César Pérez Ruiz, Chief Investment Officer Pictet Wealth Management.
Hope from Versailles
As the war in Ukraine continues, progress in negotiations provides some hope for a diplomatic resolution. In the meantime, Russia has announced plans to deliver more sophisticated arms to Belarus and banned some exports, including palladium. This could add further price pressure on commodities, on which we are positive. In response, the US banned Russian oil, gas and coal imports (with a 45-day wind down) and the UK will phase out Russian oil imports by end-2022. For its part, the EU pledged to cut Russian gas imports by two-thirds within a year, creating hopes of renewed fiscal stimulus and potential debt mutualisation to follow. At the EU summit in Versailles, leaders promised “massive sanctions” against Russia and pledged new investments to develop European energy sources. Russia threatened to repay hard-currency bond holders in rubles at the exchange rate fixed by Russia’s central bank, which may constitute a default for some specific issues.
The European Central Bank (ECB) surprised markets on Thursday by taking a hawkish tone. The central bank appears to be placing more emphasis on rising inflation concerns than on a potential economic slowdown. The ECB left open the option of ending it asset purchases in Q3 2022, with a potential interest rate hike to follow thereafter. We are negative on European bonds. European equities fell on the same day and Italian 10-year BTP yields reached 1.9%. Given the uncertainty around the conflict in Ukraine, European equities appear especially weak. We have reduced EU equities in favour of Swiss equities. Last week the London Metals Exchange halted trading in nickel after a short squeeze exposed a Chinese metals tycoon to USD billions in potential losses. Elsewhere, the current lockdown in Chinese tech hub, Shenzhen, could potentially pose significant additional global supply-chain issues. If authorities eventually abandon their zero-COVID policy, with Hong Kong potentially serving as a template, the economic implications would be considerable.
US consumer inflation (CPI) came in as expected at 7.9% year-on-year in February, higher than the previous month’s print. The Michigan consumer confidence hit an 11-year low in early March, despite a relatively healthy US consumer. US growth company stocks like the FAANGs (Meta, Amazon , Apple , Netflix, Alphabet ) were penalised the hardest following the inflation report. Asian tech companies also took a hit last week. Chinese mobile transportation giant, Didi, failed to satisfy the Hong Kong exchange listing requirements and abandoned its plan to relist there. Didi’s share price lost 44% on the news on Friday, pulling the entire Chinese tech sector down with it. We prefer developed-market to emerging-market equities. In the week ahead, the Federal Reserve meets and is expected to kick off US interest rate rises despite a slowing economy, possibly bringing uncertainty to markets.
