Late gains helped the large-cap benchmarks across global markets move higher for the week, but not before most major indexes moved temporarily into correction territory or down more than 10% from recent highs. The small-cap Russell 2000 Index lagged and ended the week down nearly 20% from its November peak, leaving it just outside of a bear market. Volatility, as measured by the globally watched Cboe Volatility Index (VIX), reached its highest level since the early months of the pandemic. Energy stocks rallied as international oil prices pushed above USD 90 per barrel, driven in part by the continued massing of Russian troops along the border with Ukraine.
Fears that the Federal Reserve might be “behind the curve” and forced to raise short-term interest rates quickly to tame inflation weighed heavily on sentiment. The Fed’s monetary policy committee met during the week and kept interest rates steady, as expected. In his post-meeting press conference on Wednesday, however, Fed Chair Jerome Powell left open the possibility that global market policymakers would raise rates in 2022 more than the three quarter-point hikes they had signalled after their December meeting, with the first increase coming in March. According to CME Group data, futures markets at the end of the week were pricing in a significant potential for at least 125 basis points (1.25%) of rate increases in 2022.
Powell also stressed that economic conditions now are much stronger than in prior cycles, particularly given the record number of open jobs. Indeed, the Commerce Department’s first estimate of economic growth in the fourth quarter showed gross domestic product rising at an annualized rate of 6.9%, well above consensus estimates of roughly 5.5%; for 2021 as a whole, the economy grew by 5.7%, its fastest pace since 1984.
U.S. Treasury yields increased in response to the hawkish Fed signals, but our traders noted that the IHS Markit data may have helped temper the rise, along with the tensions between the U.S. and Russia. (Bond prices and yields move in opposite directions.) The broad tax-exempt bond market registered firmly negative returns and underperformed Treasuries, hampered in part by notable outflows from municipal bond funds industrywide. However, following a sell-off across the municipal yield curve, our traders observed improved demand late in the week—particularly among long maturities—from bond buyers who typically invest in taxable fixed income sectors.
|Index||Friday’s Close||Week’s Change||% Change YTD|
|S&P MidCap 400||2,578.32||-16.16||-9.28%|
Shares in Europe fell for a fourth consecutive week, extending declines on rising concerns about interest rate increases and escalating tensions between Russia and the West. In local currency terms, the pan-European STOXX Europe 600 Index ended the week 1.87% lower. The major indexes in Germany and Italy suffered similar pullbacks, while France’s CAC 40 Index slid 1.45%. The UK’s FTSE 100 Index slipped 0.37%.
Yields on core eurozone, peripheral eurozone, and UK bonds increased on concerns over inflation and monetary policy tightening.
Denmark said it would remove almost all coronavirus restrictions on February 1, except for testing travellers from abroad. Denmark follows the UK, Ireland, and the Netherlands in scrapping measures aimed at reducing the spread of the coronavirus, even though infections remain at or near record highs across the Continent. Sweden, Norway, and Finland announced that they were likely to ease their restrictions in the coming days and weeks.
Germany’s gross domestic product (GDP) contracted 0.7% sequentially in the fourth quarter, an almost flat figure in global markets figures, as supply bottlenecks restricted manufacturing and consumer spending fell. In contrast, official data showed that France’s economy grew 0.7% in the last three months of 2021—above expectations but slower than the 3.1% registered in the third quarter. Spain’s economy grew 2.0% over the same period, also topping the consensus estimate. All three economies rebounded in 2021 from sharp, coronavirus-driven contractions suffered in 2020.
Chinese stocks slumped ahead of a weeklong Lunar New Year holiday as Jerome Powell’s hawkish tone following the U.S. Fed’s policy meeting raised expectations for faster monetary tightening. For the week, the Shanghai Composite Index lost 4.6% and the CSI 300 Index slid 4.5% as traders factored in as many as five rate hikes in the U.S. this year, a development that would impact the offshore borrowing plans for many Chinese companies. The CSI 300, which struck a 16-month low during the week, is now in a bear market, having fallen more than 20% from its February 2021 peak.
In global markets property sector news, debt-laden developer China Evergrande Group said it would come up with a preliminary restructuring proposal in the next six months. Creditors, however, were disappointed by a lack of detail at a bondholders’ call. Moody’s Investors Service said that the covenant packages in Evergrande’s offshore issuance had become increasingly lax, placing recovery prospects for offshore creditors in peril. Evergrande’s restructuring process was dealt a setback last week after Oaktree Capital, a Los Angeles-based alternative investments manager that issued secured loans to two major projects, seized one of the developer’s prime residential developments near Shanghai, the Financial Times reported.
Last year, China’s fiscal revenue rose 10.7% from 2020, driven by the economic recovery. The revenue surge has raised the prospect that the central government would boost transfer payments to local governments to help ease their fiscal strains.
The yield on Chinese 10-year government bonds edged down to 2.728% from the prior week’s 2.736%. The yuan currency declined for the week to around 6.36 per U.S. dollar from last week’s 6.34 as the greenback rallied after the Fed’s hawkish comments.
Japan’s stock markets generated a negative return for the week compared to global markets, with the Nikkei 225 Index down 2.92% and the broader TOPIX index falling 2.61%. The markets slumped after the U.S. Federal Reserve signalled that it plans to steadily tighten monetary policy, with high-growth technology companies leading the declines. The sentiment was also dampened by Japanese authorities’ decision to extend quasi-states of emergency to more prefectures as the country’s daily COVID-19 cases reached a record high and the omicron variant continued to spread rapidly in Tokyo and elsewhere. Against this backdrop, the yield on the 10-year Japanese government bond rose to 0.17%, from 0.13% at the end of the previous week, tracking U.S. Treasury yields higher on the Fed’s hawkish outlook for interest rates. The yen weakened to around JPY 115.55 against the U.S. dollar, from the prior week’s JPY 113.68.
Flash purchasing managers’ indices showed a divergence in the performance of the services and manufacturing sectors in January. Services activity fell sharply, with the contraction attributed largely to the reintroduction of restrictions across various prefectures, including Tokyo, due to the spread of the omicron variant. Conversely, manufacturers signalled a strong improvement in operating conditions, as both output and new order growth quickened. Across the private sector, firms remained confident about the outlook for activity in the year ahead, although the degree of optimism was the weakest since January 2021.
Other Key Global Markets.
- Chile – Chilean stocks, as measured by the S&P IPSA Index, returned about -2.3% in line with other global markets. On Wednesday, central bank officials held their regularly scheduled monetary policy meeting and decided to raise the country’s key lending rate by 150 basis points, from 4.00% to 5.50%. The decision was unanimous, and the rate increase was larger than the 125-basis-point increase that was widely expected.
- Brazil – Stocks in Brazil, as measured by the Bovespa Index, returned about 2.7%. During the week, the government issued its mid-month inflation report for January, and the month-over-month reading was higher than expected.