Global Asset Allocation Team Market Update – February 2022
The new year got off to a tumultuous start. Volatility gripped the marketplace and financial markets were whipsawed as investors contemplated the fallout from an increasingly hawkish Federal Reserve on the broader economic recovery and corporate earnings. Sentiment also remained fragile amid lingering geopolitical tensions stemming from Russia and the Ukraine, which added to investor unease at the beginning of the year. Both global equity and bond markets suffered losses in January, reinforcing the case for private alternatives in a well-balanced portfolio.
Global equity markets slid broadly lower, with the MSCI All Country World capping its worst monthly decline since March 2020. Developed markets underperformed their emerging market peers as the most expensive corners of the market assumed the brunt of the selloff. Notably, the tech-heavy Nasdaq moved into official correction terrain, while the S&P 500 led the monthly decline. Still, the equity tumult was widespread and all major benchmarks ended the month lower. With less exposure to the most heated areas of the market, the S&P/TSX was down more modestly than its global peers given solid outperformance in the heavyweight energy and financial space.
Fixed income markets also generated negative results in January. Short-term bond yields moved sharply higher after Federal Reserve officials laid the groundwork for March liftoff and as some hawkish-leaning rhetoric from Chair Powell saw investors ramp-up their wagers for rate increases, with the market now pricing close to five hikes in 2022. The two year treasury yield rose 45 basis points to 1.18%, while the ten year treasury yield rose by 27 basis points to 1.78%. Similar moves were seen in Canada after the central bank emphasized that economic slack has been absorbed, all but teeing up a rate hike in March. The two-year government bond yield rose by 32 basis points to 1.28%, while the ten-year yield rose 35 basis points to 1.77%. Consequently, both the Canadian (-3.4%) and U.S. (-2.2%) bond markets retreated in January.
The US dollar strengthened after Federal Reserve Chair Powell struck a hawkish tone at the January monetary policy gathering, with wagers for a more aggressive path to policy normalization boosting treasury yields and buttressing the greenback. The Canadian dollar slipped even in the wake of the unrelenting rise in crude prices, with broad-based strength in the US dollar ultimately capping any meaningful upside for the loonie.
Finally, the powerful rally in crude oil extended for six straight weeks and prices rose to a 7-year high as robust demand tightened global markets, while heightened geopolitical risks amid fears that Russia may invade Ukraine also contributed to oil’s climb. By contrast, gold declined on the back of US dollar strength, while the profound back-up in treasury yields also weighed on non-interest bearing bullion last month.