INVESTMENTS
RALLYING MARKETS COULD STILL GO EITHER WAY
During turbulent market shocks we remind portfolio investors of the importance of making sure that long-term investment decision-making is not overly influenced by short-term market fluctuations . Here at Tatton , we aim to ensure portfolios remain positioned appropriately , and are finetuned when medium-term changes in the economic and market outlook either necessitate adjustments or indeed present new opportunities . A strong rebound in stock markets around the world in March has been a case in point . With oil prices having rapidly fallen from over $ 130 per barrel ( pb ) back to around $ 100pb , it seems clear that the prospect and negative potential of an energy price shock has dissipated , returning more optimistic sentiment to markets . While this is broadly true , there are other dynamics at play . First , it was not just the price of oil that declined , but also heating gas and many of the other hard commodities that were driving the fear of a price shock derailing the recovery . So , was it simply the rising probabilities of a near term peace in Ukraine that reversed commodity prices ? It was a major influence , but also the magnitude of recent volatility created very large losses for speculative commodity institutions and their appetite for further ‘ bets ’ dried up . Further , commodity market price movements are increasingly exacerbated by momentum-detecting trading algorithms - once the ‘ price-tide ’ turns , the boosting dynamics go the other way , leading to the extremes of 2020 ’ s negative oil prices as well as this year ’ s sky-high levels . The more pressing questions are whether the inflation scare has peaked and if capital market valuations are more realistic ? It seemed so , after the lowering of market-implied inflation expectations decreased the historically extreme gap between equity and bond market real yields . However , there was also fear that the US or UK central banks could upset these decreasing market tensions with their recent interest rate rises . However , monetary policy tightening could still come to bite in 2022 . This is because the longer the price shock carries on , so does the risk of a transitory price shock becoming structural inflation . While central banks are tightening monetary policy gently enough to not cause serious upset , they have also signalled a willingness to step up their actions if labour markets become too buoyant .
Helpfully , labour market worries look to be receding , as shown by some labour market slackening in the US . Price rises are also increasingly driven just by car fuel and gas prices and , from past experience , we know consumers have shown a tendency to look through those .
The wider price pressures from supply chain stresses have also recently reduced , but this is where the positive news flow of the past week ends , after China reacted to fast rising cases of the Omicron variant with widespread lockdowns However , the most important aspect for the medium to long-term picture may not be Russia ’ s war on Ukraine , but how the relationship between the US and China continues to develop . Presidents Biden and Xi are talking , ostensibly to discuss Russia ’ s aggression , but beneath the surface lurks Taiwan , and how the reaction of the West to Ukraine could influence China ’ s own ambitions .
We clearly welcome the recent rally , but market valuations for the forthcoming months have an almost equal probability for improvement or deterioration . Much depends on supply bottlenecks easing and consumers increasing their demand for services rather than goods . For the positive post-pandemic recovery to feed through to risk asset returns , labour markets need to remain balanced enough to not force central banks to step up monetary tightening in to put the inflation genie back into its proverbial bottle . We are monitoring this fragile balance intently , while being ready to react with portfolio adjustments should they prove required or opportune .
Important Information
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management . The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it .
Tatton is a trading style of Tatton Investment Management Limited , which is authorised and regulated by the Financial Conduct Authority . Financial Services Register number 733471 . Tatton Investment Management Limited is registered in England and Wales No . 08219008 . Registered address : Paradigm House , Brooke Court , Wilmslow , Cheshire , SK9 3ND .
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