Market Updates

Coming into 2022, BlackRock dialed down overall risk to have a modest overweight to equities on concerns about confusion over the macro environment. They don’t see a need to reduce risk further: the confusion has materialized.

Nerves have been on edge as Russia President Vladimir Putin continues to amass troops along the Ukrainian border, which has created some market volatility as the threat of war in Europe looms over investors. January has been a rollercoaster ride for equity markets.

BlackRock see the sharp rise in government bond yields this year as consistent with a fundamental asset reallocation driven by investors wanting greater compensation for the risk of holding government bonds. The swiftness of these moves is an example of a market primed to overshoot amid confusion over the macro backdrop.

It’s been a tough start to the week for European equities as they catch up with the US move lower on Friday. Looking ahead, all eyes will be on the Fed meeting on Wednesday and a number of bellwether corporate earnings reports in the United States.

The year is off to a rocky start, with a jump in 10-year Treasury yields and a swoon in tech shares pulling down stocks. The culprit? Markets believe the Fed will raise rates sooner and more aggressively than expected. That’s not the story, in BlackRock’s view.

There has been a clear focus on central bank rhetoric at the start of the new year, with investors wary of the speed and extent to which monetary policy will begin to tighten.

The new year has started with a record COVID surge, renewed restrictions and many people working from home again. The difference this time is that the Omicron strain appears to be less severe in populations with high vaccination and immunity rates. BlackRock see Omicron delaying, and not derailing, the powerful restart of economic activity while potentially adding to supply bottlenecks.

The first half of 2022 brings a couple of European political events to keep an eye on, with a new Italian President due to be appointed and French presidential elections. A return to a more combative Italian government could create tensions within the European Union – another potential headwind for equity markets.

Last year saw central banks living with inflation. This higher tolerance for price pressures, and the powerful economic restart, kept risk assets buoyant and limited the rise in yields. How central banks – particularly the Fed – respond to inflation will be the key story for 2022, in BlackRock’s view.

Last week was a busy one for markets ahead of what is expected to be a very quiet holiday period. Central bank announcements on Wednesday and Thursday from the Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) kept investors on their toes.