César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
QT COMES EARLY
Markets last week reacted to minutes from the December Fed policy meeting showing Fed officials fully on board with an accelerated winding down of its massive bond-buying programme, with the chance the Fed reduces its balance sheet sooner than had been expected. Real yields went up by more than 30 basis points as a result, marking one of the worst starts to a new year for fixed income. In total returns terms, long-term US Treasuries had their worst week in more than 40 years. Because equity market valuations are highly sensitive to real yields, equities fell, led by growth-style stocks, with the Nasdaq down more than 5% as investors rotated from growth to value. Value-style stocks coming back into favour is one of our 2022 themes, along with conviction in European and Japanese equities, which have fared better at the start of this year than US ones. Last week’s US employment report showed strong underlying wage growth and lower unemployment despite weak headline growth, supporting the likelihood that the Fed will also hike interest rates in March. At the same time, the European Central Bank is also turning more hawkish, with executive board member, Isabel Schnabel, saying that the green transition could be inflationary, which would force the central bank to respond.
Covid cases appear to have peaked in the UK with low and steady intensive-care numbers adding support to the conclusion that Omicron is a milder variant than its predecessors. It has still managed to cause considerable disruption, however, as Omicron’s high contagiousness has sent workers from the airline to the healthcare industries into self-isolation. But Omicron’s relatively mildness also puts China’s zero-Covid policy under pressure. In Italy, we could see some volatility in Italian assets if should current prime minister Mario Draghi become a presidential candidate and early elections are called. Alternatively, should Draghi stay on as prime minister, he could become a candidate to replace Ursula von der Leyen as president of the European Commission when her term ends in 2024.
In geopolitics, we are keeping an eye on tensions involving Russia, as a series of meetings between Nato allies and Russia are set to take place this week. Oil has had a strong start to the year and we remain positive on the oil price outlook. As we move into earnings season, to be kicked off by US financials, we expect overall positive results, albeit less strong than in previous quarters. We continue to like pricing power companies. This week we will be looking at US consumer inflation numbers to see if they continue to trend above 7% or finally start to moderate.
