Heightened uncertainty weighs on economic outlook

Global & UK Investment Director18 Apr 2022

The war in Ukraine continued to dominate investors’ thinking. Stocks rallied sharply midmonth as hopes for a negotiated settlement rose but fell back as it became apparent that both sides remained far apart. Indeed, with Ukraine increasingly on the front foot the potential for a deal looks remote. As investors faced up to the prospect of a prolonged conflict, defensive stocks outperformed and cyclicals came under pressure. Large caps continued to outperform small and mid. 

The heightened uncertainty, allied to higher commodity prices, continues to weigh on the economic outlook. Economic sentiment indicators fell sharply, especially in Europe where plummeting consumer confidence drove the Euro Area indicator to its lowest level in a year. The forthcoming quarterly earnings season in the US should provide some insight into the extent of the impact on corporate profitability. Not only are investors faced with a deteriorating economic outlook, but central banks are starting to tighten monetary policy.

The Federal Reserve raised interest rates by a quarter of a point on March 16th and markets are pricing in another two percentage points increase this year. The prospect of higher short-term rates and a weaker economy had led to an inverted yield curve, where yields on short term bonds are higher than those on longer-term bonds, which has typically been a harbinger of an economic recession. Increased fears over the economy led a significant sell-off in economically sensitive stocks. 

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