What you should know about leading stock markets, heading into Q2 of 2022
Let’s start with the most important news. A confluence of factors, that acted as a tailwind for global stock markets for almost two years now, is gone. Subsequently, stocks have been struggling since the beginning of the year. Despite a temporary bounce, traders and investors are still not out of the woods, given that inflation will probably remain elevated in the near term, while fiscal/monetary stimulus dries out.
Considering such conditions, this is a good opportunity to analyze some market expectations, heading into the second quarter of the year with its awaiting challenges. Keep in mind, though, that at the end of the day the projections provided here are just that - projections. With the elevated uncertainty around today, things can change rapidly.
Alt-text: stock market expectations for Q2 2022
March 2022 is rounding up to be a positive month for all three major US indices. Surprisingly, tech stocks are among the leading performers over the past two weeks, but this has to do more with technical aspects, rather than a fundamental shift in the market’s perception.
Historically speaking, when interest rates are rising, growth stocks underperform, because technology companies benefit when financing costs are very low. As a result, it is improbable that tech will manage to keep up the same pace in Q2.
Energy and other commodities are expected to remain elevated, which means value stocks are more favored to perform well in this environment. Only if these prices start to ease rapidly, should market participants start a new rotation back into tech.
Tensions between the West and Russia are far from being over, according to specialists working for XProMarkets, which acts as a tailwind for energy and commodities prices. Both Russia and Ukraine are large exporters of commodities, so as long as disruptions persist, economic implications will be felt.
When it comes to the UK market, the situation is similar. The BoE continues to raise rates, expecting inflation to continue moving higher during the next few months. FTSE 100, the benchmark of the London stock exchange, continues to trade below pre-pandemic highs, being one of the biggest underperformers around the world.
One of the positive factors to keep in mind, though, is that the country does not have a large dependency on Russian imports, which might explain why the index has been traveling upwards for three consecutive weeks now. If geopolitical tensions take a turn for the worse, this might serve as a place of refuge for investors, which keeps the downside limited. Inflation, energy costs, and fiscal/monetary actions will have a significant role in how the markets perform in this case as well.
The good news is that traders have access to brokerages such as XPro Markets, facilitating a wide range of tradable instruments, including global shares and indices. They can diversify and adjust exposure depending on how the risk sentiment changes.
Alt-text: EU and energy imports in 2022
During the first quarter of this year, there was a large outflow from European equities. Investors fled these markets since many countries depend on Russian energy and commodities. As a result, stock market indices such as DAX40 took a sharp tumble, entering bear market territory by the end of February.
Thus, developments regarding the Russia – Ukraine conflict will play a leading role for Europe. An easing of tensions can provide some short-term relief, while no change at all can mean stocks will soon be under pressure again. A breakout below the March 2022 lows will be a major bearish sign for EU stock markets.