Market Updates

Equities have fallen hard this year on the prospect of rapid rate increases to rein in inflation, the tragic Ukraine war and a slowdown in China. BlackRock think equities remain more attractive than bonds, even as the historic sell-off in bonds has cut the gap between the two.

Given recent declines, there is much discussion around what is priced into market. With global markets declining for six consecutive weeks, there is an increasing debate over how much bad news is priced in, and whether markets are now oversold.

BlackRock sees little chance of a perfect economic scenario of low inflation and growth humming along. Last week’s market rout shows investors are adjusting to this reality. We upgrade investment grade (IG) credit and European government bonds to neutral as we see opportunities there.

Last week saw some extreme moves in equity markets as investors digested several central bank announcements, most notably the Federal Reserve (Fed) meeting on Wednesday. In Ukraine, the Russian advance in the east made marginal gains, and with no mention of peace talks anymore, a long, drawn-out campaign into the summer seems probable. The impact of this on commodity and food prices is clear.

U.S. wages are growing at the fastest clip since the 1980s. Is this the start of a “wage-price spiral” – a vicious cycle of companies funding higher pay by raising prices, causing employees to ask for even higher wages? We don’t think so. In reality, we find companies are paying less in labor costs per unit of output than before the pandemic thanks to higher productivity and prices. We believe wages can rise further without adding to inflation – and help normalize the labor market.

Inflation and hawkish central bank talk have spooked investors and led to bond losses not seen since the 1980s in developed markets (DMs). EM debt has also suffered, even ahead of the stress test of higher DM policy rates. The good news: Many EM central banks were early in raising rates to try to rein in inflation.

Corporate earnings should continue to dominate attention in the United States and Europe this week, with a significant number of companies reporting. Last week Fedspeak was a market driver, but as we enter the blackout period ahead of the 4 May FOMC meeting, it will be quieter on this front.

Bond yields have sprinted higher on ballooning inflation and hawkish comments by central banks. Yield spikes have often spelled trouble for stocks, but we believe the past is an imperfect guide in a world shaped by supply shocks.

Scarcity inflation is here. Supply shocks have created shortages of goods, energy and food that are driving up prices. We see this making inflation more persistent. It’s also spurring central banks to normalize policies faster. This is needed, in our view, as the economy no longer requires stimulus.

Last week saw lacklustre performance for many equity markets as focus turned to hawkish rhetoric from the Federal Reserve (Fed), COVID-19 concerns in China and uncertainty around the outcome of the French presidential election. In addition, the war in Ukraine continues to grind on with little or no sign of progress in peace talks.