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Market Insights – March 21, 2022

Each week, our Investment team shares its market views with you !

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Essentials

The ZEW Indicator of Economic Sentiment, based on surveys of German investors, was the first major indicator to be released since the war broke out in Ukraine. It dropped sharply in March, suggesting that the conflict will have a major impact on Germany’s economic growth. It seems that the government was right to bring in fiscal measures to cushion the blow.

Exports of Swiss watches jumped 25% in February, a sign that demand for luxury goods is still robust. Exports to the US were up 33%, driven by the high-end segment.  Economic growth is picking up particularly well in the States, with consumers spending the savings they built up during the pandemic.

After skyrocketing to USD 130 per barrel, oil prices dropped back to pre-invasion levels. This came as investors slashed their long positions, which hit a record low. As excess optimism has been completely wiped out, oil could quickly begin trending upwards again.

The war is not the Fed's main worry

The war in Ukraine has not knocked the US Federal Reserve (Fed) off course, although it has generated a lot of uncertainty. Talks are under way, but a diplomatic solution still seems a way off. And the longer the conflict lasts, the greater the impact on consumer and business confidence will be. What’s more, the optimism that the ebbing pandemic had brought is already starting to fizzle out, particularly among consumers who have been hit hard by the sharp rise in energy prices. Even if they are located far from the conflict, US drivers have not been spared and are grappling with a rise in fuel prices of close to 30%. This will almost certainly lead to a drop in spending on other consumer goods and services. The surge in the prices of certain commodities is very much the Fed’s main concern at present, especially since this uptrend is so persistent. With US annual inflation nearing 8% – a rate not seen in over 40 years – the Fed needs to take action, even if that means reining in the current economic recovery a little. The 0.25% rate hike announced by Fed Chair Jerome Powell last week was likely the first in a long series. Staying true to the transparent approach adopted by the Fed in recent years, Mr Powell set out a policy road map for the months ahead. The Fed expects to raise rates at each of its meetings this year and has forecast that the fed funds rate will level off at no less than 2.75% by the end of 2023. The era of zero interest rates has now come to an end in the States, and other central banks are likely to move in the same direction in the coming months. Despite this monetary tightening, the US stock market continued on the uptrend that began around ten days ago, and most other financial markets also rallied. This is a sign that the markets had already largely priced in the tightening. The dip in energy prices also helped to push up the stock markets. Oil prices will no doubt continue to have a strong influence on the financial markets. That is, until a long-lasting truce can be found in Ukraine. 

 

 

China Tech : a new confidence crisis

With the markets already rattled by the war in Ukraine, the ensuing sanctions and lockdowns in China, investors have little tolerance for additional risk. That became clear when the US regulator’s announcement to delist of Chinese American depository receipts (ADRs) triggered unprecedented volatility on these stocks, most of which belong to the tech sector.

Pushing for these companies to be expelled from US stock markets was one of the negotiating tactics used by President Trump back in 2020. We think the market has overreacted to the announcement, given that any forced delisting won’t take place until 2024 at the earliest. The biggest ADRs, such as Alibaba, JD.com or NetEase, are well prepared for this possible outcome and have since had secondary listings in Hong Kong. These stocks are fungible between these markets, so their economic value will not be affected. 

While their fundamentals are not impacted, sentiment towards these tech giants remains extremely fragile. Investors have only just got over a series of measures imposed by the Chinese regulator since late 2020. Meanwhile, Beijing’s message of support for Chinese stocks in the middle of last week managed to briefly calm investors’ mood. Even though these stocks have already rallied sharply, further gains can clearly not be ruled out. But for this market to outperform over the longer term, it needs to be more clarity on whether secondary sanctions will be imposed against China for its role in the invasion of Ukraine. We are also waiting for the Chinese regulator to make its stance clearer, and for its government to announce more convincing stimulus measures. Investors will not fully regain their confidence when this happens.

 

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