Monthly Market News March 2022 – Trends in the markets

Alexandre Gauthy - Economist

After a difficult start to the year, equity markets recovered somewhat from the decline in March.

Our expert, Alexandre Gauthy, analyzes the trends in March 2022.

Equity markets: strong rebound in the second half of the month

U.S. stocks ended, in March, 4.5% higher in euro terms. European equities, which had fallen sharply at the beginning of the month, closed virtually unchanged in March. The market's rebound from the middle of the month can be attributed to progress in negotiations between Russia and Ukraine and the Europeans' refusal to include the energy sector in sanctions against Moscow. Ceasefire talks have had ups and downs, with two face-to-face meetings in Turkey initially generating optimism that quickly faded. Ukraine seemed willing to negotiate on its neutrality and non-membership in NATO but consistently rejected the idea of territorial concessions. At the same time, Russia appears to have scaled back its war aims and is preparing to focus its efforts on separatist areas in the Donbass region.

In March, the energy sector outperformed the oil sector, while companies active in material extraction received a boost from the strength of industrial metals. In addition, the automotive industry did exceptionally well in the consumer goods sector. Equities rose in March despite the Fed's expected monetary tightening and expectations that its pace will accelerate in the coming months. Inflation remained a key concern, as the February U.S. Inflation Report showed that 12-month inflation rose 7.9% - the fastest pace since 1982. Although the prospect of a rapid tightening by the Fed is fueling fears of recession (and the rapid flattening of the yield curve and reversals of the order of key segments are not helping), the labor market proved resilient: February non-farm employment exceeded expectations and average hourly wages held steady month-on-month.

Equity markets	March	3 months	Since 31/12	12 months
MSCI EMU NR	-0.7%	-9.2%	-9.2%	1.8%
MSCI EUROPE NR	0.8%	-5.3%	-5.3%	9.3%
MSCI USA NR	4.5%	-3.2%	-3.2%	20.0%
MSCI JAPAN NR	0.4%	-4.5%	-4.5%	-1.2%
MSCI EM. MARKETS NR	-1.3%	-4.9%	-4.9%	-6.4%
MSCI AC WORLD NR	-3.1%	-3.3%	-3.3%	13.3%
Performances in EUR dd. 31/03/2022				Source : Bloomberg

Bond markets: significant increase in bond yields

In March, the U.S. 10-year interest rate rose from 1.82% to 2.34%, while the German equivalent rose from 0.16% to 0.55%. This rise in risk-free rates follows the development of inflation and the more aggressive rhetoric of central bankers. As a result, the markets have significantly revised their expectations for monetary policy over the next 12 months. They now assume a U.S. policy rate of 2.8% in March 2023 and 0.6% in the same month within the eurozone. Eurozone government bonds were negative throughout the month, as were euro-denominated corporate bonds. In contrast, inflation-linked government bonds experienced a positive month (+2%) due to investors' sharply higher inflation expectations.

Government Bond Yield 10 yr	Current	March	3 months	Since 31/12
Belgium	1.03	0.48	0.84	0.84
France	0.98	0.38	0.78	0.78
Germany	0.55	0.41	0.73	0.73
Italy	2.04	0.33	0.87	0.87
Greece	2.67	0.15	1.34	1.34
Spain	1.44	0.32	0.87	0.87
United States	2.34	0.51	0.83	0.83
Japan	0.22	0.03	0.15	0.15
Evolution until 31/03/2022				Source : Bloomberg

Central banks: the Fed begins its cycle of interest rate increases

At its March meeting, the Fed announced the long-awaited first interest rate hike (+0.25%), which was in line with expectations. However, Chairman Powell did not provide substantive details about the plans to shrink the Fed balance sheet, although he did mention that the shrinkage could begin as early as the May meeting. The minutes of this meeting (to be released on April 6) will provide more details about their discussions. While expectations for a 50 basis point move had cooled in the weeks leading up to the March meeting, the Fed's post-meeting speech indicated that it was very comfortable with a 50 basis point move in May (Powell himself suggested that the Fed might have to act ‘quickly’). A more aggressive path to neutral long-term rates would be broadly consistent with the March Fed forecast, which shows a median expectation of 175 basis points of additional tightening in 2022 alone.

The ECB also met in March. Again, inflation dominated the Governing Council's discussions and outweighed everything else, including war, uncertainty and fears about growth. In March, the ECB announced its intention to halt its net bond purchases in the third quarter due to the recent flare-up in inflation. Eurozone government bond yields rose sharply following the ECB's announcement to phase out asset purchases more quickly.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	0.25-0.5%	+0.25%	Mar. 2022
ECB deposit rate	-0.50%	-0.10%	Sept. 2019
Situation on 31/03/2022			Source : Bloomberg

Currencies: the euro appreciates in the second half of the month

The euro initially fell against the dollar to 1.08 dollars but then rose on more optimistic investor sentiment and the ECB's decision to accelerate the pace of its tapering. The euro ended the month at 1.11 dollars. The Japanese yen declined during the month due to the significant spread in the yield differential between Japan on the one hand and the U.S. and the eurozone on the other. Indeed, Japan's policy of setting its 10-year interest rate at around 0% is harmful to the yen in an environment where long-term interest rates in other regions are rising sharply. Finally, the Russian ruble appreciated sharply during the month, returning to levels close to those before the invasion. The absence of further significant sanctions against Russia and Russia's demand that 'hostile' countries pay for their oil and gas purchases in rubles supported the currency.

Currencies	Current	March	3 months	Since 31/12
USD	1.107	1.4%	2.7%	2.7%
GBP	0.842	-0.8%	-0.1%	-0.1%
JPY	134.67	-4.4%	-2.9%	-2.9%
CHF	1.021	-0.7%	1.6%	1.6%
Evolution versus EUR until 31/03/2022				Source : Bloomberg

Commodities: increased volatility

Oil prices experienced a roller coaster ride in March. The price of Brent crude oil peaked at nearly 140 dollars per barrel on March 7, then fell below 100 dollars in mid-March before rebounding to 120 dollars. Oil prices finally fell at the end of the month when the U.S. announced that it would release its strategic oil reserves. Energy commodities rose 8.8%, industrial metals 7.6%, and agricultural products 6% during the month. At the beginning of the month, gold prices rose above 2,000 dollars per ounce, only to lose ground in the second half of the month. In the end, gold was virtually unchanged in March.