Sabco® Investment's Monthly Market Report - February, 2022

Sabco® Investment's Monthly Market Report - February, 2022

In February, the conflict in Ukraine took center stage in economic and financial news, causing a downturn in the markets following the Russian invasion.

Global equity markets faced downward pressure throughout February. Indexes in various regions, including the US, emerging markets, and Europe, experienced around a 3% decline in euro terms, following a challenging January where the US S&P 500 index saw its largest monthly drop since March 2020. In the US, only the energy sector managed to end the month on a positive note with a nearly 19% increase in January. Major US technology company stocks (FAAMG+T) declined, except for Amazon, which saw a 2.7% rise. The cloud (-9.3%), social media (Facebook -32.6%), investment banking (Morgan Stanley -11.5%), and automotive (Ford -13.5%, GM -11.4%, Tesla -7.1%) sectors performed poorly in the US market.

In February, market concerns grew regarding the Federal Reserve's more aggressive stance following higher-than-expected inflation and wages in January. The elevated inflation rates prompted some Fed members to support a quicker initiation of rate hikes. Additionally, the Russian military action in Ukraine contributed to the weakening of global stock prices towards the end of the month, creating turmoil in bond, commodity, and currency markets.

U.S. 10-year yields initially surpassed the 2% threshold in mid-February but then retraced. The recalibration of monetary policy initially pushed long-term interest rates higher, but geopolitical tensions in the latter half of the month dampened investor sentiment, leading to a decrease in rates to 1.82% by month-end. All segments of the bond market registered negative returns during the month. The German 10-year interest rate briefly rose above 0%, reaching 0.33% in mid-February before declining again. In the corporate bond segment, high credit-rated bonds experienced a negative return of 2.5% in euro terms.

Jim Bullard, a voting member of the Federal Reserve, expressed his support for a 0.50% increase in the key interest rate in March, aiming to bring the short-term interest rate to 1% by July. The Bank of England raised its key interest rate by 0.25% early in February, reaching 0.50%. The European Central Bank (ECB) held a meeting in early February, maintaining its monetary policy unchanged. However, ECB President Christine Lagarde surprised market participants during the subsequent press conference by refraining from confirming her previous statement that the ECB was unlikely to raise interest rates in 2022. Nevertheless, she emphasized that the principle of sequencing, ending net asset purchases before increasing interest rates, remained in place. As a result, the markets quickly anticipated two 0.25% interest rate hikes in the second half of the year, although by month-end, these expectations were revised downward due to the risks posed by the conflict in the East to the Eurozone economy.

The dollar index saw a modest 0.2% increase during the month, concealing significant fluctuations against various currencies, particularly the euro. The euro initially appreciated significantly against the dollar in the first half of the month, climbing from 1.11 to 1.15. However, as geopolitical tensions escalated, the dollar strengthened. The Swiss franc and Japanese yen gained value in the latter half of the month as risk aversion returned to the markets. The Russian ruble declined following the West's imposition of severe sanctions on the Russian economy at the end of the month.

Commodities performed well in February, with gold rising nearly 6% and WTI crude oil experiencing a nearly 9% increase, following a 17% rise in January. Agricultural commodities also saw a 10% uptick due to concerns of supply shortages for certain raw materials (wheat, corn) from Ukraine. Furthermore, industrial metal prices displayed positive growth throughout February.