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Article | 04 February 2022 | Investments
In the US the S&P 500 suffered its worst January since 2009, closing the month 5.3% lower. The Nasdaq index of tech heavyweights underperformed, closing 9% lower. European markets took fright at the prospect of higher rates, with the Eurostoxx 50 falling 2.9%. The UK posted a rare positive month as bargain hunters circled, whereas Japan was knocked back by further quasi-state of emergency orders in several areas. Chinese markets were roiled once again by negative newsflow in the property sector.
Government bond yields rose across the board, in anticipation of higher rates, as prices fell. The German Bund yield climbed above 0% for brief periods, a level not seen since 2019. Investment grade corporate bond markets were boosted at times by energy names, while high yield bonds mirrored risk off sentiment in the equity markets.
The US dollar made ground against all majors, as expectations for higher interest rates hardened. The euro was weaker across the board as the ECB (European Central Bank) insisted on no change to policy. Sterling made modest gains against the euro and the yen.
The price of oil soared, as demand forecasts edged up post the Omicron surge and geopolitical tensions on the Ukrainian border led to fears of supply interruptions. Gold was subdued, falling 1.8%, despite more persistent levels of inflation. Industrial metals, including copper, were weaker on the month.
Volatility spiked higher as January progressed, on fears of a faster pace of monetary tightening in the US. The Vix index reached levels not seen since the start of the pandemic, rising 44% on the month.
ECB president Christine Lagarde committed to ‘greener’ changes to all the bank’s operations. This could include using the €2.8 trillion asset purchase scheme in the fight against climate change, for example by prioritising green bonds.
As US inflation hit 7%, a more hawkish tone from the US Federal Reserve (Fed) led to forecasts of a faster pace of interest rate rises for 2022. The Fed also signalled that its $8.9 trillion balance sheet is substantially too large, indicating more aggressive action to come.
Eurozone GDP regained its pre-crisis level in Q4, despite negative growth in Germany, as France registered its fastest growth rate for more than 50 years. Meanwhile, activity in China edged closer to contraction levels, held back by zero-Covid policy and lower demand.
Apple became the first company to reach a $3 trillion valuation, before falling back with the tech sector. The Nasdaq index hit correction territory, falling 10% from its November peak, as markets re-evaluated highly rated growth stocks in the light of interest rate forecasts.
Rising geopolitical tensions could bring further spikes in oil and other commodities. Meanwhile, more broad based price increases in energy and food across the Eurozone could make it difficult for the ECB to hold the line that interest rate rises are ‘very unlikely’ this year.
Markets will likely remain nervous, faced with uncertainty over the direction of rates and prices. Old economy sectors such as energy and banks could benefit from stronger corporate earnings, while the yield on the German Bund could trade more consistently above 0%.
The Omicron variant might still inhibit spending and consumption plans. Meanwhile, China’s zero-Covid strategy will be tested to the max, as contestants arrive for the Winter Olympics. Significant breaches could have a global inflationary impact via supply shocks.