On the face of it, not a great deal changed in February. If anything, economic data marginally strengthened and yet markets became increasingly skittish on central bank concerns. In this environment, the VIX remained above the long-term average but only just and far below the peaks of last year.
February was, however, the first anniversary of the invasion of Ukraine. Sadly, beyond Russia's pared-back ambitions, the situation remains horrendous for Ukrainians, with no sign of a further pullback. Furthermore, Putin appears to have China's backing, or at least verbal assurances, with Xi Jinping set to visit Moscow and rumours that China is planning to send weapons to Russia.
Regardless of what we read, central banks are winning the battle against high inflation, yet economies are still running too hot and inflation too embedded. The main outlier on this trend was the Fed's preferred inflation gauge marginally ticking up in January, going against the grain of falling inflation, but is still significantly below that of the UK's 10.1% and Eurozone's 8.5%.
Central banks have made it clear they will continue raising rates, albeit at an increasingly slower pace than we saw in 2022. For them, this is a golden opportunity to normalise rates. The start of February saw the Fed raise the benchmark interest rate by a quarter point to between 4.5% and 4.75%; the Bank of England likewise increased rates by a further 0.5% to a 14-year high; and the ECB by 0.5% to 2.5%, with the President, Christine Lagarde, saying they remain committed to raising rates by 50bps in March.
Inflation remains sticky in the employment market and producer prices/ supply chains, where there continue to be disruptions and high costs still in the system - US core monthly personal consumption expenditure, for example, rose 0.6% from December to January, against the expected 0.3%.
Yet even with this sticky inflation, there is a confidence that major economies will dodge the telegraphed severe recession that so concerned markets last year - it is now about a shallow recession, with Germany arguably at the front of the queue. This confidence is clear from the PMI numbers, with US PMI at 50.2 in February against 48 in January, following eight consecutive months of contraction. In February, the S&P Global/ Cips Flash UK Composite PMI rose to 53, well above analysts' predictions of 49 and above January's 48.5. It was the same in continental Europe, which saw a strong rebound in European business activity in January - the busiest since May of last year.
Despite improving sentiment, central bank worries are a big overhang on global equity markets, which suffered during the month. After starting the year strongly, markets seesawed on rate rises and disappointing financial results - the last full trading week saw US stocks have their worst loss in two months. February closed with the S&P 500 down -2.6% for the month, although it was down almost -5% from the month’s high. The Nasdaq was better, down -1.1%, partly buoyed by Tesla’s share price, which was up +18.5%. The FTSE 100 briefly broke through 8,000 at new highs, before retreating to close the month at 7,876, up +1.3%. The Dax likewise closed the month +1.6% and Nikkei 225 +0.4%.
The oil price followed economic winds, with WTI -2.9% and Brent -1.7%. Coal fell over -25% as power producers return to cheaper gas, with TTF fell -15% during the month. Precious metals were up against global rate rises and these headwinds, with gold falling -4.8% and silver -11.2%.
This was a comparatively stable month for crypto. There was volatility but it was muted compared to previous months. Bitcoin bounced back from its lows as it knocked on the door of $25,000, but closed the month at 23,307, up +0.6%.