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

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

After a challenging start to the year, equity markets showed signs of recovery in March. U.S. stocks, measured in euro terms, ended the month 4.5% higher, while European equities, which had initially experienced sharp declines, closed nearly unchanged. The market's rebound in the middle of the month was driven by progress in negotiations between Russia and Ukraine, as well as the exclusion of the energy sector from sanctions against Moscow by European countries. Talks for a ceasefire had their ups and downs, with initial optimism fading quickly after face-to-face meetings in Turkey. Ukraine showed willingness to negotiate its neutrality and non-membership in NATO but remained firm on territorial concessions. Meanwhile, Russia seemed to have scaled back its war objectives, focusing on separatist areas in the Donbass region.

In March, the energy sector outperformed the oil sector, and companies involved in material extraction benefited from the strength of industrial metals. The automotive industry performed exceptionally well within the consumer goods sector. Despite expectations of monetary tightening by the Federal Reserve and concerns over inflation, equity markets saw gains. The U.S. Inflation Report for February showed a 7.9% increase in 12-month inflation, the fastest pace since 1982. While fears of a rapid tightening by the Fed raised concerns of a recession, the labour market remained resilient, with non-farm employment exceeding expectations and average hourly wages holding steady month-on-month.

Risk-free rates experienced a rise in March, with the U.S. 10-year interest rate climbing from 1.82% to 2.34%, and the German equivalent rising from 0.16% to 0.55%. This increase was driven by inflation developments and more assertive statements from central bankers. As a result, market expectations for monetary policy over the next 12 months underwent significant revisions. Projections now assume a U.S. policy rate of 2.8% by March 2023 and 0.6% for the eurozone in the same month. Eurozone government bonds and euro-denominated corporate bonds both posted negative returns for the month, while inflation-linked government bonds experienced a positive month due to higher inflation expectations.

The long-awaited first interest rate hike by the Federal Reserve (+0.25%) was announced at the March meeting, aligning with expectations. However, details regarding the plans to shrink the Fed's balance sheet were not provided, although there was mention of potential commencement as early as the May meeting. The minutes of the meeting were expected to provide more insight. While expectations for a 50 basis point move had cooled in the weeks leading up to the March meeting, the Fed's post-meeting remarks indicated comfort with a 50 basis point move in May, with Chairman Powell suggesting the need for swift action. The March Fed forecast showed a median expectation of an additional 175 basis points of tightening in 2022 alone, indicating a more aggressive path towards neutral long-term rates.

The European Central Bank (ECB) also held a meeting in March, with inflation dominating the discussions and outweighing other factors such as war, uncertainty, and growth concerns. In response to the recent surge in inflation, the ECB announced its intention to end net bond purchases in the third quarter. This decision led to a sharp increase in eurozone government bond yields as markets reacted to the faster tapering.

The euro initially weakened against the dollar, reaching 1.08 dollars, but later recovered due to improved investor sentiment and the ECB's accelerated pace of tapering. By the end of the month, the euro stood at 1.11 dollars. The Japanese yen depreciated during the month due to a significant yield differential between Japan, the U.S., and the eurozone. Japan's policy of maintaining a 10-year interest rate around 0% had a negative impact on the yen as long-term interest rates rose in other regions. On the other hand, the Russian ruble appreciated significantly, returning to levels close to those before the invasion. The absence of further significant sanctions against Russia and the country's demand for payment in rubles for oil and gas purchases from "hostile" countries supported the currency.

March proved to be a volatile month for oil prices. Brent crude oil reached a peak of nearly $140 per barrel on March 7, then dropped below $100 in mid-March before rebounding to $120. Prices ultimately fell towards the end of the month following the U.S. announcement of releasing strategic oil reserves. Energy commodities experienced an 8.8% increase, industrial metals rose by 7.6%, and agricultural products saw a 6% gain during the month. Gold prices initially surpassed $2,000 per ounce but lost ground in the second half of the month, ending March almost unchanged.