March was a rather nervous month for investors, although equity markets in developed countries continued their advance, ignoring negativity in media and social networks, military action, sanctions and counter-sanctions. The S&P 500 index managed to withstand the pressure from the bears and rose by almost 500 points from its lowest point in March. Global Emerging Market indices were less fortunate, with good performance in Latin America and India not enough to offset losses in Asia.
Companies continue to lower their earnings forecasts
According to FactSet, 95 companies included in the S&P 500 index announced their earnings forecasts for the first quarter of 2022, and in 70% of the cases, those were downgraded. A similar situation was observed in the last quarter of 2019. In addition, for the third consecutive quarter, the number of companies slashing their EPS forecasts continues to grow. Even the behavior of market participants suggests that the market now lacks the confidence and strength to move to new highs.
European and US equity markets
It is better across the ocean
With Russia’s invasion of Ukraine and heavy sanctions, the supply chain bottlenecks intensified, hitting demand and consumer confidence. S&P Global final manufacturing PMI decreased to a 14-month low of 56.5 in March compared to February’s reading of 58.2. Demand growth was negatively impacted by soaring input costs, as prices increased at the fastest rate in decades. Eurozone’s inflation continued to increase and reached another record high of 7.5% in March. Consequently, Eurozone’s economic sentiment dropped, as index stood at -18.7 in March compared to -8.8 in February.
US unemployment rate decreased to a new two-year low of 3.6%, while wages rose. Overall employment is now 1.6 million jobs below its pre-pandemic level. Private payrolls increased in March by 455 000 jobs according to ADP National Employment Report due to rolling back of Covid-19 restrictions across the country. Due to healthy job market, the Conference Board’s consumer confidence index increased to 107.2 in March compared to 105.7 a month ago.
China’s factory activity in March decreased at the fastest pace in two years, and that can be attributed to local Covid-19 resurgence and military conflict in Ukraine Caixin/Markit Manufacturing PMI decreased to 48.1 in March compared to 50.4 in February and National Bureau of Statistics data also showed contraction in manufacturing On top of that, non manufacturing PMI also decreased by more than 3 points to the reading of 48.4 in March.
High Yield bond Indexes
Dollar tests 2020 levels precious metals push higher
After February shock, forex market is trying to adopt accordingly. EUR/USD tested 1.0850 lows but since then the pair showed relative stability when looking from a bigger perspective. It is obvious that Eurozone is rather close to the conflict, but market still looks at the situation with a big dose of optimism. We mentioned last month that 1.06 was a key support and nothing has changed since then; should this level break, euro has a serious risk of cascading lower. On the upside, we are watching 1.1250 levels and then the larger area of 1.15-1.16.
Finally, gold reacted to the heightened stress in the markets and added 15% from February lows. Yes, it could not “crack” XAU/USD 2070 level, but the overall picture looks constructive. The metal now consolidates over an important 1900 dollars per troy ounce support area trying to generate energy for a new push. If gold will be able to hold current levels and blow past 2070-80 resistance zone, we will have a longer-term target of XAU/USD 2500 in play.
Yields and energy prices continue to cause trouble
Yields have turned higher globally and some central banks like the Bank of Japan are starting to ring alarm bells. Looking at the two-year US treasuries yield chart, we are now hitting our heads against the long-term bearish trend line, which, time and time again, was able to withstand the pressure and push yields lower. There is a strong probability that will see a strong resistance at 2.40-2.50% level and even pull back to the 1.80-2.00% zone, but bigger picture warns us that yields are aiming for a 3.00% area and higher. Yield curve itself is flat and a step away from inverting itself, which is usually bad news for the stock market.
Oil and gasoline have become a sensitive topic. Our hope for a fast resolution of the military conflict was too naïve. One can argue that oil price spiked and reversed as we have anticipated. Still, current market context, which is probably here to stay, points at any price move closer to 86-88 level as being a bargain, with targets of 150-160 dollars per barrel being absolutely real.
Benchmark 10-year bond yields
We remain optimistic
During the times of prevailing negativity and pessimism, we were allocating the cash we raised at the end of last year. We plan to invest the remaining small portion of it after market consolidation. Most probably, the consolidation / correction will be accompanied by yet another wave of negativity and loud predictions about the beginning of the bear market. It looks quite probable that the correction may prove to be quite deep (6-8%), but we do not expect market to fall below the February lows.