Wall Street's main indexes ended sharply lower for the week, the technology-focused Nasdaq posted its worst week since 2020, after dropping nearly 7.5% in the holiday-shortened week as government bond yields surged with the benchmark 10-year Treasury yield trading above 1.9% during the week. The Dow Jones Industrial Average slipped roughly 4.6%, while the S&P 500 is down about 5.7% for the week.
Bitcoin fell to its lowest point since August on Friday, while ether prices also dived, wiping off nearly $150 billion from the crypto market. Bitcoin fell about 15% and was trading around $36,000 late Friday, while Ether, the second-largest cryptocurrency by market cap, dived about 20% to trade at around $2,500.
Markets are on edge ahead of next week’s Fed policy meeting in the U.S. with policymakers likely to start preparing for an interest rate lift-off in March and the prospects that the Fed will need to act more aggressively to battle persistent inflation impacting investor sentiment. This fear of rising rates as well as the Federal Reserve’s indication that it plans to begin reducing its balance sheet has prompted investors to shed positions in riskier assets.
With earnings season well underway in the U.S. worse-than-expected earnings in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares over the week, while a disappointing earnings report from global streaming giant Netflix, showing slowing subscriber growth, led to a more than 20% decline in Netflix shares further contributing to the indexes’ losses.
Shares in Europe also ended lower, as expectations grew that the European Central Bank (ECB) may need to raise interest rates this year and that the Bank of England (BoE) would also need to further tighten its monetary policy. In local currency terms, the pan-European STOXX Europe 50 Index fell 1.00%, while the UK’s FTSE 100 Index slipped 0.65%.
Despite increasing numbers of COVID-19 cases in Europe, a stabilization in the number of hospitalizations has prompted some countries to ease restrictions. In France most controls will no longer apply from early February, although citizens will be required to show vaccine passes and wear masks indoors, while the UK is in the process of scrapping most measures.
Japan’s stock market was negative for the week, with the Nikkei 225 Index falling 2.14%. As expected, the Bank of Japan (BoJ) maintained its dovish stance at its January monetary policy meeting, saying it was in no rush to change its ultra-loose monetary policy.
In contrast, Chinese markets posted a weekly gain as the government stepped up monetary easing measures and signalled additional support for the beleaguered property sector. During the week China’s Central Bank cut its benchmark lending rates again, reducing the one-year loan prime rate by 10 basis points from 3,8% to 3,7%. Following the rate cut, the People’s Bank of China (“PBOC”) Vice Governor Liu Guoqiang said that China will roll out additional policy measures to stabilize the economy and pre-empt downward pressures. The Shanghai Composite Index edged up 0.1% over the week.
Continued Ukraine-related tensions between the U.S. and Russia also weighed on investor sentiment. The Kremlin denies it is planning to attack the Ukraine and argues that NATO support for Ukraine (including increased weapons supplies and military training) constitutes a growing threat on its western flank. As many as 100,000 Russian troops have remained amassed at the Ukrainian border, despite warnings from US President Biden and European leaders of serious consequences should Putin move ahead with an invasion.
Market Moves of the Week
South Africa’s consumer inflation spiked up to 5.9% in December, its highest level in almost five years, from 5.5% in November. The CPI data was unveiled on Wednesday by Stats SA, which also said that consumer inflation in 2021 averaged 4.5% compared with 3.3% in 2020. Fuel prices are presently the main driver and will likely remain so for some time, with global oil prices around seven-year highs.
The South African Reserve Bank (“SARB”) is now expected to raise interest rates to 4,00% when they meet on January 27, this according to 18 of 23 economists polled from January 12-18, saying the central bank would add 25 basis points (bps) to the repo rate at its first meeting of 2022, while five economists said the central bank would leave rates on hold.
South Africa’s inflation remains reasonably benign, but inflation is edging higher and the SARB's is expected to continue its hiking cycle amid a pick-up in consumer price inflation. Inflation (CPI) is expected to average 4.8% this year, slowing to 4.5% next year and 4.4% the following year, the poll showed. The central bank tries to keep inflation within a range of 3%-6%.
The JSE All-Share Index was down 0.43% over the week, with the financial (-3.14%) and listed property sectors (-2.64%) leading the benchmark lower, while the resource (+0.66%) sector proved more resilient against the global market sell-off. By Friday close, the rand was trading at R15.10 to the U.S. Dollar.
Chart of the Week
Meanwhile, expectations for the Federal Reserve have been turned on their heads. As per the chart above, markets have effectively added one extra 25 basis-points hike for this year, just since Jan. 1. As recently as the beginning of the fourth quarter of 2021, it was thought to be on a knife-edge whether there would be any hikes in 2022.