tHE u.s.
Small-caps outperform as investors observe interest rate hikes and earnings
Another week of above-average volatility. The large-cap indexes ended lower, while the S&P MidCap 400 and small-cap Russell 2000 indexes recorded subtle gains. The tech-heavy Nasdaq ended the week 15% down from its recent peak. It’s clear to say large-cap growth is still in correction territory. As time goes on, it will be interesting to see how the markets unfold, with concerns of an aggressive monetary tightening. An additional spanner in the works which adds to the risk of increased volatility is the likeliness of Russia invading Ukraine.
The Labor Department reported that the headline Consumer Price Index (CPI) advanced 7.5%in the last year, more than consensus expectations and its highest annual gain since February 1982. Core prices, which exclude food and energy purchases, rose 6.0%, the most since August 1982.
Markets have priced in, half-point rate increase in March
The upside CPI surprise sent short-term rates surging, resulting in a flattening of the yield curve. The two-year U.S. Treasury note yield reached its highest level since January 2020 as investors priced in expectations of a hawkish hike schedule by the Fed, starting with a 50-basis-point rate increase at the March FOMC meeting.
uk
Stability in the UK Markets
The UK’s FTSE 100 Index rose 1.92%. The UK gilt yields increased after a smaller economic contraction than expected in December and grew 1% in the fourth quarter. This contributed to increased expectations for the Bank of England to increase interest rates again.
Growth comes as a surprise
GDP was better than expected in December down only 0.2%, adding up to 6.5% Q4 growth (year-on-year) and 7.5% growth in 2021.. In December, there was a fall of 0.5% in the services sector, manufacturing was up 0.2% and construction 2%. The trade balance was heavily negative.
Europe
Delightful earnings across Europe
Solid corporate earnings induced a rally in European stocks, as STOXX 600 edged 1.61% higher. Germany’s Xetra DAX Index advanced 2.16%, Italy’s FTSE MIB Index gained 1.36%, and France’s CAC 40 Index added 0.87%. Core eurozone government bond yields rose with higher-than-expected inflation forecast issued by the European Commission (EC) and an upside surprise in U.S. inflation.
Central Bank policy controversy
The head of the Dutch and German central banks mentioned that the ECB should start winding down their asset purchasing programme, in preparation for an end of year interest rate hike. However, the ECB president was against prematurely tightening monetary policy, reiterating his view that inflation could subside and approach the central bank’s 2% target in the medium term. The market expects the ECB to taper asset purchases and end the programme in the third quarter. However, there is likely to be only one rate hike of 25 basis points, probably in the fourth quarter.
EC forecasts slower growth but higher inflation
The European Commission lowered its 2022 outlook for economic growth in the European Union (EU) by 4.0% from its forecast last fall, for a 4.3% expansion. The winter update to the EC’s forecasts also said inflation was expected to accelerate to 3.9% in the EU and 3.5% in the eurozone—faster than previously expected—before easing to less than 2.0% in 2023.
China
Markets optimistic about regulatory crackdown
Chinese stocks rose amid supportive official comments that the country’s regulatory crackdown cycle had peaked. The Shanghai Composite Index gained 3% and the CSI 300 Index added 0.8% since January 28. The yield on the 10-year Chinese government bond rose to 2.81% from 2.728%. The yuan ended the week flat versus the U.S. dollar at around 6.36 per dollar.
China Central Bank remains supportive
The Public Bank of China’s foreign currency reserves fell in January by roughly 28 billion USD to 3.22 trillion USD. New aggregate financing and new loans rose more than expected to record levels in January, lending to local governments and companies. China’s credit growth will likely continue to accelerate in the coming months amid declining borrowing costs, showing no change to the central banks looser fiscal stance.
Property Sector
In the property sector, Evergrande Group plans to pay off its debt by restoring construction and sales activity rather than selling assets below market price. Shares of Zhenro Properties, a mid-size developer in Shanghai, plunged by over 65%, amid speculation that the company wouldn’t be able to pay a USD 200 million bonds in March.
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