Below is a summary of some of the relevant news items from the Capital Markets and the Economy from the past week extracted from RBC Global Insights and FactSet Research.

 

Markets

Market scorecard as of close on Friday March 25, 2022.

Equity Indices	Level	1 week	YTD	52-week
S&P/TSX Composite	22,006	0.9%	3.7%	17.3%
S&P 500	4,543	1.8%	-4.7%	14.3%
NASDAQ	14,169	2.0%	-9.4%	7.8%
Euro Stoxx 50	3,902	-0.9%	-9.2%	13.5%
Hang Seng	21,685	1.3%	-7.3%	-23.5%

Source: Bloomberg, RBC Wealth Management

• The weakness in equities so far in 2022 has been driven in large part by a downward adjustment in valuations. The Bloomberg consensus forward 12-month earnings estimate for the MSCI All Country World Index is slightly higher today than it was at the start of the year, but the pricing multiple that market participants are willing to pay for those profits has declined as investors have demanded a higher risk premium to compensate for the mounting downside risks to growth.

• The S&P 500, at 19.2x forward consensus 12-month earnings, still appears expensive relative to history, but not nearly as stretched as it was a few months ago. Meanwhile, equity market valuations in Canada, Europe, and the emerging markets are now below or roughly in line with their long-term averages. Thus, even if earnings estimates are trimmed modestly in the coming months, there now appears to be a relatively larger buffer against heightened near-term risks.

• The S&P/TSX Composite Index is on track to outperform most global peers by a substantial margin in Q1, thanks to a strong rally in commodity prices, which has helped lift consensus 2022 earnings estimates. As of last Friday, the S&P/TSX Composite Index is up approximately 4% year to date, beating the S&P 500 by a measure of nearly 10 percentage points and the MSCI All Country World Index by nearly 11 percentage points on a total-return basis.

 

Update on Russia-Ukraine war

• The range of possible outcomes in the conflict between Russia and Ukraine remains uncomfortably wide, stretching from a near-term ceasefire to a protracted multiyear war. But the recent optimism projected by negotiators about a diplomatic pathway to halt hostilities is encouraging, and has helped markets rebound from near-term lows.

• Commodity prices, an important economic spillover channel, are a key area to monitor—and the Bloomberg Commodity Index has rallied nearly 30 percent since the start of the year. Until markets see definite signs that geopolitical tensions are easing, we think strength and volatility are likely to persist in commodity prices, particularly in energy products.

• Geopolitical shocks are always disruptive in the short term, but a key lesson from history is that the impact of major military conflicts on markets has typically been brief. Even so, we think the road to a resolution that could allow attention to shift back to fundamental drivers will likely be potholed by unsettling developments that create more episodes of volatility.

• One month on from Russia initiating its attack on Ukraine, European equities are back to the level they were before the war started. Having initially fallen more than 9% in the two weeks following the invasion, the STOXX Europe ex UK Index has recouped those losses.

 

Economy

Canada

• A political power-sharing deal has been struck between the Liberals and the New Democratic Party with the intent to tackle several key areas, notably housing affordability and tax initiatives.

• Regarding the tax initiatives, last year, the Liberals proposed a surtax on the large banks and insurance companies, which could be addressed in the 2022 budget. RBC Capital Markets estimates that a combined earnings impact for the affected group could be about 4%, but does believe these measures have already.

U.S.

• Whether the Fed will need all the rate hikes that are currently anticipated is still an open question. Many of the inflationary pressures we are witnessing today are coming from the supply side, and there appears to be little that monetary policy can do to influence factors such as oil supply, resource shortages, and logistical gridlocks.

• Government bonds remained under pressure last week as hawkish testimony from Fed Chair Jerome Powell led traders to position for a faster pace of rate hikes. By midday Thursday, interest rate futures reflected a high probability the Fed will raise rates by a half-percentage point at one of its meetings this year and potentially as early as May 4.

Further Afield 

• UK Chancellor of the Exchequer Rishi Sunak announced a new budget that includes modest stimulus measures to help households impacted by the steep rise in the cost of living, opting to keep some powder dry for a one percentage point reduction in the basic income tax rate in 2024, just ahead of the next general elections.

 

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Regards,

Shiuman