After a very strong 2021, the first quarter of 2022 proved more of a challenge for markets. Concerns over rising inflation, tightening monetary policy, and the Russian invasion of Ukraine, meant most asset classes lost ground over the quarter.

Russia’s invasion of Ukraine towards the end of February was unquestionably the main story of the quarter. While Russia is not a very large part of the global economy, Russia is a major energy and commodity producer (Ukraine is also a sizeable exporter of wheat and sunflower oil) and the escalation of tensions pushed energy and commodity prices to extreme levels, exacerbating the surge in inflation caused by supply chain disruptions as a result of the pandemic, and acted as a risk to global growth; especially given the dependency of Europe on Russian gas and crude oil.

High and persistent inflation, largely as a result of supply-side issues, meant that the central bank narrative that inflation was “transitory” began to change at the beginning of the year, and over the quarter central banks became gradually more hawkish, driving bond yields higher. In fact, the US Federal Reserve raised its target rate by 0.25% in March, the first time since the pandemic, with the expectation that many more increases will be necessary over the next two years. The Bank of England raised its policy rate twice in the first quarter, reaching 0.75%. These increases in interest rates, albeit from a very low level, indicate that despite the uncertainties and economic effects related to the geopolitical situation, central banks view inflation, and keeping longer-term inflation expectations well anchored, as paramount, unless the growth outlook deteriorates sharply. With unemployment currently at post-pandemic lows in many countries, but inflation at multi-decade highs (US 7.9%, UK 6.2%, Europe 7.5%), you can understand why central banks are starting to tighten monetary policy. The dilemma for central banks, over the next few years, will be stemming inflation without tipping economies into recession.

It would be fair to say that, although March saw developed markets recover some lost ground, it was not a good quarter for risk assets, with many equity markets posting their first quarterly loss since the onset of the pandemic in Q1 2020. Global equity markets fell -4.7% on the quarter, despite rallying +2.5% in March, with the areas

INDEX END FEBRUARY VALUE END MARCH VALUE
FTSE 100 7458.25 7515.68
DJ Ind. Average 33892.60 34678.35
S&P Composite 4373.94 4530.41
Nasdaq 100 14237.81 14838.49
Nikkei 26526.82 27821.43
£/$ 1.342 1.3138
€/£ 0.83608 0.84239
€/$ 1.1219 1.1067
£ Base Rate 0.50 0.75
Brent Crude 97.97 104.71
Gold 1908.99 1937.44

This month’s values quoted as at 31/03/2022. The above values are sourced from Bloomberg and are quoted in the relevant currency.