‘Everything rally’ turns ugly as markets fret central banks will choke activity

Great unknown hanging over markets is how long the war in Ukraine will last

 A trader works on the floor of the New York Stock Exchange. It is more important than ever for investors to take a long-term view, claims one analyst. Photograph: Justin Lane/EPA

A trader works on the floor of the New York Stock Exchange. It is more important than ever for investors to take a long-term view, claims one analyst. Photograph: Justin Lane/EPA


The outlook could not have been rosier for CRH when the biggest building materials group across North America and Europe updated investors three weeks ago on trading so far this year.

Sales were up, earnings margins were running at record levels and the biggest company on the Iseq index in Dublin had, as chief executive Albert Manifold told analysts on a call, the financial scope to spend $30 billion (€28.4 billion) over the next five years on investing, striking deals and returning cash to shareholders.

While Manifold said that the spectre of inflation – ignited by a reopening of global economies after the worst of the Covid-19 pandemic and stoked by the war in Ukraine and lockdowns in China on the back of the manufacturing hub’s zero-Covid policy – would need to be tackled by interest rate rises, he expressed confidence that the US Federal Reserve and the European Central Bank (ECB) would be careful not to choke activity.

“There is a determination with the Fed in the US and the ECB in Europe to ensure, as they rein in and tighten monetary policy, they do everything they can to avoid a hard landing,” he said.

The problem, however, is that the markets aren’t buying it. Shares in the company have slumped 23 per cent so far this year – wiping €8 billion off the market value of one of the Iseq’s most globally exposed companies, and making it among the worst performers in the Irish market so far this year.

Policy fears

It’s far from alone. Some $22 trillion (€21 trillion) has been wiped off the value of listed companies globally since equity markets peaked last November, according to Bloomberg data, with the pace accelerating in recent weeks as investors fret about policy errors from central banks, potentially triggering recession, as they pull back extraordinary stimulus and hike rates to rein in soaring consumer prices.

Figures released on Wednesday showed that US consumer prices rose at an annual rate of 8.3 per cent in April, faster than economists had forecast and running at a four-decade high. That adds to adding pressure on the US Federal Reserve, which has pushed through 0.75 percentage points of rate hikes since March, to do more to stamp out inflation.

Euro-zone inflation is estimated to have reached 7.5 per cent in April, according to “flash” estimates released by the EU’s statistics office, Eurostat, earlier this month. And, on Thursday, Ireland’s Central Statistics Office disclosed that inflation here has hit 7 per cent.

The tech-rich Nasdaq index in New York has plunged 30 per cent from its all-time peak in November. Nasdaq darlings such as Amazon, Netflix and Tesla, that were the vanguard of a global equities surge following an initial sell-off as Covid swept the globe in March 2020, have fallen 37 per cent, 72 per cent and 25 per cent, respectively, over the past six months.

The so-called “everything rally”, where just about everything investors touched in the wake of the initial Covid slump seemed to turn to gold, was turbocharged as the world’s four largest central banks pumped $11 trillion into financial markets in the two years after the coronavirus shock. The cash saved the financial system from collapse and allowed governments to borrow cheaply to support businesses and households through lockdowns.

But with central banks now seeking to take away the punch bowl, markets have turned ugly. Dublin’s Iseq index is down almost 20 per cent so far this year, with the pan-European Stoxx 600 off 15 per cent.

While government bonds normally offer a safe haven for investors when equities are under the cosh, they have also been falling in recent times as market interest rates – or yields, which move inversely to bond prices – have surged as central banks wind down their stimulus programmes and plot official rate hikes.

US 10-year government bonds – a benchmark for mortgage rates and other financial instruments – spiked at 3.2 per cent on Monday, a level last seen in late 2018. Closer to home, Irish 10-year bonds approached 1.85 per cent earlier in the week, up sharply from 0.25 per cent at the end of 2021.

ECB president Christine Lagarde hinted in a speech in Slovenia on Wednesday that the bank’s first interest-rate hike in more than a decade could come as soon as July.

Those who have piled into bitcoin and other cryptocurrencies in the belief that they offer a hedge against inflation and volatility in other assets – or are tantamount to “digital gold” – have also been left red faced. Bitcoin has slumped by 17 per cent in the past month alone, bringing its retreat since early November to 50 per cent. The crytocurrency has now surrendered all of its early 2021 gains.

Back on equity markets, a Bloomberg index covering 37 so-called meme stocks – from video games and consoles retailer GameStop to Bet Bath & Beyond – that had become the playthings of amateur day traders during the pandemic, has plunged by almost two-thirds from a January 2021 high.


“The overwhelming sentiment in the market right now is that scepticism about everything. It’s not a question of whether the glass is half empty or half full. It is in pieces on the floor,” said Aidan Donnelly, head of equities in Davy’s private clients business.

“You can actually trace this back to October when real bond yields [stripping out inflation] started moving higher, causing a major problem for really high-growth companies in the market that weren’t making a profit. The ‘hope value’ attached to these companies started getting hit from then on, and rightly so.”

Investors cannot value unprofitable companies on the most basic level of looking at their share price relative to earnings. So, they have to find a way to estimate the present value of companies’ future cash flows. And for this, they use bond yields as the discount rate. The higher the bond yields go, the greater the discount that must be applied to the estimated forecasts.

“Since then, everything that was growth orientated – irrespective of whether companies were making decent money now or projected to in future – have led equities lower,” Donnelly said. “The markets are convinced the Fed is going to make a policy mistake.”

Cathie Wood, the Irish-American stock-picking toast of Wall Street in 2020 as her Ark Investment Management’s focus on disruptive technologies, and bets on companies including Tesla and Zoom, came into its own during the pandemic, warned on Tuesday the global economy could already be in recession.

“There are a lot of indicators to us that we are in a bit of a bear market” because of the Fed’s expected plan to follow up recent rate hikes with 0.5 percentage points of increases over the next two months, she said.

“The markets are speaking pretty loudly right now and seem to be calling into question the Fed’s strategy.”

Investors in Wood’s flagship Ark Investment exchange traded fund (ETF) have been asking questions about the guru’s own market nous for some time. The ETF has plunged more than 60 per cent so far this year.

Tightening belts

Seamus Murphy, founder of Carraighill Capital, a provider of research to global asset managers and hedge funds on financial systems and select equities, says that “it is very hard to see a circumstance under which growth is not challenged significantly”.

“In Europe, household consumption accounts for 60 per cent of GDP, while discretionary consumption accounts for 40 per cent of all consumption. So, what will happen as a result of the soaring energy and food prices? Discretionary consumption will decrease,” said Murphy, a former Davy stocks trader who correctly advised clients from 2006 to get out of Irish banks, before the crash.

Murphy highlighted recent producer prices as “astonishing numbers”. EU industrial producer prices for goods as they leave factories were rising at an annual pace of 36.5 per cent in March, according to figures published by Eurostat last week.

“The problem is that a lot of the things that are going up in price are categorised as essential consumption. They’re inelastic. People are still going to have to try and feed themselves and put fuel in their cars.”

Murphy said a figure that jumped out at him recently was when a Lloyds Banking Group executive highlighted on an analysts call late last month that the bank had seen customers cancel 1.2 million subscription payments since last summer. The bank’s chief financial officer, William Chalmers, said the drop related to everything from television streaming services to gym memberships. “We’ve seen signs of customers somewhat tightening their belts with respect to discretionary expenditures.”

Wage spiral

Des Lawrence, a senior investment strategist with State Street Global Advisers Ireland, said central banks know that they are “damned if they do and damned if they don’t” continue to tighten monetary policy.

“There is no easy way out,” he said. “They know that the economy is going to slow and if they [continue to] hike rates, they could tip the economy into recession.”

But the big concern is if inflation goes unchecked and it feeds salary increases to the extent that they trigger a dangerous wage-price spiral, where pay growth chases inflation higher, pushing prices up further in a self-reinforcing loop, he said.

US private sector wages and salaries grew at an annual rate of 5 per cent in the first quarter of this year, according to the US Department of Labor. The ECB’s chief economist, Philip Lane, said last week that euro zone pay agreements concluded since the start of this year point to wage growth of about 3 per cent this year and 2.5 per cent in 2023.

“If we end up in a situation of a wage-hike spiral, markets could get a lot more volatile,” said Lawrence.

Meanwhile, Murphy believes the ECB will not be able to push through the rate hikes expected by the market, because of the knock-on effect on euro zone market borrowing costs, following continued growth in government debt across the single-currency region following the great financial crisis. The ECB’s hands will be further tied on the rates front by the fact that it is winding down multitrillion euro bond-buying programmes, which had kept bond yields in check in recent years.

“The question is who will buy the debt, when the ECB was the major buyer since 2012,” he said.

“With very few exceptions, relative and absolute debt levels have increased since 2011,” Deutsche Bank said in a note to clients last week. “If rates were to rise sharply for longer, we might well be facing Euro Crisis 2.0.”

Countries like Italy and Spain have seen their debt-to-GDP ratios blow out by 26 per cent and 70 per cent, respectively, over the past decade, as they increased borrowings in a low-rates environment, according to Deutsche Bank figures.

The eye-watering 150 per cent surge in Irish nominal GDP in the decade – driven by the activities of multinationals in the State – may have served to push down the Government’s debt burden from over 110 per cent of the size of the economy to 56 per cent by the end of 2021. But the general government debt figure jumped almost 40 per cent over the period to just under €236 billion.


While there had been an expectation late last year that inflation would start to taper quite rapidly from the middle of 2022, the great unknown currently hanging over western markets is how long the war in Ukraine will last.

Oil and gas prices have been exceptionally volatile in recent months, as investors weigh supply concerns stemming from the war against fears of recession. Brent crude oil prices spiked at $139 a barrel in early March, levels last seen in 2008 and almost 80 per cent ahead of where they ended 2021, but have since fallen back to about $106.

For stock investors looking on in horror at the recent declines in equity prices, Donnelly says it is more important than ever to take a long-term view.

“At times like this, investors need to focus on two important things: stick to good quality companies that are going to be around for a long time and make sure that you are diversified by stock, sector and region,” he said.

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