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February Investment Review: Volatility in the Air

by Haith Nori

February saw a continuation of increases in equity markets in Europe after a positive start in January, while US markets have moved in the opposite direction. At the beginning of February many central banks including the Federal Reserve, the Bank of England and the European Central Bank all increased interest rates once more. After an initial drop in yields, US and UK 10 year bond yields at the beginning of February have recovered to levels higher than seen in January as many other 10 year bond yields have reached highs not seen in years. The US Dollar has once again strengthened as the price of gold has fallen. Global tensions continue to rise as Russia’s invasion of Ukraine reached its one year anniversary (24th February). Rishi Sunak is also attempting to push forward Brexit negotiations, having delivered the ‘Windsor Framework for Northern Ireland and Great Britain’.

On 1st February, the US Federal Reserve made the decision to raise interest rates by 0.25% to 4.75%, marking a notable reduction in pace from their previous increase of 0.5%. Markets responded positively to the news, with the Technology sector in particular outperforming others, however February saw a more general decline alongside US Equity indices. On 14th February we received a Valentine’s gift. US CPI data was released for the 12 months ending in January of 6.4%, down from December of 6.5% and 7.3% in November, continuing its gradual decline since June (9.1%)! Whilst this is still a decrease it is much lower than expectations and suggests a long-awaited slowing in the rate of progression. On Thursday 2nd February, in the UK the Bank of England announced an 0.5% increase in interest rates to 4%. As expected, they did not follow the US in targeting a reduced pace of 0.25%. Furthermore, in the UK CPI data released was 10.1% for the 12 months ending in January down from 10.5% in December, 10.7% in November and 11.1% in October. On this occasion, this was softer than consensus expectations and the reduction pattern is continuing in the UK. Also, on 2nd February the European Central Bank (ECB) announced a 0.5% increase in their interest rates to 2.5%, and the ECB have ‘pre-announced another increase of the same size for March 16’[i]. The ECB continues to  present itself as being particularly hawkish under the stewardship of Madame Lagarde.

In Bond Markets, ‘Germany’s 10-year yield, the benchmark for the euro area, rose 7 basis points (bps) to 2.66%, its highest since July 2011’[ii] and the same has been seen in both France and Spain where yields have hit their highest levels in many years. Both the UK 10 Year Gilt and US 10 Year Treasury Note yields have surpassed their January levels, both increasing to just under 4% after an initial drop at the beginning of February. The US Dollar has regained its losses from January against Sterling, the Euro and the Japanese Yen. Gold, after reaching a high level at the beginning of February has returned to levels at the start of January. Prices for gold at the end of February ‘were headed for their biggest monthly decline since June 2021 as a stronger dollar and fears that the U.S. Federal Reserve would keep raising interest rates weighed on the non-yielding asset’s appeal’[iii]. We are seeing a very uncorrelated performance from assets including what was once considered the safe havens.

On 11th February, Fumio Kishida, Prime Minister of Japan, nominated Kazua Uedo as the next Governor of the Bank of Japan, who is set to take the reins after 8th April when Haruhiko Kuroda steps down. This has come as a surprise as originally the Deputy Governor Masayoshi Amamiya was viewed as being the front runner.

After several countries, including the UK, the US and Germany agreed to send military battle tanks to aid Ukraine in January, President Volodymyr Zelenskyy of Ukraine has been touring Europe in an attempt to drum up more military support. Firstly, he flew to the UK to meet with Prime Minister Rishi Sunak whom, after their meeting, is providing NATO-style training to thousands of Ukrainian soldiers and marines from the UK. Rishi Sunak is also considering his options to offer fighter jet planes. Zelenskyy then flew to Paris meeting with Emmanuel Macron and Olaf Scholz before flying to Brussels where he addressed the European Parliament, meeting with twenty-seven heads of state asking for European Unity. In the run up to the one-year anniversary of Russia’s invasion of Ukraine (24th February), US President Joe Biden travelled to Kyiv on Monday 20th February and later met with NATO leaders on the eastern flank to highlight geopolitical tensions. We are seeing clear escalations in the Russia invasion of Ukraine.

On 27th February a new Brexit deal was signed by the UK and European Union known as the Windsor Framework, which attempts to deal with the problems created by the Northern Ireland Protocol, binding international law obligations. One of the key issues has been checks on goods travelling from Great Britain had created a border with Northern Ireland and hence certain goods were no longer able to reach them. The Windsor Framework will, as Rishi Sunak has said, ‘ease trade between Britain and Northern Ireland, firmly root the province’s place in the United Kingdom and give lawmakers there a say in whether they must implement EU law, with London having a veto’. [iv] There is a long way to go and this needs to be approved by all parties but is a positive step forward for Brexit and will hopefully open up more lines of trade.

Overall, February has been reasonably volatile across various asset classes, with Large-Cap UK Equities in particular having hit an all-time high. Brent Crude fell sharply in value at the beginning of the month (below $80 per barrel) but has since recovered to c.$84 a barrel. 10 year bonds are increasing in yield, with various countries now having reached all-time highs. The US Dollar has gained strength back from its lows of January against Sterling, the Euro and the Japanese Yen. Geopolitical tensions are rising with Russia’s invasion of Ukraine.

[i] https://www.reuters.com/markets/rates-bonds/hawkish-ecb-comments-push-up-rate-hike-expectations-2023-02-17/

[ii] https://www.reuters.com/markets/global-markets-wrapup-1-2023-02-28/

[iii] https://www.cnbc.com/2023/02/28/gold-faces-worst-month-in-nearly-two-years-on-us-rate-hike-dread.html

[iv] https://www.reuters.com/world/uk/risk-taken-uks-sunak-announces-windsor-framework-2023-02-27/

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