April 2022
INVESTMENT MARKET UPDATE
Welcome to our latest global market update
This month we’re going to concentrate on the global markets and what’s happening that might affect your investments. Our thanks to our partners at Charles Stanley for their help in pulling this together. We hope you find it useful and informative. As always, if you’d like to discuss anything below, or any other financial planning matter, then just give your adviser a call.
THE BIG PICTURE
Global stock markets fell on Friday after Federal Reserve Chair Jerome Powell indicated the pace of increases in interest rates must increase to fight inflation. The central bank has turned increasingly hawkish this year after inflation proved stubborn, despite their assurances that price rises were only “transitory”. The Fed said it was to officially stop using “transitory” in December last year. Oil prices also declined at the end of the week but remained above $100 a barrel.
The blue-chip FTSE 100 index was down 0.2% over the week by mid-session on Friday, with the more UK-focused FTSE 250 up 0.4%.
UKRAINE
Russia is teetering on the edge of defaulting on its sovereign debt. The Credit Derivatives Determinations Committee – which includes Goldman Sachs, Barclays and JPMorgan – said on Wednesday that a “potential failure-to-pay” event occurred for credit-default swaps when Russia paid bondholders in rubles instead of dollars after foreign banks declined to process US currency transfers. If Russia doesn’t pay up in dollars by the time its grace period expires on 4 May, it would be the country’s first default on external debt in more than a century. Holders of the swaps could then start the process of getting paid on contracts covering about $40bn of debt.
Companies that are registered in Russia and have depositary receipts traded on foreign bourses must revoke them by 5 May, the country’s central bank said. Russian President Vladimir Putin signed into law a bill requiring Russian companies to delist their depositary receipts from international bourses and convert them into local securities in a bid to reduce foreigners' control over these companies.
European Union (EU) officials are fine-tuning a phaseout of Russian oil imports, which could be presented to EU countries as early as next week. However, it is still unclear how hard they will squeeze President Vladimir Putin's core revenue stream. An immediate, full-blown ban imposed by the EU on oil is still a no-go for Germany. Nevertheless, Germany will stop importing oil from Russia by the end of the year, Foreign Minister Annalena Baerbock said after a meeting with her Baltic counterparts. Gas will then follow as soon as possible afterwards.
The EU is also urging people to drive less, turn down their heating and cooling units and work from home three days a week to reduce reliance on Russian oil and gas. The European Commission (EC) said the measures, drawn up with the International Energy Agency (IEA), would save households close to €500 a year on average. If all EU citizens followed the nine-point plan, which has been called “playing my part”, this would save enough oil to fill 120 super tankers and enough natural gas to heat almost 20 million homes, the IEA said.
UK companies should protect themselves against cyberattacks and be wary of hackers exploiting software used to work from home, according to the Five Eyes alliance of spy agencies from the UK, US, Canada, Australia and New Zealand. It said the Russian government is planning to launch a series of cyberattacks against countries that have provided support to Ukraine and several Russian hacker groups have already pledged their support for the Kremlin.
ECONOMICS
Nestle, the world's biggest food and drinks company, raised prices by more than 5% in the first three months of 2022, as it passed on rising costs to consumers. North America took the hardest hit, with an 8.5% rise in prices, with Latin America seeing the second-biggest increase, with the price of Nestlé products rising 7.7%. Chief executive Mark Schneider signalled that more increases are on the horizon.
If you haven’t picked up on this yet, a hawkish Fed has turned even more hawkish. Jerome Powell, chair of the US central bank, outlined his most aggressive approach to soaring inflation so far, potentially endorsing two or more half percentage-point interest-rate increases while describing the employment market as “overheated”. Currently, there are fewer Americans claiming unemployment benefits than at any time since 1970 and staff shortages has raised concerns that inflation could be embedded in the system in a wage/price spiral.
UK interest rates could also be increased in May, according to a member of the Bank of England’s Monetary Policy Committee. Catherine Mann, a former Citigroup economist who joined the rate-setting committee last year, said that soaring energy and food prices will persist next year, even if consumer demand weakens.
UK retail sales dropped in March as the rising cost of living hit consumer spending, with online sales falling sharply as people cut down on non-essential spending. Fuel sales also fell as people cut non-essential travel. However, overall retail sales were still above pre-pandemic levels. Retail sales fell by an unexpected 1.4% in the month, and February's sales figures were also revised down.
China's first-quarter GDP growth came in at 4.8%, beating expectations. However, a recent slump in consumer spending and rising unemployment suggests much tougher months ahead as dozens of cities remain under Covid lockdowns. Most of the outperformance came in January and February. Retail sales fell by 3.5% year-on-year in March – its first decline since July 2020.
Japan's government agreed on a supplementary budget to support lower-income households and small businesses. Last Tuesday, Prime Minister Fumio Kishida's Liberal Democratic Party-led (LDP) coalition will set out almost 1.5 trillion yen ($11.7bn) of measures, including a one-off 50,000-yen (£301) cash pay-out per child for low-income families and an expansion of subsidies to fuel wholesalers.
The International Monetary Fund (IMF) slashed its expectations for global economic growth over the next two years because of Russia's invasion of Ukraine. The IMF now expects the world economy to expand by 3.6% in both 2022 and 2023, a sharp deceleration from growth of 6.1% in 2021. The new forecasts reflect downgrades of 0.8 and 0.2 percentage points, respectively, from its January forecast. The conflict is driving up prices for food and fuel which the international body expects to slow growth globally.
COVID 19
The Chinese Communist Party’s flagship newspaper – The People’s Daily – called on the nation to support President Xi Jinping’s “Zero-Covid” strategy, as anger grows over lengthy lockdowns in Shanghai. Beijing is holding firm on its policy and warned more measures could be introduced in Shanghai and elsewhere, but authorities promised to ease anti-virus controls on truck drivers that were hampering food supplies and trade.
The US Transportation Security Administration will stop requiring passengers on airplanes, trains and other public transportation to wear masks after a federal judge struck down the mandate. Judge Kathryn Mizelle said the Centers for Disease Control (CDC) had exceeded its authority with the mandate, had not sought public comment and did not adequately explain its decisions.
US SECOND QUARTER EARNINGS
The US earnings season has started and JPMorgan, at least, is optimistic. Strategists at the investment bank said they expect corporate America to easily trounce Wall Street’s earnings forecasts. They argued that consensus earnings estimates for the S&P 500 were “overly pessimistic” for the first quarter and companies in the index were poised to deliver a surprise of 4% to 5% because of “better-than-feared margins”.
Have we hit peak Netflix? An unexpected drop in subscribers sent shares in the streaming giant and lockdown “winner” sharply lower, forcing the company to consider experimenting with ads and cracking down on people who use passwords shared by friends or family. After buying more than $1bn of shares in January, billionaire hedge fund manager Bill Ackman sold all his shares in the group at a loss of about $400m. Meanwhile, CNN's new owner said it will close the US-based news channel's streaming service just a month after it launched. Warner Bros Discovery (WBD) says it will issue refunds to subscribers after the service is shut down on 30 April. The head of CNN+ resigned following the announcement.
Elon Musk’s electric-vehicle (EV) group Tesla reported a $3.3bn (£2.5bn) profit in the first three months of the year, as customers proved willing to pay more as the group passed through rising costs to customers. Deliveries were up 68% and this was held back by supply-chain shortages. Meanwhile, Mr Musk, now the world’s richest man, overtaking Amazon’s Jeff Bezos, has secured $46.5bn in financing to fund a possible hostile bid for social-media group Twitter and is putting up $21bn of his own money as part of the proposal.
United and American Airlines both reported first-quarter losses but expect to book record revenue in the second quarter, two years after Covid-19 brought the travel industry to a halt. Both airlines expect to return to profitability in the current quarter, despite significantly higher fuel prices.
Bank of America posted first-quarter profit that beat Wall Street’s estimates, helped by the better-than-expected credit quality of its borrowers. It’s been a lukewarm reporting period for US banks, with Bank of America the only big bank to post higher revenue. First-quarter revenues fell at JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley.