Global markets remained mixed this week, with a majority of the investors gaining ground on basis of interest rates rising as mentioned by the Feds, an event that the market has been anticipating for over 18 months.
Rising interest rate fears and growth worries pushed the global benchmark, S&P 500 Index to its biggest decline in more than 14 months over the holiday-shortened week. (Markets were closed Monday in observance of the Martin Luther King, Jr., holiday.) The Nasdaq Composite index slumped roughly 7.5%, its biggest weekly drop since the start of the pandemic. Weakness in semiconductor shares weighed on technology stocks, while weakness in automakers and home improvement retailers dragged down the consumer discretionary sector. Declines in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares. A more than 20% decline in Netflix shares following its fourth-quarter earnings report contributed to the indexes’ losses on Friday.
Fears that the Federal Reserve will need to act aggressively to curb inflation loomed large over sentiment. Global market investors reported increasing speculation on Wall Street that the Fed will announce a 50-basis-point (0.50%) increase in the federal funds target rate at its March meeting, instead of the incremental 25-basis-point increases that have characterized Fed action in recent years. According to CME Group data, futures markets are currently pricing in a nearly two-thirds chance of official short-term rates increasing by at least 100 basis points in 2022.
Growth forecasts weakened even as interest rate expectations increased. The trading week began on Tuesday with a report showing a surprise drop in factory activity in the New York region, the first since early 2020; a related gauge of activity in the mid-Atlantic region, released the following day, surprised on the upside and indicated solid expansion, however. The latest housing market data were mixed. Housing starts and permits in December surprised to the upside, while existing home sales slumped over the month. An unexpected jump in weekly jobless claims seemed to have the biggest impact on markets. Claims rose to 286,000, the most since mid-October.
The jobs data appeared to result in the flattening of the Treasury yield curve—or the relationship between short- and long-term yields. The yield on the benchmark 10-year U.S. Treasury note hit 1.90% on Wednesday—its highest level since late 2019—but fell back sharply in the wake of Thursday morning’s weaker-than-expected jobless claims report.
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Shares in Europe ended lower compared to other global markets, as expectations grew that the European Central Bank (ECB) would raise interest rates this year and that the Bank of England (BoE) would also need to tighten its monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index fell 1.40%. Among the major indexes, Germany’s Xetra DAX Index slid 1.76%, Italy’s FTSE MIB Index lost 1.75%, and France’s CAC 40 Index weakened by 1.04%. The UK’s FTSE 100 Index slipped 0.65%.
Core eurozone bond yields fell in line with global markets as ECB President Christine Lagarde squashed expectations for an interest rate increase this year and as geopolitical tensions over Ukraine intensified. Peripheral eurozone bond yields broadly tracked core markets but ended almost flat. UK gilt yields ended slightly higher, as inflation at a 30-year high led to markets pricing in the higher likelihood of a BoE rate hike in February.
ECB President Christine Lagarde rejected calls for the central bank to raise interest rates more quickly than planned to curb record inflation. She said, on France Inter radio, that the cycle of economic recovery in the U.S. is ahead of that in Europe. Earlier, data showed that surging energy and food costs drove eurozone inflation to a record 5% in December—well above the ECB’s 2% target. Lagarde reiterated that inflation would stabilize and “gradually fall” back below target by the end of the year.
Deep divisions in the ECB’s rate-setting Governing Council emerged at the December meeting, minutes showed. The majority agreed that “substantial monetary support was still needed” for inflation to stabilize at the central bank’s targeted level in the next three years. However, some members warned that inflation might stay higher for longer and said that they could not support the “overall package” of adjustments to the bank’s asset purchase programs.
BoE Governor Andrew Bailey told a committee of lawmakers that he was concerned that elevated UK inflation might last longer than previously forecast, due to surging energy costs and signs that wage demands are rising. Earlier, data showed inflation hit 5.4% in December, the highest level since 1992.
Chinese markets posted a weekly gain, unlike other major global markets as the government stepped up monetary easing measures and signaled additional support for the beleaguered property sector. The Shanghai Composite Index edged up 0.1%, and the CSI 300 Index added 1.1%.
Last Monday, the People’s Bank of China (PBOC) unexpectedly reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%, the central bank’s first reduction since April 2020. In response, Chinese banks cut their loan prime rates for one- and five-year loans. China’s central bank sets the MLF rate, upon which domestic lenders set their loan prime rates, or the de facto benchmark for new loans.
Following the rate cut, PBOC Vice Governor Liu Guoqiang said that China will roll out additional policy measures to stabilize the economy and preempt downward pressures. His comments triggered a rally in Chinese government bonds, sending the yield on the 10-year sovereign bond down to 2.736% from last week’s 2.809%.
In global economic readings, China’s gross domestic product expanded at better-than-expected 4% in the fourth quarter of 2021, slowing from the third quarter’s 4.9% expansion pace. The data suggest worsening downward pressure, especially in consumption and property trends, though infrastructure investment showed some improvement.
The yuan currency ended the week steady at 6.34 per U.S. dollar after rising to its highest level since May 2018 earlier in the week. Some analysts have attributed China’s recent currency strength to inflows from bond investors globally, positioning for further rate cuts and predicted that they would slow as valuations become less attractive and imports increased.
Japan’s stock market returns were negative for the week, with the Nikkei 225 Index falling 2.14% and the broader TOPIX Index down 2.62%. Amid record new coronavirus infections nationwide, the government placed Tokyo and 12 other prefectures under a quasi-state of emergency, which weighed on sentiment. Against this backdrop, the yield on the 10-year Japanese government bond fell to 0.13%, from 0.15% at the end of the previous week, while the yen strengthened to around JPY 113.96 against the U.S. dollar, from the prior week’s JPY 114.22.
As widely expected, the Bank of Japan (BoJ) maintained its dovish stance at its January monetary policy meeting, keeping short- and long-term interest rates unchanged. The central bank said that it will continue with quantitative and qualitative monetary easing with yield curve control, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner, and it will not hesitate to take additional easing measures if necessary.
The BoJ upgraded its forecasts for economic growth in fiscal year (FY) 2022, expecting gross domestic product (GDP) to expand year on year in real terms by 3.8% (compared with the 2.9% expansion it projected in October 2021), mainly on the back of the effects of the government’s economic measures and a recovery in production to catch up with demand.
The central bank also upgraded its forecasts for the consumer price index (CPI) in FY 2022 to 1.1% from October’s projected 0.9%, mainly reflecting a rise in commodity prices and the pass-through of that rise to consumer prices. Notably, the BoJ shifted its view on the risks to prices for the first time since October 2014, stating that they are “generally balanced,” whereas they previously had been “skewed to the downside.” Japan’s core CPI rose 0.5% year on year in December, matching the previous month’s rise, largely due to the impact of rising energy prices.
Other Key Global Markets
- Turkey – Turkish shares, as measured by the BIST-100 Index, returned about -3.0% in global markets. As expected, the central bank left its one-week repo auction rate at 14.0% at Thursday’s scheduled monetary policy meeting. However, the central bank has recently been active in other areas. In an attempt to stabilize the Turkish lira in the FX market, Turkey’s central bank has been establishing FX swap lines with central banks of other countries, including Qatar, China, and, in an agreement reached during the week, the United Arab Emirates (UAE).
- Brazil – Brazilian shares, as measured by the Bovespa Index, returned about 1.9% in global markets. Chilean shares, as measured by the S&P IPSA Index, returned about 3.5%. Investors seemed generally satisfied with President-Elect Gabriel Boric’s cabinet appointments announced on Friday.
- Mexico – Mexican stocks, as measured by the IPC Index, returned -4.0% in global markets. The market was hurt in part by Mexico’s proximity to the weak U.S. equity market. Sentiment was also hurt by news that Mexico’s economy, which contracted in the third quarter of 2021, seems to have contracted also in December, raising concerns that the country may already be in a recession. A conventional definition of a recession is two consecutive quarters of negative GDP growth.