaking. In addition, the heads of the New York, San Francisco, Cleveland, Minneapolis and Chicago regional Fed will also comment during the week. In particular, Minneapolis Fed President Neel Kashkari has made no secret of the fact that the central bank should act more aggressively.
- In Europe and the UK, eyes will be on the purchasing managers’ index and UK inflation.
- The geopolitical situation in the markets will remain uncertain with the war in Ukraine and the situation surrounding the spread of Covid-19. Talks on a ceasefire are nowhere to be seen, and there is no significant breakthrough towards a positive development in the coming week.
- China is still enforcing a reasonably strict approach in dealing with Covid, so restrictions and lockdowns are no exception. The continued spread of the disease leads to further tightening measures, which keeps investors on a continuous tightening spree.
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