Market Overview – 05/04/2022

Last Thursday heralded the end of the first quarter of 2022 and quite a tumultuous one it was for investors. Rising inflation and hawkish commentary from central banks about the future path of interest rates was overlayed by the Russian invasion of Ukraine, which is now in its sixth week. These conspired to push global stock and bond markets down, although share prices bounced towards the end of March, recovering some of the earlier lost ground. Most equity markets delivered a negative return although the UK large company index was bolstered by higher share prices of oil and mining companies. Oil prices as measured by Brent crude rose by nearly 35% over the period. High growth and technology shares bore the brunt of the weakness, with higher bond yields pushing down valuations. Central banks in the UK and US raised interest rates and seem likely to continue to do so over the balance of the year.

Commentators have looked at previous rate tightening cycles to assess the risks of possible recession should central banks raise rates too far. At this stage it is too early to tell but policy makers are aware of  mistakes of the past and will pay close attention to the economic data as it evolves over coming months. Most developed economies are still benefiting from the strong stimulus measures introduced during the early stages of Covid and employment remains strong. It should therefore be possible to reign in excess demand without pushing economies into recession – the so-called soft landing scenario. Of course an economy is a complex system and behaviours are difficult to predict so this may prove to be wishful thinking. Against this background company balance sheets are strong and profitability remains high. Clearly some companies will be more impacted than others in terms of dealing with higher input costs and their ability to pass these on to customers. The upcoming quarterly results season should provide greater evidence of how companies are adapting to these conditions.

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