Bond investors return to a dose of déjà vu, hawkish Fed minutes roil tech stocks and the Dublin office market strengthens further in Q4. All these stories and more are covered in this week’s insights update from BlackBee.
The final few trading sessions of 2021 mirrored the most powerful trend investors saw last year, that of massive outperformance of risk assets (equities, credit, commodities) versus bonds and cash deposits. We see this clearly in this week’s chart of the week which shows a massive performance from equities and commodities in particular last year.
Over the course of the Christmas break and into the new year the most visible market development was a notable rise in bond yields with investors now apparently reconciling themselves to the fact that the US Federal Reserve will taper bond purchases and move quickly onto increasing interest rates in 2022. Last week’s release of the minutes of the Fed’s December meeting gave investors (particularly bond ones) even more to fret about on this front. One statement in particular jarred with investors “Almost all participants agreed that it would likely be appropriate to initiate balance sheet runoff at some point after the first increase in the target range for the federal funds rate.”
This line from the minutes suggests that not alone will the Fed stop buying government and mortgage backed bonds this year but that they are looking at gradually selling this stock in its balance sheet back into markets. This was a development that investors were not prepared for just yet, one which potentially puts more upward pressure on bond yields in both the sovereign and credit spaces. Such an aggressive move also represents an early year headwind for risk assets more generally in our view although on the whole we still expect equities and credit to outperform this year even if the return potential from both in 2022 is much lower than we’ve seen in the past couple of years.
Aside from the Fed’s minutes last week’s other key data revolved around the release of December PMI readings across a number of large developed economies. The US, UK and Irish readings were all generally quite indicative of robust economic growth in the respective economies although momentum seems to have slowed, not entirely surprising considering the onset of the omicron strain of COVID 19 over the past few weeks.
Equity investors endured a difficult first week back at their desks with US equities in particular succumbing to worries about US monetary policy and how aggressive the Fed could be in 2022. Technology stocks (where valuations are high and showed a lot of sensitivity to market chat about Fed policy last year) struggled badly in the face of the Fed’s minutes, particularly the more speculative holdings in the tech space. Outside of the tech sector conditions were a little more benign with travel and leisure stocks faring quite well on hopes that the omicron variant wouldn’t disrupt travel in 2022 as much as initially feared.
As we noted in the Global Economy section, the sharp spike in bond yields over the Christmas break and last week due to the Fed minutes heralded a torrid start to 2022 for bond investors following bruising experience last year. US bond markets bore the brunt of the impact from the Fed’s December minutes with ten year yields trading at their highest levels since March 2021. Credit markets also struggled with high yield and emerging markets suffering as investors worried about the impact a faster pace of monetary tightening in the US might have on borrowers which typically have lower credit ratings.
Commodities had something of a mixed opening to 2022 with gains in energy offsetting weakness in metals. In the energy space oil prices resumed their moves higher as investors became more relaxed about the impact omicron might have on oil demand in light of growing evidence that elevated global case numbers might not automatically translate into fresh restrictions on businesses and households. Elsewhere the sharp spike in bond yields around the world (which raise the opportunity cost of holding precious metals) hit precious metals like gold and silver hard.
Forestry – Irish Foresters outline their wishes for 2022.
Last week Irish Foresters from organisations such as the Irish Forestry association (IFA), Forestry Industries Ireland (FII), and Irish Forest Owners (IFO) among others outlined a number of industry developments they would like to see for this year. These included the creation of a forest carbon code enabling farmers to monetise the value of carbon sequestered by their forests, the formation of a forest development agency to promote the sector and its products, the inclusion of afforestation under the CAP, compensation for Ash Dieback, and a resolution to the licensing debacle. In relation to the carbon code issue, the Carbon Removals Action Group (CRAG) announced over the Christmas break that it was seeking to develop a certification and validation system so that farmers could develop afforestation offsets to be sold internationally. Minister Hackett also announced over the break that afforestation planting targets and license approvals would be something her department would be prioritising in 2022, as well as announcing a citizens assembly to gain insight into what Irish forestry stakeholders believe is required for the industry to advance. Hopefully this action will further address issues surrounding licensing and carbon ownership, thereby allowing the industry to flourish over the medium term.
Commercial Real Estate – Dublin office market strengthened further in Q4, indicating further improvement is likely in early 2022
Data from CBRE last week showed that Dublin office transactions exceeded 90,000sqm in the fourth quarter of 2021, more than twice the transactional activity recorded in the third quarter of last year and three times higher than that recorded in Q4 2020. Although some question marks still linger about what office life will look like in the future, 75,000sqm of office stock was still reserved over the quarter, and demand at 300,000sqm remains well above its long term average (200,000sqm). As such the vacancy rate continued to fall quarter-on-quarter to 8.5%, all of which bodes well for the beginning of 2022 as recovery in the sector looks to gather momentum.