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FTSE shows defensive qualities

Last Week in the City provides a round-up of market movements and the global investing outlook. This covers week ending 1 April 2022.

| 6 min read

US equity markets had their worst quarter since the start of the Covid-19 pandemic in the first three months of 2022. Sentiment has been hit by the war in Ukraine, persistent high inflation and what is expected to be an aggressive run of interest-rate rises by major central banks.

The S&P 500 index slipped 4.9% between January and March, with the tech-heavy Nasdaq Composite down 9.1%. The sharp sell-off in technology stocks has prompted SoftBank, the world’s largest tech investor, to temper its investment plans and possibly raise more cash, reports suggested. The technology sector has been heavily impacted as higher interest rates reduce the value that investors place on future earnings, hitting companies where the valuation depends on longer-term growth as they tend to rely on borrowing.

The FTSE 100 outperformed global markets, finishing the first quarter 1.8% ahead. This was due to its high weighting in energy and mining companies, but also the lack of major technology companies. The FTSE 250, which has a higher concentration of domestic-focused stocks, was down 10% over the quarter.

The blue-chip FTSE 100 index was +0.7 over the week by mid-session on Friday, with the more UK-focused FTSE 250 +1.5%.

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Ukraine

Russian gas was still flowing into Europe on Friday, despite a deadline set by President Vladimir Putin to cut off supplies unless “unfriendly” countries start paying in roubles. This represents Moscow's strongest threat to retaliate for sanctions imposed over its invasion of Ukraine so far.

Russian energy giant Gazprom is looking at ways to halt gas supplies to so-called "unfriendly" countries, reports noted. The state-controlled group is said to be “working on an option of a complete stoppage of gas supplies to unfriendly countries and is evaluating the consequences of such measures”.

Russia's central bank softened restrictions on foreign fund transfers for individuals.

EU and Chinese leaders met for their first summit in two years, with Brussels pressing Beijing for assurances that it will neither supply Russia with arms nor help Moscow circumvent Western sanctions imposed over its invasion of Ukraine. EU officials reportedly said any help given to Russia would damage China's international reputation and jeopardise relations with its biggest trade partners – Europe and the US.

The Opec+ group of oil-producing nations said it would aim to raise production by 432,000 barrels a day in May, continuing with the monthly plan agreed last year to gradually replace output cut at the start of the pandemic. But can the West rely on the cartel to help soaring prices?

Russia's central bank softened restrictions on foreign fund transfers for individuals for a six-month period. The bank said the measures, which raised an earlier limit on funds that can be transferred abroad, did not apply to residents and non-residents from countries that had imposed sanctions against Russia over Ukraine.

Covid-19

China's commercial hub of Shanghai ground to a halt on Friday after the government locked down most of the city's 26 million residents to stop the spread of Covid-19, even as official numbers put local cases falling for the second day in a row. Indeed, China's factory activity slumped at the fastest pace in two years in March, a survey showed on Friday. The Caixin/Markit Manufacturing Purchasing Managers' Index (PMI) fell to 48.1 in March, indicating the steepest rate of contraction since February 2020, from 50.4 in the previous month.

Economics

The UK economy was only 0.1 percentage points below pre-pandemic levels after it grew by more than expected at the end of last year. GDP grew by 1.3% between October and December, up from the initial estimate of 1%, despite the slump in activity caused by the Omicron variant, according to the Office for National Statistics. The revisions to estimates of growth mean that the economy ended 2021 only 0.1 percentage points short of its pre-Covid level at the end of 2019, compared with a previous estimate of 0.4 points.

UK consumers will be hit significantly by rising energy costs. A 54% rise in the government’s energy price cap means a household using a typical amount of gas and electricity will now pay £1,971 a year, up about £700.

UK manufacturing growth hit a 13-month low in March.

High Street stalwart Next lowered its sales and profit outlook, citing the closure of its businesses in Ukraine and Russia, as the high-street fashion chain warned it would raise prices further to deal with the cost of inflation. The retailer reported a double-digit rise in sales and profit growth for last year compared with pre-pandemic levels but cautioned that it was operating in an “increasingly uncertain world”. However, management have a reputation for cautious guidance.

UK manufacturing growth hit a 13-month low in March, while business optimism fell to a 14-month low. The S&P Global/CIPS manufacturing purchasing managers’ index fell to 55.2 from 58.0 in February. This was below the flash estimate of 55.5 but above the 50.0 mark that separates contraction from expansion.

US President Joe Biden has been forced to scale back plans to boost investment in green technology and tax credits for the worst off as defence spending becomes a priority following the Ukraine war.

Concerns about inflation remain elevated as central banks grapple to bring price rises under control. These worries are now being seen in bond markets.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

FTSE shows defensive qualities

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