Last Week in Review – March 11 2022

Last Week In Review

Last week, stocks moved lower and into bear market territory provoked by the Russian invasion of Ukraine. At its intraday low for the week on Tuesday, the Nasdaq Composite fell to a level that was nearly 22% below its recent peak, more than the 20% threshold that technically defines a bear market. The S&P 500 Index was roughly 14% off its high, still in correction territory at its low point. Consumer staples stocks underperformed as Coca-Cola, PepsiCo, and other food and consumer product makers announced suspending Russia’s business.

On Monday, over 19 billion shares traded hands on U.S. markets—the most since the meme-related GameStop short squeeze in January 2021, according to traders I spoke with. Traders also noted that technical factors, such as the need to cover short positions or meet margin calls, appeared to amplify the indexes’ swings. (Short positions involve selling borrowed shares in the hopes of repurchasing them at a lower price.)

A surge in commodity prices resulting from the Russian-Ukrainian conflict seemed to dominate sentiment last week. The escalation was most visible to consumers in oil prices, which reached USD 139 per barrel—a 14-year high—in international markets on Monday amid reports that the Biden administration was weighing a possible embargo of Russian crude oil.

On Tuesday, President Joe Biden announced that the U.S. was cutting off all Russian oil and gas imports and told Americans to be prepared for even higher gas prices. European nations, which are much more reliant on Russian energy imports, announced less stringent measures. Oil prices fell back some midweek after a United Arab Emirates official stated that the country would increase production substantially. However, its energy minister later said it would stick with existing OPEC production plans.

Turmoil in the market for nickel, a component of stainless steel and other alloys, also seemed to worry investors. Russia’s threat to ban nickel exports—it supplies over 9% of the world’s supply—caused prices to double before trading was halted on the London Metal Exchange. The unprecedented rise threatened the ability of the world’s largest producer, China’s Tsingshan Holding Group, to meet margin calls on its short positions. Some better news came in the grains market as shipping resumed in the Black Sea. Trading in wheat futures on the Chicago Mercantile Exchange was halted after a report that global stockpiles would remain substantial even after the cutoff of exports from Russia and Ukraine.

US – Markets & Economy

Much of last week’s economic data came in roughly in line with expectations. The consumer price index (inflation) matched market expectations, rising 0.8% in February and 7.9% over the previous 12 months, the most since January 1982. Weekly jobless claims came in slightly above expectations, at 227,000, but remained low. January job openings beat expectations at 11.26 million, as declines in accommodation and food services in the face of the omicron variant of the coronavirus were offset in other areas. Americans remained pessimistic about their financial prospects, however. In March, the University of Michigan’s preliminary gauge of consumer sentiment fell more than expected to 59.7, a new decade low. The survey’s chief researcher pointed to inflation worries exacerbated by the Russian invasion of Ukraine as the main factor in the decline.

US – Equity Market Performance

SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.

US Yields & Bonds

Last week, U.S. Treasury yields increased amid continued inflation concerns and renewed hopes surrounding Russia-Ukraine negotiations. (Bond prices and yields move in opposite directions.) Traders indicated that supply factors also weighed on Treasuries, including heavier corporate borrowing and possible large-scale debt issuance by the European Union for energy and defense spending. On Monday, the spread between 2- and 10-year Treasury yields reached its tightest level since March 2020, but it began to widen as the week progressed. Tight spreads are often considered indicators of a coming recession, although not an infallible one.

Tax-exempt municipal bonds outperformed Treasuries but continued selling-off amid rising interest rates and steady outflows from municipal bond portfolios industrywide. Municipal traders observed that risk appetite began to improve late Thursday. However, the week’s largest deal, California’s USD 2.2 billion general obligation debt offering, was well received.
Investment-grade corporate bonds traded lower amid heavy new issuance. According to traders, the combination of an active primary calendar and elevated new issue concessions on some deals contributed to the weakness seen in the secondary market. Conversely, new issuance in the high yield market was very light as a few new deals expected to come to the market were pulled due to the broad risk-off sentiment. The leveraged loan market was weaker as broader risk assets continued to sell-off on the back of the Russian invasion of Ukraine.

US Treasury Markets – Current Rate and Weekly Change

Interesting News Overseas

Last week shares in Europe rebounded in a volatile week of trading, perhaps reflecting hopes that a diplomatic solution to the Russia-Ukraine conflict might emerge. The pan-European STOXX Europe 600 Index ended 2.23% higher in local currency terms. Germany’s DAX Index advanced 4.07%, while Italy’s FTSE MIB Index, which dropped briefly into bear market territory earlier in the week, tacked on 2.57%. France’s CAC 40 Index climbed 3.28%. The UK’s FTSE 100 Index rose 2.41%.

Core eurozone bond yields climbed after inflation expectations strengthened. The European Central Bank (ECB) surprised markets by announcing that it could wind up its bond-buying program sooner than expected. Bonds in the eurozone’s periphery, some of the biggest benefactors of the ECB’s monetary stimulus, also saw yields shoot up. UK gilt yields rose as well, buoyed by rising inflation expectations.

The ECB indicated that inflation expectations appeared to be driven higher by the Russia-Ukraine conflict and announced that it could end its asset purchase program in the third quarter rather than at the end of the year. “If the incoming data support the expectation that the medium-term inflation outlook will not weaken even after the end of our net asset purchases, the governing council will conclude net purchases under the APP [asset purchase program] in the third quarter,” the ECB said. The bank also said it could revise the schedule to reflect how the macroeconomic situation evolves. Regarding the timing of a rate increase, ECB President Christine Lagarde stressed that the ECB would be “data-dependent” (right out of the lexicon of the Fed), acknowledging that a move could happen a week or several months after the central bank stops bond purchases.

Japan’s stock markets lost ground over the week as uncertainty about the Russia-Ukraine situation continued to dent risk appetite, global commodity prices soared, and many central banks continued to shift toward a more hawkish stance. The Nikkei 225 Index fell 3.17%, and the broader TOPIX index was down 2.46%. The 10-year Japanese government bond yield rose to 0.18%, from 0.15% at the end of the previous week. The yen hovered around its weakest level in five years against the U.S. dollar, finishing the week at about JPY 115.97, compared with JPY114.82 the prior week, mainly on policy divergence as the Bank of Japan (BoJ) reiterated its commitment to ultraloose monetary policy.

The government announced that it would freeze the assets in Japan of three Belarusian banks due to Belarus’ involvement in Russia’s invasion of Ukraine. It has already taken similar measures against several Russian banks and individuals, closely coordinating its response with the U.S. and European countries. Export controls on semiconductors and telecommunication equipment to Russia and Belarus will also be toughened. Several large Japanese companies have suspended their operations in Russia, joining other global companies in scaling back their businesses as the invasion continues.

Lastly, assets in Poland have been pressured by the country’s proximity to the conflict and a prominent position in Russian bonds, which are likely to default. Poland shares its southeastern border with western Ukraine. It has received more than 1.4 Ukrainian refugees, according to data from the United Nations (UN), in what has become the worst humanitarian crisis in Europe since World War II.

Elevated inflation and zloty weakness have also weighed on Polish assets. On Tuesday, the National Bank of Poland decided to raise its reference rate by 75 basis points, from 2.75% to 3.50%. While the rate increase was larger than expected, the central bank’s increased projections for inflation caught investors’ attention.

According to the central bank’s post-meeting statement, policymakers believe there is a 50% probability that inflation in 2022 will be in the 9.3% to 12.2% range. This is well above their November 2021 projection for inflation to be between 5.1% and 6.5%. Similarly, central bank officials believe that 2023 inflation could be in the 7.0% to 11.0% range, rather than their previous projection of 2.7% to 4.6%.

This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com