This week

With the government’s B Plan coming to an end this week, although it is no longer legally compulsory to wear face masks in indoor venues, there has been no way to cover up the rotation equity markets have been experiencing since the beginning of 2022.

Intensifying during the past week, investors further shunned growth stocks in favour of commodity and value-based holdings. Flirting, then eventually falling into technical correction territory (defined as a fall of 10% from a previous all-time high) the tech heavy S&P 500 has borne the brunt of investor selling this year. Although it must be noted, the index staged a mighty recovery during the beginning of the week, reversing a fall of 4.3% from its session low to its closing level, the largest such daily swing since 26th March 2020.

The reason for such a rotation has been largely attributed to a much more hawkish Federal Reserve, heightening its rhetoric around a more pronounced pace of possible rate rises in order to supress spiralling inflation. Indeed, Wednesday evening saw Jay Powell, the Fed’s Chair, do little to dispel market worries, indicating the committee was likely to raise rates in March, as widely expected, and reaffirmed plans to end its pandemic-era bond purchases that month before launching a significant reduction in its asset holdings. The most comprehensive reaction to his words were found in bond markets where U.S. two-year yields rocketed to near 2-year highs, with the greenback also adding around 0.6% against a basket of currencies.

The losses endured in the US were to the commodity heavy FTSE 100’s gain, as tensions between Russia and Ukraine helped push oil price up past $90 a barrel, to its highest levels in 7 years. The FTSE 100, having lagged its American peers over the last few years, as investors largely shunned older industries for innovative, but expensive tech stocks, has experienced something of a renaissance this year, recovering to levels not seen since the start of the pandemic.

In company specific news, it was Levi’s that was enjoying a strong week. Trousering some serious profits after it topped analysts' estimates, bolstered by higher prices and strong demand for its jeans and jackets, sending its shares up 8% during the middle of the week. Consumers shopping for casual outdoor clothing as pandemic restrictions eased has led to a resurgence in retro fashion styles such as high-rise and loose-fitting jeans, lifting demand for the company's denims.

Next week

The coming week should start in a relatively subdued manner as Chinese banks close in observation of the country’s Spring Festival on Monday. Whilst talk of Spring in the UK may be a bit premature, proceedings will certainly be hotting up on Threadneedle Street, as the Bank of England (BoE) releases the minutes from its most recent Monetary Policy Committee and gives its latest decision on base rates.

With inflation running at 5.4%, its highest in 30 years, the market is pricing in a strong chance that the BoE will be forced to increase interest rates by 0.25%, raising them to 0.5%. The announcement should come on Thursday as the bank holds a press conference to discuss their views on the domestic economy as the UK navigates its way out of the pandemic.

For those watching the commodity markets, the Organisation of Petroleum Exporting Countries (OPEC) holds its monthly meeting on Wednesday. With oil prices having pushed past $90 a barrel for the first time in 7 years, it will be interesting to see how the cartel reacts in terms of its production. During the meetings themselves, delegates will discuss a range of issues regarding energy markets and, most importantly, agree on how much oil they will produce. The meetings are closed to the press but officials usually talk with reporters throughout the day and a formal statement covering policy shifts and meeting objectives is released after the meetings have concluded.

The end of the week brings with it the first Friday of the month and as always, US Non-Farm Payroll data. A key piece of information when determining the US central bank’s next rate move, it provides plenty for economists to get their teeth stuck into. The employment data itself will be accompanied by Average Hourly Earnings, allowing us to gauge future inflation expectations as the more consumers earn, the more they tend to spend, a vital piece of data as the bank evaluates the Omicron variant’s potential economic damage during the Christmas period.

The information in this blog or any response to comments should not be regarded as financial advice. If you are unsure of any of the terminology used you should seek financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in January 2022.