world market: 5 world market themes for the coming week
Also, Europe’s dilemma will be central to whether or not to sanction Russian energy exports, potentially leading to further price hikes and economic difficulties.
This is your week ahead at markets of Ira Iosebashvili in New York, Alun John in Hong Kong, Sujata Rao, Tommy Wilkes and Dhara Ranasinghe in London.
1 HAWKISH ENOUGH?
Is the Federal Reserve’s aggressive trajectory for tightening monetary policy too aggressive or not aggressive enough? That’s according to Friday’s jobs report in the US.
Economists polled by Reuters expect 450,000 new jobs to have been created, up from 678,000 in February.
Renting well above those estimates will bolster the case for a 50 basis point rate hike in May. Fed Chair Jerome Powell has indicated that he is willing to take a big step if necessary.
Despite this, the S&P 500 has managed to nearly halve its losses since the start of the year. But watch the US Treasury yield curve nearing inversion as investors worry about a Fed-induced recession. The bond market is rarely wrong.
2 HARD TO SAY NO
Targeting Russian energy, as the United States and Britain have done, is one of the most powerful levers the European Union could use to punish Moscow for its invasion of Ukraine. But it remains a divisive choice for the bloc that depends on Russia for 40% of its gas and is reeling from a rise in fuel prices.
But as pressure mounts to announce a ban, a new twist has come: President Vladimir Putin’s demand that “unfriendly” countries should pay for gas in rubles is raising even more concerns about Europe’s energy crisis.
EU leaders could soon agree to jointly buy gas and secure additional US gas supplies. In the meantime, however, the debate is causing unrest in all kinds of circles. Oil-producing group OPEC, for example, has warned the move could harm consumers.
3 ON AND GO
When the first estimates of inflation in the eurozone in March come out Friday, they could test the European Central Bank’s narrative that there is no rush to raise interest rates.
Inflation is already at a record high of 5.9% and could reach 7% in the coming months. Given the ECB’s target of 2%, it is not surprising that some officials are pushing for one or even two rate changes this year.
Strong inflationary pressures will strengthen their case. But bond markets are also suggesting higher yields, as they had priced five moves of 10 basis points each by the end of the year.
German two-year bond yields rose 30 basis points in March, the largest monthly increase since 2011. After spending years deep in a negative interest rate zone amid the ECB’s bond purchases to boost inflation, it is quickly approaching 0%. This is important.
4 THE BEST AND THE WORST
The first quarter of 2022 was one that most investors would prefer to forget. Except, of course, for those trading oil, metals or grains, who would have been happy to see a price increase of more than 50% Brent oil and a 30% increase in the CRB commodities index.
It was less rewarding for stocks; With a 5% loss, the S&P 500 looks poised to break out of a seven-quarter winning streak. Nasdaq stocks in the eurozone underperformed, while Chinese markets in many cities faced renewed COVID-related lockdowns.
Bond markets hit milestones that in some cases were unprecedented for decades. The 140 basis point rise in US two-year yields is the largest since mid-1984; the German equivalent will record its largest quarterly increase since 2011.
Not surprising, given that central bankers recognize that inflation is not transitory and that interest rates should rise. Global inflation is set to hit 6.3% this quarter, the fastest rise in a quarter of a century, estimates JPMorgan.
Finally, pity those who failed to cut Russian investment on time – now that the country has been removed from the stock and bond indices, they will have to zero their holdings.
5 STILL PLEASE
China’s commitment not to introduce a property tax offers only short-term relief for developers struggling with debt restructuring and access to finance.
Evergrande, the figurehead of the sector’s difficulties, has revealed new issues at a major subsidiary and will not publish the audited results before the March 31 deadline.
Another controversial developer, Kaisa, said the same thing, although others such as China Vanke, Country Garden and Sunac China plan to release annual results next week.
Developer stocks and Chinese high-yield bonds remain under pressure. The woes in the real estate sector will remain on the list of investors to watch out for until real emergency measures come in.