César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.

STICKY INFLATION

Surging prices in the euro area drove the European Central Bank (ECB) to adopt a more hawkish positioning last week. The euro shot up spectacularly as markets anticipated higher rates in Europe, while German Bunds moved from negative territory to +20 basis points (bps) in a single day. Looking forward, the ECB’s main challenge will be to engineer just the right degree of tighter financial conditions without overtightening. We now expect two 25bp ECB rate rises in 2023. We are short duration and prefer European to US equities. Meanwhile, the Bank of England raised interest rates by 25bps as expected last week. But it gave a more dovish statement, even as four out of nine Monetary Policy Committee members voted for a 50bp rise for this round. Markets took last week’s positive US employment figures as a risk of faster and more aggressive tightening from the Federal Reserve.

Elevated volatility continued to dominate equities markets. Key players in the highly concentrated US tech sector saw their share prices either climb or tumble dramatically on the back of their Q4 2021 earnings results. We saw the single biggest market-capitalisation loss of a single stock in one day, followed by the single biggest daily gain the following day. Active stock picking becomes crucial in this environment. The risk for these types of high-growth companies is in their ability to maintain earnings growth while avoiding the transition to a more utilities sector model, in which growth stabilises at a much lower rate. Valuations in this shift tend to find lower landing levels, as was the case for Facebook ’s parent company, Meta, last week. We can now consider that the hitherto all dominant FAANG ( Facebook , Apple , Amazon , Netflix and Alphabet ) stocks are no longer an asset class in and of themselves, nor a homogeneous group. Elsewhere in markets, some long-short growth managers have had a tough start to the year due to net long positions. In the hedge fund space, we prefer macro and event-driven managers.

The world’s foremost club of oil producers voted to increase production at last week’s OPEC+ meeting. However, actual oil production already falls short of the members’ respective quotas as some countries struggle to fulfil their allocations. As tensions around Ukraine continue, energy prices remain at a high level, contributing to inflation and pressure on central bank to raise rates. We are positive on commodities and commodity-related currencies with stable fundamentals. In the week ahead, we will be watching for US inflation numbers.