Notes from the Kitchen


  • Mar 29, 2022
  • Craig Farley

The term ‘bouncebackability’ is credited to former Crystal Palace football manager Iain Dowie and describes a team’s capacity to recover quickly from a setback or situation. In a financial market’s context, the term seems to aptly characterise the performance of global equity markets lately.

Against a backdrop of a hot war in Europe, rampaging global inflation, and a re-escalation of pandemic concerns following further lockdowns in China, equity markets continued to power higher over the week, taking the fortnightly advance for the headline S&P Index to almost 10% in sterling terms. The technology-laden Nasdaq closed 3.7% on the week, whilst in Asia Japan’s Nikkei Index was the standout performer, jumping 5.3%.

Performance is even more impressive given the abrupt change in tone and rhetoric from US Chairman Powell and a Federal Reserve desperately attempting to regain policy credibility. The message is clear: interest rates are going higher, and quickly. So, whilst bond markets (as measured by the Bloomberg Aggregate Bond Index) are staring down the barrel of potentially the worst quarterly performance since 1980 (currently -7.3%), the S&P500 Index is less than 5% from all-time highs. Go figure.

US 10-year Treasury yields jumped by 17 basis points over the week to 2.46%, whilst the spread (difference) between 2-year and 10-year Treasury yields ‘inverted’ this week. This is an important development, implying that investors can earn more interest lending money to the government for a 2-year period than over a 10-year period. Yield curve inversion boasts an excellent track record as a recession forecaster, pointing to deeper worries over America’s longer term growth prospects.

In Europe, Russia’s continued invasion and relentless bombardment of Ukrainian strongholds prompted further coordinated action from Western countries in the shape of further military support for Ukraine, a reinforcement of troops on European borders and the extension of sanctions on Russian institutions, companies, and individuals. The financial and economic chokehold continues in earnest.

Closer to home, consumer prices in the United Kingdom were 6.2% higher in February than a year earlier, reflecting the fastest annual inflation rate since 1992. For seasoned market observers, that date throwback will evoke memories of Britain’s painful withdrawal from the European Exchange Rate Mechanism (ERM) following a collapse in the pound. Those of us shopping the isles lately may, or may not, have noticed creeping ‘shrinkflation’, a subtle but material drop in the weight of our day-to-day goods and services without a change in price.

Turning to assets that operate outside of fiat currency systems, gold consolidated recent price gains by inching down slightly (-0.17%). Crypto currency markets enjoyed a stellar week, with Bitcoin and Ethereum (now approximately US 2 trillion of market capitalisation) both rising more than 15%. Several potential triggers for the price move include Russia’s statement that it would accept Bitcoin in return for energy resources, increased Ukrainian demand to enable individuals and businesses to freely move their wealth across borders, and headlines that the UK Treasury is exploring a regulatory regime for the space.

Finally, one interesting development has been that companies are scaling back their expectations heading into earnings season, which begins in mid-April. Admittedly, it is still early days, but of the 100 or so companies in the S&P 500 that have reported a change in guidance, 70% cut expectations versus 30% that lifted them (Factset). One feels that this ratio will need to improve dramatically in the coming weeks if corporate America, and equity markets in general, are to sustain momentum.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.