The month of February 2022 was an incredibly wild ride in markets, with 2-3% daily swings in major equity indices a regular occurrence. The month of February started positively, following on from the late January rally in equity markets. Investors remained sceptical of a supposed 50bps interest rate hike from the US Fed in March, which saw yields back off the highs and risk appetite pick up slightly. The rally quickly faded after the January inflation data came in at the highest rate since 1982 and called for a more aggressive path for interest rate hikes returned.
No sooner than the market was coming to terms with a March interest rate hike in the US, the focus quickly shifted to the geopolitical headlines regarding Russia and Ukraine, which has since turned into the precursor for the Russian invasion. Risk assets dived on this news, and safe-haven flows were in demand. Fighting intensified in the closing days of the month, as did the sanctions imposed by Western countries, which now include removing some Russian banks from the SWIFT payment network and freezing Russian assets around the globe.The ASX 200 finished the month of February in the green, finishing up +2.11% with most other global equity markets in the red. This was after the index's worst monthly performance in January since 2008. The RBA did not change the current monetary policy settings at the March meeting, noting that the economy had a positive feeling, even as the risks increased from the previous meeting. The RBA noted the upside risks to inflation coming across as more hawkish in their overall assessment. The January unemployment rate in Australia held steady at 4.2%, while the participation rate (66.2%) and the number of people employed grew slightly.
February 2022 Summary:
- Geopolitical tensions are pushing commodities sharply higher
- Inflationary pressures are increasing with new data beating market estimates
- Interest rate futures are forecasting a 25bps rate hike in March from the US Fed
- The US 2Y/10Y spread has flattened further to 21bps
- 76% of S&P 500 companies reported positive earnings surprises for 4Q21
- Over 70% of S&P 500 companies reported positive earnings surprises for the last quarter in 2021
US Corporate Earnings:
Earnings growth is expected to slow in 2022 from the blistering pace seen in 2021 (+47.8% annual growth). Revenue figures are falling short of earnings, with close to 70% of companies reporting upside sales figures surprises, beating estimates by around 5%. Tech companies lead the way in terms of earnings beats, with close to 88% of tech companies beating market estimates, closely followed by real estate companies at 82%, Medical/Healthcare at 81% and Financials at 80%. On the earnings growth front, Materials and Industrials sector companies lead the charge reporting strong 56% and 104% growth, respectively.
Regarding price action following the earnings data release, Consumer Staples names saw the largest positive 2-day move, trading up by around +2.2%, followed by Real Estate at +1.2%. On the downside, Communications stocks slid around -2.4% after the data release and Financials gave back around -1.7% on average.
US Equity Sectors:
Small and micro-cap stocks were the best performers during the month of February on a total return basis, with large-cap stocks feeling the worst of it. Unsurprisingly, Energy stocks were the best performing, posting a +7.2% for the month. The Communication sector was the biggest loser, down -7.1%, with REITS, Tech and Consumer Discretionary all lower by around -4.0 to -5.0% in what was a month to forget.
Interest Rates:
The US 2Y/10Y spread continued to narrow further during February, trading below 38 basis points, due mainly to the upward trajectory in the 2Y yield. A negative 2Y/10Y spread is said to be the precursor to a recession, albeit a lagging indicator, but one to watch in the months to come. The interest rate futures market is pricing in a 25 basis point increase in rates for March, plus another five rate hikes in 2022. In early February, the market was pricing up to seven rate increases, so expectations have fallen in recent weeks.
Commodities:
Commodity prices measured by the Bloomberg Commodity Index traded to record highs in February, up over +6% in the month. Brent Crude gained +10.3%, and WTI Crude prices closed behind +8.6% on the back of constrained supply and harsh sanctions on Russia for the Ukraine invasion. Aluminium was up close to +12%, and Gold lifted around +6.8%. The Wheat market has seen enormous gains since the geopolitical situation has intensified +19% on the month, due to Russia and Ukraine accounting for almost 25% of the world's wheat exports.
Cryptocurrencies:
Major cryptocurrencies seemed to find a base in February after experiencing selling pressures since late last year, with Bitcoin trading around $38,000-$44,000 and Ethereum between $2,600-$3,200. Digital currencies are expected to see upward pressure as sanctions, and payment networks attempt to constrict the movement of fiat currencies. In recent weeks, the Russian Ruble has devalued by almost 50% as many major Russian banks have been removed from the SWIFT payment network, and sanctions have taken effect. Many Russian citizens have looked to cryptocurrency to avoid further Ruble depreciation.
The Months Ahead:
Key risk events in the months ahead at the time of writing are the Russian/Ukraine conflict and, to a lesser extent, the upcoming FOMC meeting where the US interest rate settings are expected to change on March 16th. Some have speculated that an escalation in the geopolitical sphere would cause the US Fed to hold on to their rate hike plans, but this would be a surprise to markets at this time. COVID restrictions are starting to be reduced in some countries, with many opening their borders to international travellers without isolation requirements which should be broadly positive for economic growth. However, inflation around the globe continues to push higher, which has the opposite effect.