Ongoing Markets Commentary: Investors shake off a recession signal

written on April 4, 2022

The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects.  When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks.  The medium- to long-term consequences, on the other hand, could be significant.  It is possible that we are at the beginning of a new bloc formation or a new Cold War.  This would put a significant damper on globalisation and further fuel higher structural inflation. 

The US stock market eked out slight gains on Friday as investors appeared to largely shake off a recession signal from the bond market that was triggered when the two-year and 10-year yields inverted for the first times since 2019.  For the week, the S&P 500 squeaked out a slight gain while the Dow Jones edged slightly lower and the Nasdaq gained 0.6%, after the three benchmarks indices closed the first negative quarter for stocks in two years. 

Summary

  • The Hang Seng index led gains among the major Asian markets on Monday as Chinese tech stocks in the city jumped.  The city’s chief executive Carrie Lam announced she will not be pursuing a second term in office.  Markets in mainland China are closed on Monday and Tuesday this week for holidays.  Markets in South Korea and Australia were also trading in positive territory while the Nikkei 225 in Japan swung between positive and negative territory. 
  • European stocks are poised for gains while US stock futures drifted lower early on Monday. 
  • Oil prices fell on Monday, with Brent crude trading around $104 a barrel and WTI oil about $99, as members of the IEA agreed to join in the largest-ever US oil reserves release while a truce in Yemen could ease supply disruption concerns in the Middle East.  Oil prices sank over 13% Friday, their biggest weekly falls in two years, on demand concerns from China as it extends Covid-19 lockdowns. 
  • Some European Union governments are pushing for the bloc to quickly impose new sanctions in response to multiple reports that Russian troops executed unarmed civilians in Ukrainian towns. 
  • Two European leaders most closely allied to Russian President Vladimir Putin before he launched his invasion of Ukraine won decisive election victories on pledges to stay out of the war. Hungarian Prime Minister Viktor Orban scored a crushing election victory to clinch a fourth consecutive term. Serbian President Aleksandar Vucic won a second term in office and his ruling party headed for an election victory. 
  • The US economy added 431k payrolls in March, following an upwardly revised 750k gain in February but below market expectations of 490k as the labour market remains tight.  Meanwhile, the jobless rate declined to 3.6%, the lowest since February 2020. 
  • The ISM Manufacturing PMI for the US fell to 57.1 in March from 58.6 in February, well below market forecasts of 59 and pointing to the slowest growth in factory activity since September of 2020. 
  • Annual inflation rate in the Euro Area surged to an all-time high of 7.5% in March compared to 5.9% in February and well above market forecasts of 6.6%. The inflation broke a new record high for the 4th straight month.  Meanwhile, excluding food and energy, the inflation rate increased to 3.0% from 2.7%. 
  • Tesla reported record electric vehicle deliveries for the first quarter, largely meeting analysts’ estimates, but production fell from the previous quarter as supply chain disruptions and a China plant suspension weighed.  Meanwhile, yesterday, the company notified workers and suppliers that production at its Shanghai factory will not resume today as it had hoped. 
  • The spotlight again this week will be taken by the developments around the war in Ukraine and central banks’ tightening plans.  The US Federal Reserve and the European Central Bank are set to publish minutes from the last meetings.  

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Life’s full of mysteries. Your money shouldn’t be one of them.