WeeklyWatch – Financial markets battle with ambiguity

5 April 2022

Stock Take

See-saw of signals

Once again, financial markets battled with ambiguity last week due to persistent military conflict in Ukraine, while the likelihood of rising interest rates and inflation continued to trouble investors.

At the beginning of the week, Russia was allegedly open to the idea of Ukraine joining the European Union, on the understanding that Ukraine pledge not to join NATO. This apparent development meant a strong start to the week for the leading US equity indices – by Tuesday, they had managed to recuperate the losses they had suffered since the invasion began in February.

Wednesday and Thursday saw a U-turn on this, however, as peace talks made no headway and Russia ramped up its efforts to take possession of the eastern Donbas region. On the whole, there was little change in US equities over the course of the week, with the S&P500 likewise looking flat.

In the meantime, hostilities rose between Russia and Europe, with President Putin demanding that “unfriendly” foreign purchasers must pay for Russian gas in roubles. Countries required to pay in roubles include those who have imposed sanctions on Russia, such as US, EU member states, the UK, Japan, Canada, Norway, Singapore, South Korea, Switzerland and Ukraine.

The G7 therefore chose to challenge Putin, with German Finance Minister Christian Lindner telling Bloomberg: “We cannot accept any blackmail.” Ahead of a possible supply emergency, Germany and Austria have started to ration gas.

Market fluctuations

In spite of such friction, European markets performed well, with the German DAX rising by 1.0% during the week. In the UK, meanwhile, the FTSE 100 rose by 0.7% and the mid-cap FTSE 250 rose by 1.3% – in spite of a sharp drop in Sterling last week.

As for bond markets, it was a somewhat more challenging week. Central banks are increasing interest rates in a bid to manage inflation, and in turn, investors are becoming more cynical regarding the outlook for the asset class.

The Federal Reserve (the US central bank) has pledged to action a series of rapid interest rate rises this year. As a result, investors have opted to sell US government bonds, leading to a rise in the yield on a two-year bond, which moves inversely to its price.

Pessimism in the air

Investors were alarmed last week, as parts of the US treasury yield curve inverted for the first time since 2019. In so-called normal times, investors holding longer-duration bonds would anticipate being rewarded with higher yields for taking on more risk over a longer duration.

A yield curve inversion suggests that investors have a pessimistic outlook for the world economy. On the other hand, however, while this can be a sign of recession, it has so far only been a brief adjustment. Indeed, commentators would examine an extended period for a more reliable indicator of a future recession.

The Fed is due to release minutes from its latest policy meeting this Wednesday, with undoubtedly each word scrutinised for any clues about the future trajectory of interest rates.

Saving adjustments

Soaring energy prices, coupled with 30-year-high inflation, mean UK households are facing a cost-of-living crisis. On Friday, the energy price cap rose from approximately £1,300 to almost £2,000, while official forecasts propose it will rise to £2,800 in October.

The Office for National Statistics (ONS) issued data last week, which reported that the household saving ratio dropped by 0.7%, to 6.8% between the third and fourth quarters of 2021. “It shows that households are willing to adjust their saving behaviour to carry on spending,” commented Paul Dales, Chief UK Economist at Capital Economics. “A continuation of this trend is the key reason why we suspect that the economy will probably avoid a recession this year, even as real incomes fall further.”

Granted, the short-term outlook might currently appear discouraging – with both equities and bonds having their fair share of struggles so far in 2022, together with rising inflation impacting the daily lives of many – and therefore, investing in a diverse portfolio for the long term continues to be the best way for many investors to meet their goals and objectives.

“One lesson that we have yet again from the opening months of this year is how difficult it is to predict financial markets,” comments Joseph Wiggins, Director of Liquid Markets at St. James’s Place. “It’s impossible and dangerous to try to predict with any confidence what will happen over short-term periods.”

Wealth Check

It can be easy to put off saving for retirement, especially when there are more immediate financial matters to attend to. But we need to look to our future if we’re going to get there smoothly.

The responsibility for planning retirement very much lies with individuals these days, and although this might seem overwhelming, it’s important to remember that it presents opportunities as well as challenges. And, by following five simple rules, you can make that responsibility work in your favour.

  1. Make it a habit

Taking that first step and putting some money away is the most important thing – it’s the act of saving that really counts, rather than the amount in question. Save small amounts and let the magic of compounding go to work.

As Tony Clark, Senior Propositions Manager at St. James’s Place, comments:

“It’s more important to be realistic and get into the habit, and you can then build it up over time as and when you can.”.

  1. Have a plan

Be sure on your direction, purpose and incentives – in short, what makes you tick! Tony says:

“Knowing why you’re saving and what you want to use the money for can really help. The short term might be about having a rainy-day fund, the medium term perhaps saving for a car or a home, and the longer term is about setting yourself up for when you’ve finished working.”

  1. Diversify to thrive

Diversification refers to putting your money in different places or assets rather than putting your eggs in one basket. Tony adds:

“Make sure you use your tax-efficient allowances such as ISAs and pensions, and diversify across products with different risk levels.”

  1. Pension priority

It’s worth checking what your employer will contribute towards your pension. Most will match your own contributions or pay in a certain percentage of the amount you do. If you’re self-employed, think about using the ‘carry forward’ rule. This allows you to use any unused allowances from your previous three tax years to maximise your pension contributions in the current tax year.

  1. Take advice

There are many reasons for taking professional financial advice, including the role we can play in helping you get into good habits and providing the reassurance and guidance to keep you on course. Tony concludes:

“What will help keep you on track are those regular check-ins with your financial adviser. Life can take over and even important things can lose our attention, so a regular check-in with your adviser puts the focus back on your planning.”

Creating a detailed financial plan to match your goals will make you feel confident and in control, meaning you can spring forward into the future – and embrace it!

If you’d like to talk through your own personal goals, or review your existing ones, please get in touch.

The value of an Investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount Invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

The Last Word

“If you look back at other periods of history, high prices sow the seeds of their own destruction.”

– Explaining that high prices often lead to new ways of managing supply and demand, Paul Jackson (Global Head of Asset Allocation Research at Invesco) offers some welcome reassurance on the long-term trend of energy prices.

The information contained is correct as at the date of the article.

Invesco is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2021. FTSE Russell is a trading name of certain of the LSE Group companies.

“FTSE Russell®” is a trademark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2021; all rights reserved.