March was a month dominated by the war in Ukraine, as market participants got
to grips with the global macro-economic consequences of Russia’s invasion. Commodity prices
were extremely volatile, with oil futures jumping to their highest in 14 years as the West
began to announce sanctions on Russia, before tumbling 13% in the following session. Oil
trading was marked by thin liquidity as open interest in WTI fell to its lowest in seven
years, adding to the volatility. There were also sharp spikes for grains and other
soft commodities and metals, though again these have pared a lot of their war premium later
in the month. Cotton continues to ride high. Dislocation and lack of liquidity was a
definite theme of the month, with nickel trading halted on various occasions and trades even
cancelled, controversially, by the LME. The European Federation of Energy Traders called on
central banks and governments to provide “emergency liquidity support”. The body warned that
many were in a “position where their ability to source additional liquidity is severely
reduced or, in some cases, exhausted”, and it stressed that “generally sound and healthy
energy companies” might be “unable to access cash”. Equity markets plunged in the
wake of the invasion at the end of February but after bottoming around March 7th
/8th, there has been a strong rally for stocks, albeit an unpopular one. The
sense is that buybacks are the main driver along with retail investors tempted to buy the
dip, whilst institutions remain more hesitant against a very challenging macro outlook.
Another factor for equities was the rally in the second half of the month in Chinese and
Hong Kong tech stocks after Beijing announced measures to maintain calm in the markets
following a period of steep selling. This came after the Hang Seng fell 6%, its worst day
since 2015, after analysts at JPMorgan described it ‘uninvestable’ amid a regulatory
crackdown. The following day it rallied 9%, and 7% the day after that. The Federal
Reserve raised interest rates for the first time since 2018 as it seeks to combat spiralling
inflation that saw US CPI hit 7.9%. The Fed’s new median dot plot calls for 7 hikes this
year to 1.9%, with members pencilling in 2.8% further out, which would take the fed funds
rate above neutral. The Bank of England also raised rates for a third straight meeting.
With the Fed tightening monetary policy, bonds have moved sharply to the downside.
The yield on the 10yr Treasury topped 2.5%, whilst the 2yr yield rose to fresh 3-year highs
above 2.43%. Yield curves flattened through the month as investors priced in more rate hikes
but questioned whether the Fed might start to ease in a year or two. The US 5-year yield
briefly rose above that of the 30-year bond for the first time since 2006, a move that many
believe could signal a recession. It’s likely in the weeks ahead that clients will
continue to wrestle with rising interest rates, persistently high inflation, volatile
commodity markets and an uncertain macro outlook, combined with deteriorating liquidity in a
number of asset classes. At Finalto we will help you navigate this and continue to deliver
deep liquidity to our clients through our extensive selection of Tier 1 banks, ECNs and
non-bank liquidity pools.
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