This Week In Markets: 21st - 25th March 2022

Okay, it's just coming up to 11 PM on March 20th, so just going into electronic open, thought I'd gather some of the major news from the weekend, just get you up to speed. What can you expect from the week ahead? We're going to bring up some charts as well from a longer-term perspective in the equity and energy market, but I thought prudent just to start with the heat map of the S&P 500, but rather than the daily performance, this was last week's performance. And as you can see here, some really bright screen green spots across the board. We had the likes of Amazon up nearly 11%, uh, Apple up 6%, Microsoft up 7.25%, Google up nearly 5%. And these are, don't forget, mega-cap tech names. So some big outperformance in the likes of the NASDAQ 100. And in fact, the S&P and NASDAQ posted their biggest weekly gains since November of 2020. And just wanted to bring that up first and have a look at a few things and discuss a little bit the market mood at this present point in time, because it's been a, as we know, an incredibly volatile start to the year for different reasons, but namely that most recently of the geopolitical tensions emanating from Ukraine. But here we are, this is the S&P 500 on a weekly candlestick chart, and this was last week's move. You can see here this big fat green candle, biggest weekly rally we've had since November 2020. As mentioned, we bottom out at around a key level of now what will be closely followed support on the higher time frame at 4138.5 in the futures market. You can see that held up a couple of times last week and also did create a period of support as well through April, May, and June of 2021. I'm just having a look at a couple of different things. For one, you know, where do we go next from here in regards to the equity indices? We have bounced a lot question marks over is this a dead cat bounce, i.e., meaning that it's just a slight reprieve before we move back to the downside. For the more bearish camp thinking that, look, we're not out of the woods yet, we're going to see further escalation from Russia military advancements, and that's going to create more nervousness in the market. Or the opposite, and actually have we hit, as far as market positioning is concerned, peak Ukraine, and do we start to move higher? And I've got up here JP Morgan, they are the perma bull on the streets So a bit of context needs to be applied, but they reiterated their call at the end of last week for 4900 year-end S&P, which should be a good kind of 10% above where we were trading last week. And what their kind of rationale is, is that we've now cleared the much anticipated Fed liftoff with the policy likely as hawkish as it gets. And, you know, I think that is a very important milestone that we've crossed. If you think about prior to the Ukraine situation emerging, it really was this almost anxiety that the markets was really sensitive to since the beginning of the year with a lot of that yield movement that we saw and subsequently leaking out into other asset classes over the Fed having to initiate not just the execution of the first rate hike, of course, but it's the commencement of that cycle. And now that that's out of the way, have we now got a degree of a little bit more visibility over the medium-term horizon rather than the unknown, which which was at the time talk of 50, talk about multiple rate hikes. The kind of cat is out the bag in that regard. The other thing that I thought was quite interesting that I read this weekend was talking about last month's inversion of the VIX futures curve, and that has actually reversed in recent days in tandem with what we've seen with a little bit of the, the uptick in the equity markets of late. So that kind of positioning and hedging for short-term shock in the market is starting to dissipate a little bit. Does come as well as we, we started to get the emergence of some of the, uh, kind of more ceasefire-type neutrality talks coming through. Although I'm sure much debate to go on between those two nations before we get anywhere near permanent more resolution of which military withdrawal and so forth. But the signs of that happening has been met a little bit more positive. A good quote that I saw over the weekend was that a fund manager said, now I'm more worried about the next 3 months versus 3 weeks ago when I was just worried about tomorrow. And I think that really kind of sums up definitely that VIX positional move, some of the equity rallies we've had at the moment. I think the Fed now having come out, and that's already passed now, I think that's quite a meaningful event as plus as well that the markets now have acclimatized a little bit, albeit still a fluid situation to what's been happening in, obviously in Ukraine. A few other things to be aware of on this kind of discussion point, stocks historically have weathered rate hike cycles fairly well. Looking at data provided by analysts at UBS, the Swiss bank, they said since 1983, the S&P 500 has returned an average of 5.3% in the 6 months following the first Fed rate rise of a cycle. Now, don't get me wrong, I do definitely look at these types of statistics with some interest, but we do need to apply the context to the situation. Obviously, inflation, a particularly sensitive metric right now given the direction of travel. Sight to go much further north at the moment. I'm still mindful of, of mapping supply chain disruptions coming out of lockdowns emerging in China at the moment. So things can change. And but the historical pattern is fairly telling. The other thing for the more to even out the argument for the sake of not sounding too bullish is the fact that fund managers' allocation to cash that is currently standing at its highest levels since April of 2020, as according to Bank of America's latest Global Research monthly survey. So a lot of people have been sat on the sidelines It's going to be interesting to track that data to see whether or not they start to dip their toes back into the water now, given some of the, the things I've just mentioned. Um, one of the other things I guess to talk about while we're on the, the charts at the moment is oil prices, because when we go back to the heat map and we look at last week's price activity, you'll see there are two quite bright spots of red down on the right-hand side. That is in the energy components, and that's for ExxonMobil and Chevron. Exxon was down about 7.5%, Chevron was down about 5.4%. But don't forget that these stocks have really outperformed in the prior weeks, and of course that comes after we've seen a rampant oil price and that kind of positioning play of the potential energy disruption effects that we're seeing from the Russian invasion of Ukraine. So we initially peaked up not that long ago, it was only back, um, 7th of March when we hit that— when the futures market up at around the $130 price point But we've come collapsing in price and actually from peak to trough of last week's low printed back on Tuesday, we've actually declined about 28%. And a little bit of that also being weighed upon by that aforementioned situation in China that we're seeing at the moment with further COVID outbreaks that we're seeing, which are resulting in large populous areas being locked down again, congestion at key transportation manufacturing hubs, which is going to be particularly key on the supply chain front. But from an energy demand point, that did weigh a little bit. We bottomed out. And actually, though, as we started to see some more, albeit inconclusive headlines, a lot of noise last week over Ukraine, the price did bounce quite aggressively and we actually finished the week up at around $105. So yeah, quite a lot to digest there. But certainly last week, energy suffered a little bit. I'd be interested to see how we settle out here. I'd probably say that barring anything substantially unexpected, then perhaps then at this point, being that I doubt we'll get any kind of concrete deal as yet between Russia and Ukraine. That's probably going to take weeks, if not months, for that to really emerge. And so the idea of that happening immediately and prices just declining on pricing out of that risk, I think, is gone. And then also the China stuff's kind of already filtered in from last week. So perhaps we start to trade a little bit more of a narrow range, but still I'd imagine very volatile. One thing to mention on the energy front while we're on the subject is we did have this over the weekend. Should definitely be aware of it. Yemen's Iran-aligned Houthi group fired missiles and drones at Saudi energy and water distillation facilities over the weekend, causing a temporary drop in output at a refinery, but no casualties have been reported. It's according to the Saudi Energy Ministry and state media today on Sunday. I haven't been able to actually find out the degree of the temporary drop, but it has been termed as temporary. So I'm assuming that it's gone back up. But nonetheless, definitely I'd be interested to see how electronic trade opens in the crude market. Not looking for any long-lasting nature in terms of impact on the back of this headline, but perhaps a little bit bumpy at the get-go in futures trades as we get underway momentarily. Yemen's Iran-aligned Houthi trying to disrupt Saudi infrastructure. Is not uncommon. So is this the initiation of something new? Not really, because this sort of stuff goes on quite a lot. The point here is it has hit a specific energy facility, which is quite interesting. The other things then, let's update on Russia. What is the latest here in Ukraine? And Russia has given Ukrainian forces a Monday deadline to surrender control of the besieged port city of Mariupol. Down here you can see in the southeastern corner, Russia's advance in Mariupol came after Kyiv said it had been cut off from strategically important Sea of Azov, a conduit to the Black Sea, and capturing Mariupol would give the Russians control of the main part of Ukraine's southern coast, as you can see here, and kind of links up the move north they've made out of Crimea and then moving towards the east to connect with the Russian separatist areas that were originally there from 2014. It also comes after Russia's defense ministry has said that on Saturday it used a Kinzhal hypersonic missile to hit a target in Ukraine for the first time. So a bit of new weaponry coming to the table. Despite that, the Ukrainian president, Zelensky, did call for comprehensive peace talks with Moscow. And with that in mind, in terms of the schedule for this week ahead, NATO heads of state, including US President Joe Biden, are going to be gathering on Thursday for an extraordinary meeting to discuss next steps in retaliation to the conflict. I think this will be particularly interesting given the fact that lots, lots have happened to certain different degrees in terms of countries' reactions and sanctions and so forth. Particularly interested to see how the German-US relationship is looking at the moment. Given the fact that the assertiveness of Biden, but really it's Germany who takes the brunt of that. And certainly we're going to get some German economic data this week, which will be interesting to see the impacts of the Ukraine situation. In terms of that meeting with NATO heads of state, it will also coincide with a pre-planned meeting of European Council members, of EU member leaders, discussing the energy crisis and COVID as well as the Ukrainian war as well. Okay. Other things in the news before I talk about the kind of week ahead. One was from some ECB comments. The ECB, the bank will take action if it sees second-round inflation effects and a de-anchoring of medium-term inflation expectations. That was according to the vice president, Luis de Guindos, over the weekend. In terms of the calendar, what have we got on the outlook? Well, actually, Monday and Tuesday are pretty quiet overall. So as you can see here from this calendar from the the Dutch Bank ING. It really kicks off from, from Wednesday. But a few things to talk over from a top level. First off, from the UK, we've got UK CPI coming out on Wednesday. That is expected to tick up year on year to 5.9% from 5.5%. But I would definitely not expect that to really create any shock in the market, and that's because we already know that UK inflation is going to head substantially higher than, than what's expected in this particular reading. The Bank of England said at their most recent meeting, of course, last week, that inflation is now expected to climb to 8% in Q2 with a risk of further advances thereafter. So got a long way to go in that story. And so an upside price shock, unless it's substantially higher— we've still got things like the, the change in electricity prices, things like that to drop in April— could create a reaction in markets. But I think a lot of people are kind of primed for that to be the case going forward. Also on Wednesday, on the same day, Chancellor Rishi Sunak delivers his spring statement, which will create a lot of media interest, I'm sure, and you'll read about it a lot in just the, the general news because households are really feeling the pain at the moment with wages well below that of the, the level of inflation that we're anticipating to see going forward. And that's putting a lot of pressure on those household incomes, confidence, and so on and so forth. It's worth noting though that UK Prime Minister Boris Johnson is expected separate from the Spring Statement to outline a plan for the broader energy strategy at this, this week. I don't have a day at this point or a time, but that might give Sunak a little bit of breathing room, I guess, in that regard to kind of talk about that as a separate point. Bank of England dissenter, if you remember, there was one, John Cunliffe, the Deputy Governor. He is actually speaking on Tuesday. Could be quite interesting to see what he's got to say. He voted against the PAC and actually went for a hold decision despite the bank executing their third consecutive rate hike last week. And Governor Bailey is up on Wednesday, and you've got UK retail sales coming out as well on Friday, which again, with UK data, it's probably going to materially worsen, particularly when it comes to something like consumer spending at this point because of the household incomes being squeezed. Confidence is likely to degrade over time, and that is going to have a consequent impact. So Again, low side numbers are probably not going to be that surprising, both this figure and particularly going forward. Then otherwise on Thursday, you can see quite a busy day, and that's because we get the European flash PMIs, UK, US as well. And that's expected to show a sharp drop in business activity, largely of course due to the Ukrainian situation. The recent ZEW survey, you remember, beginning of last week, saw expectations metric fall to a pandemic low, and that kind of sets the scene then. IFO likely to follow suit. Again, if you're not familiar with these data points, ZEW is the survey of current economic conditions and 6-month outlook from economists and analysts. German IFO is from thousands of businesses on the ground in Germany. So it's a really good insight to see how pessimistic basically they're becoming given the risks associated with the connection of that with the disruption from Russia and the situation in Ukraine. The impact definitely likely to be most acute in, in Germany compared to more service-based industries like that in France, for example. And German IFO, that comes out on Friday, is expected to drop by about 5 points down to around 94.1. And from a US perspective, aside from PMI, you've got new home sales due on Wednesday, durable goods, which analysts at ING note that it's likely to be dragged down by a drop in Boeing aircraft orders. Alongside weekly jobless claims, all due on Thursday. And then you do have Fed Chair Jerome Powell speaking on Monday and Wednesday. In fact, I haven't listed all of them in my notes, which you can obtain by my Twitter handle, but, um, there are a lot of Fed speakers this week. And so looking out for perhaps a little bit of clarity— we've already had the meeting, and so we've got some degree of visibility, perhaps looking for any information further on the balance sheet side of things. Could be something to, to just keep on the, on the radar. But that is it for me. So hopefully that was useful. Don't forget, I'm going to drop a link, some useful links within the video description. 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