Please see the below Daily Investment Bulletin, received by Brooks Macdonald late yesterday afternoon:
What has happened
The risk off theme continued in markets yesterday with higher energy prices weighing on investor risk appetite. 2022 interest rate expectations also fell yesterday as bond markets priced in a more cautious central bank backdrop given the Ukraine crisis.
Bond moves
Europe saw some of the most dramatic shifts in interest rate expectations yesterday with the bond market now pricing in only a c. 20% chance of even one rate hike in 2022. This changing narrative led to further declines in European sovereign bond yields with the 10-year bund yield now back in negative territory after declining by 30bps in the last week. UK markets have seen similar moves with the 10-year gilt yield now at 1.17% after being almost at 1.5% a week ago. Given the inflationary impact of higher energy prices and the second order inflation generated by sanctions reducing trade, the bond market feels on a knife edge but for the time being the risk-off of geopolitics is trumping the inflation hawks. The ECB meeting is next week so we will have official confirmation of how Ukraine is impacting the central bank’s thinking in just a few days. Today sees the first of Fed Chair Powell’s Congressional testimonies so market focus could move from the ECB to the Fed today.
State of the Union
President Biden’s State of the Union address began with a message of support for the Ukrainian people alongside a reiteration that there would be no US military deployment unless a NATO ally was threatened. The speech focused on the administration’s economic plans with a particular focus on easing the current inflationary pressures. Biden detailed a number of policies including supply side expansion, removal of anti-competitive structures, productivity improvements and the release of oil form the Strategic Petroleum Reserves. The President also outlined his proposals for additional corporate taxes and the closure of tax loopholes for richer Americans.
What does Brooks Macdonald think
The huge swings in the bond market have helped cushion the financial market impact from the Ukraine crisis. Central bank speak over the coming weeks (and the meetings themselves) remain critical however as if the bond market concludes that central banks still side with the hawkish inflationary narrative the fall in bond yields, which has offset some of the severity of the market impact, could reverse.
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Andrew Lloyd DipPFS
03/03/2022