NO SIGNIFICANT CHANGES THIS WEEK GIVES MARKETS TIME TO DIGEST RECENT EVENTS

NO SIGNIFICANT CHANGES THIS WEEK GIVES MARKETS TIME TO DIGEST RECENT EVENTS

This week there was little in the way of new information to move markets very much – more inflation statistics were released but didn’t tell us anything we didn’t already know. There was some development in Ukraine, with high level talks on ending the war underway, but the core facts haven’t changed; Russia is still invading, and Ukraine is still fighting them off. Whether the reported withdrawal of Russian forces from around Kyiv to the Donbas region in the east is a sign of Putin giving up on the idea of conquering Ukraine, and so perhaps the first step towards de- escalation, remains to be seen but, short term, troops moving from one region to another doesn’t really affect the bigger picture.

It’s important not to mistake a lack of change for calm as things are far from tranquil. But time to process what is going on and provide a rational response is welcome and markets have surely benefited from it this week as some of the extreme moves from earlier in the month unwound.

Eurozone unemployment fell to 6.8% in February, but despite a tighter labour market, consumers continue to struggle with rising costs as wages are outpaced by inflation. European Central Bank President Christine Lagarde suggested that Europe was “entering a difficult phase” due to the increase in living costs and markets now expect the ECB will increase interest rates at a faster pace to control inflation.

UK: UKRAINE AND INFLATION DENT BUSINESS CONFIDENCE

UK manufacturers have reported a slight deterioration in sentiment as new orders slowed down and exports were disrupted by geopolitical tensions. The UK Manufacturers Purchasing Managers’ Index dropped from 58 in February to 55.2.

Although any reading over 50 indicates expansion, this is the lowest reading in more than a year. Businesses report that supply chain problems are continuing to ease but input prices continue to rise. There was a very similar update from Europe, with Manufacturing PMI falling from 58.2 to 56.5 and manufacturers increasingly pass on price increases.

The slowdown in manufacturing is accompanied by declining confidence among some businesses. The Institute of Directors reports that increasing taxation and rising costs have caused its Economic Confidence index to fall to its lowest level since late 2020. Employers are reporting that the labour market is starting to ease with many employers reporting that wage increases will remain manageable.

EQUITIES: UK EQUITIES POST A SMALL GAIN IN THE FIRST QUARTER

UK equities rose in value over the first three months of the year, despite very high volatility. Markets have been buffeted by a number of conflicting drivers, including inflation, the Russian invasion of Ukraine and a surge of Covid infections alongside the removal of most pandemic restrictions. UK equities have been the best performing developed equity market so far this year. The FTSE All Share has returned 0.49% so far in 2022. This compares with returns for sterling-based investors of -7.39% for the MSCI Europe ex UK index, -1.97% for the S&P 500 and -3.71% for Japan’s Topix index.

The UK has been boosted by strong performance of large oil and gas producers as they benefited from the sharp rise in energy prices. UK banks have also fared well, as rising interest rates usually bring rising profits. However, not all UK equities have done well. Rising fuel costs and uncertainty about travel restrictions have weighed on travel and leisure stocks, and the rising cost of living has hurt the price of consumer discretionary companies.