Closing the quarter with optimism

As we approach the final stretch of the first quarter of 2022, equity markets have been decidedly bullish, largely recovering from the volatility generated by the conflict in Ukraine, fears of stagflation and more hawkish central bank rhetoric. With regard to the debt market, the rise in sovereign debt yields in just a few days is particularly noteworthy, with one of the most remarkable points being the close convergence between the 2 and 10-year maturities of the US curve.

1. Equity recovery in the final stretch of the quarter

Despite the rapid rise in real interest rates, risk appetite has greatly increased in recent sessions. Optimism about the peace talks, and the fact that the stock market had largely priced in the economic slowdown stemming from the conflict in Ukraine, have caused the Euro Stoxx 50 and the S&P 500 to rise by 18% and 10% respectively since the lows of early March.

This translates into year-to-date losses of 3.5% in the American market and almost 7% in Europe.

2. The bond market prices in central bank action

Powell’s bold comments aimed at continuing the interest rate hike cycle, and the fact that he left the door open for the next hike to be 0.50% instead of 0.25%, have pushed sovereign bond yields particularly fast in recent days.

The 2Y and 10Y maturities of the US curve are almost at the same level, at 2.32% and 2.38% respectively, while the Bund yield is already at 0.67%, in contrast to the negative yield of a few weeks ago.

3. Update on the situation in Ukraine

The conflict in Ukraine is still dominating headlines, and economic actors continue waiting for a peace agreement to be reached in the negotiations currently taking place in Turkey.

The alignment between Europe and the US materialised in a multi-day summit featuring an agreement on energy whereby Europe will substantially increase imports of US LNG to reduce energy dependence on Russia.

Meanwhile, the G7 has unanimously rejected Russia’s demand that it make energy payments in roubles, in a clear move by the Kremlin to support its currency.

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