Market Overview – 22/03/2022

Equity markets had their best week in fifteen months with major indices such as the US seeing gains of over 6%. What lay behind this recovery? In one sense, markets often rally sharply after periods of weakness for no other reason than pockets of value appear when other participants become fearful and sell down positions. However, there were a couple of other factors that contributed to the decent rally. Firstly, China, whose economy has been suffering due to reduced investment in the property sector as well as recent Covid related lockdowns, indicated that it would restart stimulus to reinvigorate activity. The region has a formal target of GDP growth of 5.5% this year and with President Xi up for potential re-election in the autumn, this may be seen to be supportive of his chances.

We also had the long-awaited meeting of the US central bank last week. As expected, it increased interest rates by 0.25%, the first rise since December 2018. Forward guidance points to six more rate rises this year and a further three in 2022. Although this was viewed by some as a little more “hawkish” than expected, it does give the market clarity over the future direction of travel. Perhaps more positively, Fed Chair Jay Powell commented that the economy was strong enough to withstand higher rates and that he expected employment levels to remain strong. By comparison, the Bank of England adopted a more dovish tone at its MPC meeting. Although interest rates were increased by the expected quarter point, the accompanying statement suggested that further rate rises would be modest in quantity. With inflation levels expected to continue to rise in the UK over coming months, the Bank of England is weighing the potential impact of higher borrowing costs against the negative impact on consumption of higher prices. Getting this balance right is difficult and Bank officials will be keen to avoid being overly aggressive in dealing with the current elevated levels of inflation.

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