Strong Rally Ends the Week
At the close of business on Friday, global equities were mixed with a strong rally on Friday. It appeared the markets were trying to rally all week, but it was not until Friday that they broke out and moved forward very constructively. We will see if this continues on Monday.
The yield on the US 10-year Treasury note rose 2 basis points to 1.80% while the price of a barrel of West Texas Intermediate crude reached its highest level since September 2014, $88.40, amid concerns Russian oil exports will be interrupted if Russia invades Ukraine. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 31.5 from 25.7 a week ago.
We continue to see 2022 as a year to be tactically opportunistic. In the early stages of a tightening cycle, equities have always outperformed other asset classes. The current period we have gone through at the start of the year has provided an excellent opportunity for your fund managers to add to their positions. The correction we have just experienced is consistent with how markets behave during the early stages of expected rate hikes.
The appetite for investors to own quality companies with strong earnings and free cash flow should only improve as this year progresses.
Companies that you own in your portfolio, like Apple, Microsoft and Google, will continue to play a big role in our daily lives regardless of rate hikes.
High-yield bonds have enjoyed a full recovery since the start of the pandemic, and valuations are at fair value. Re-opening economies, strong corporate profits, and low default rates continue to provide supportive fundamentals, and investor demand for yield remains robust.
We believe there is still some runway to collect reasonable coupons and enjoy decent returns in high yield, although we are mindful of new risks and potentially higher volatility as we approach Fed rate hikes this spring.
CANADIAN ECONOMIC NEWS
Our central bank left rates unchanged at their meeting this past week. However, they said that they are going to increase rates as inflation is a large concern and the rate of inflation needs to come down.
US ECONOMIC NEWS
With about 33% of the constituents of the S&P 500 Index having reported for Q4 2021, blended earnings per share shows that earnings growth is running at 24.1% while sales rose about 13.7% compared with the same quarter a year ago. 79% of those reporting have beaten expectations, though forward guidance has generally been cautious.
Fed leaves options open on tightening pace
The US Federal Reserve left rates unchanged this past week and also announced the end of its asset purchases. The US economy expanded at a 6.9% annual rate in the last quarter of 2021 and for the calendar year at 5.5% rate, the fastest since 1984.
EUROPEAN ECONOMIC NEWS
The European Central Bank this week warned European financial institutions with exposure to Russia to prepare for sanctions that could sever Russia’s link to the SWIFT international payments system.
Supply chain bottlenecks and coronavirus restrictions saw the German economy shrink 0.7% in the fourth quarter of 2021. The government estimates that the economy grew 2.8% for the year. However, German business sentiment improved for the first time in seven months in January as the Omicron wave went down. German business sentiment improved for the first time in seven months in January.
Markets have almost fully priced in a 0.25% hike in the Bank of England’s base rate this coming week.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
Concerns if Russia will invade Ukraine
I’ve had a lot of questions on this topic over the past few weeks. These geopolitical concerns have added to recent market jitters as Russia continues to amass troops and weapons near the Ukrainian border. This past week, Russia rejected a written response to its security demands from the United States, though said it would continue diplomacy.
In a sign that it is taking the threat of a Russian invasion seriously, the US Department of State urged American citizens to leave Ukraine, while the families of US and British diplomats were pulled out of the country.
Concerns continue to mount that Russia will limit or halt energy supplies to Europe if it faces sanctions resulting from a military move against Ukraine. NATO countries, including the US, are moving troops to Eastern Europe to deter Russian aggression. On Thursday, US President Joe Biden warned Ukrainian President Volodymyr Zelensky of the possibility of a Russian invasion next month. Neither side wants a nuclear war. Russia does not want the Ukraine to be a part of NATO and it does not want missiles deployed on Ukraine soil pointed at Russia.
I believe the key point is that Russia is continuing to try to find a solution to this problem through diplomacy. We will continue to watch this situation closely.