Reflections on a tough first quarter for investors, President Biden’s raid on the Strategic Petroleum Reserve hits oil prices and lack of supply squeezes Irish house prices higher again in Q1 2022. All these stories and more are covered in this week’s insights update from BlackBee.
Investors had a lot on their plates in the first quarter of the year which wrapped up last week. Our chart of the week shows that commodities were really the only game in town from a return perspective as the energy and agricultural sectors charged ahead on foot of the war in Ukraine. As we’ve noted previously, this is likely to add to short term stagflationary fears around the world economy, but as yet central banks haven’t altered their newfound hawkish tendencies. All of these factors were major headwinds for the other asset classes, particularly government bonds which suffered their worst quarterly loss in many years. Equities didn’t emerge unscathed either although they managed to claw back some of their losses over the past couple of weeks.
As regards the dominant economic themes of the moment, slowing economic momentum in certain parts of the world is still visible. The March readings for the closely watched Purchasing Managers Indexes in China showed that both the manufacturing and service sectors contracted in recent weeks. China’s efforts to stimulate its economy have been stymied of late by COVID with the government there forced to fully lockdown Shanghai last week, a city of 26 million people! The greater transmissibility of the latest BA.2 variant will in our view really test Chinese authorities’ resolve in following through with its zero tolerance COVID approach, especially if the economy continues to suffer as a result.
Meanwhile, in the Euro area German inflation rose again to a 40 year high of 7.3% in March. Interestingly however, in a speech in Paris last week ECB Chief Economist Philip Lane appeared to give the bank some wriggle room around the issue of interest rate increases by saying that the time interval between the end of the ECB’s asset purchases and the first interest rate rise is not predetermined. We think the ECB is wise not to precommit to rate hikes (or give any signals of this) given the likely negative fallout of the armed conflict in Eastern Europe.
Equity markets whipsawed last week on continuing news around the conflict in Ukraine. Sentiment has certainly been chastened of late by the war and by the US Federal Reserve’s comments around interest rate increases. This was clear from the data released by Refinitiv last week which showed that global merger and acquisition (M&A) volumes were 23% lower in Q1 2022 compared to the previous year. One factor that did help sentiment however on the week was President Biden’s significant decision to release 180 million barrels of oil from the US’ Strategic Petroleum Reserve which softened oil prices.
In recent weeks the bond market investor narrative has very much been along the lines of ‘higher commodity prices = higher inflation = sell government bonds’. Well with President Biden’s decision to raid the US Strategic Petroleum Reserve, that cycle took a bit of a breather last week thereby allowing sovereign yields to soften a touch and prices to rise modestly. Even credit markets enjoyed a rebound with emerging market bonds posting good gains over the week.
As we noted earlier, oil was the big loser last week on foot of the US deployment of its oil reserve. It has been suggested that the 180 million barrels released could be used to increase weekly supply by one million barrels over the next six months. This will certainly help absorb some of the Russian output ‘lost’ to world markets over this period. However, for prices to ease further investors will need to see further supply increases from OPEC and Iran. We are optimistic that this will happen and that further positive supply news flow can ease some of the current pressure on the world economy.
Housing – Lack of supply and strong demand suggests growth in house prices will continue for time being
Last week Daft.ie published its Q1 house price report indicating that the level of housing stock for sale as of March 1st this year was 20% lower than a year ago. This is the lowest level on record and is well below the 2019 average of 17,500 and the 2010-2015 average of 38,000. The fall in supply saw house prices rise by 8.4% in the year to March and by 2.4% over the first quarter of this year, with the provinces suffering from the lowest levels of supply over the year the ones also experiencing the greatest price inflation. Again, this clearly underpins what many housing market commentators have been saying for some time – supply is the key to reining in house price (and rental) inflation.
This becomes all the more pressing when viewed against continued strength in housing demand as signalled by the latest mortgage data which showed mortgage volumes up 6.7% in the year to the end of February – driven mainly by first time buyer activity. In value terms mortgage approvals were actually up 14% year on year in February, suggesting that levels of competition amongst bidders are rising. This trend also resonates with another of Daft’s findings, that houses are now selling for above asking prices. In our view, as long as supply remains low and momentum in demand continues to grow house prices are likely to grind higher. In addition, this dynamic may also be impacted further by Ireland’s commitment to rehome displaced refugees arising from the conflict in Ukraine.