Please see yesterdays Daily Investment Update from Brooks Macdonald:
What has happened
A wild ride for sovereign bonds yesterday led to another leg lower in equity markets with only around 10% of US large cap stocks managing to achieve a gain on the day. The catalyst for this was another incremental repricing of interest rate expectations, there was no specific event to cause this, but sentiment appears to be increasingly falling behind a tightening narrative.
Energy
One sector that did manage to avoid the US equity selloff was energy which has been supported by the strong year-to-date gains in both Brent and WTI oil. These numbers come on the back of a strong 2021 however the last quarter of last year saw oil retrench from its highs as Omicron fears grew. The impact of rising energy costs can be seen in the UK’s CPI headline release today which beat analyst forecasts at both the headline and core levels with a 0.5% month-on-month move higher. Higher energy costs create challenges for policymakers, not only due to its direct impact on inflation but also the indirect inflationary impact as it works through complex supply chain processes. Central bankers are also having to weigh up the impact of consumer inflation on demand with CPI now outstripping wage growth in many countries. There have been supply chain issues within the oil sector and the rapid improvement in sentiment around the Omicron variant has caused expected demand to increase markedly.
Financials
As is tradition, US financials have been leading the US earnings cycle, but so far the results have been mixed despite the sector being in favour during the rotation this year. Most banks have pointed to the revenue impact of lower trading revenues in the last quarter of 2021 and have guided that profitability will be impacted by higher wage inflation. Within the banking sector there is a spectrum of those more reliant on capital market activity compared to more traditional banking models that are beneficiaries of a higher yield story. Yesterday’s price action will be a salient reminder to investors of the lack of homogeneity in the sector.
What does Brooks Macdonald think
With the Fed communication blackout there is relatively little on which investors can hang their hat at the moment. The rotation has been painful for many active investors and most are asking whether the Fed will step away from their tightening narrative given the market impact so far, or whether concerns around inflation are sufficient that tackling consumer price rises is the primary concern this time.
Bloomberg as at 19/01/2022. TR denotes Net Total Return
Please continue to check back for our latest blog posts and updates.
Andrew Lloyd DipPFS
20/01/2022