Market Overview – 22/02/2022

Last week markets continued to weigh up the likelihood of a Russian invasion of Ukraine, leaving equites down over the period. Meanwhile bond prices rose and yields fell as safer havens were sought. Herein lies the dilemma, particularly for bond markets. As geopolitical tensions rose at the beginning of the week, equity markets sold off and bonds rallied. Towards the middle of the week we heard stories that Russian troops were withdrawing from the Ukraine border. Equities rallied and bonds sold off. Then towards the weekend the view emerged that more troops were assembling at the border and markets went into reverse again. This all sounds like a short term risk on / risk off rotation. The problem for markets is that the recent trend in bond yields has been sharply upwards as central bankers become more hawkish about inflation. While it is possible that central banks might delay interest rate rises were Russia to invade Ukraine, unless there were a spillover that heavily impacted on the global economy, it seems likely that interest rates are still headed upwards.

While markets find it virtually impossible to price in geopolitical events, hence the daily volatility we are seeing, company results continue to come through thick and fast. Nearly 80% of major US companies have now reported their Q4 2021 earnings. Of those reporting, more than three quarters have beaten market estimates, with year on year earnings growth running on average at 28%. In Europe just over half of major companies have reported and roughly two thirds have beaten estimates, showing an average growth in earnings of 49% year on year. Despite the challenges of Covid, companies are mostly continuing to deliver good results. With economic growth expected to remain positive, this trend should continue over the rest of this year.

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