Global stocks started 2022 on a strong footing, with US and eurozone stocks hitting record highs, but sold off sharply when the US Federal Reserve indicated that surging inflation may mean it will need to raise rates more swiftly than had been expected. Bond yields moved higher on the news.

Tech stocks fell while travel and leisure stocks gained after early data suggested Omicron was less likely than previous strains to result in hospitalisations and therefore widespread lockdowns. Shares in cyclical businesses such as banks and energy producers also rallied even as new infection levels surged around the world.

UK

The FTSE 100 rallied 1.1% over the week thanks to its high concentration of banks, energy companies and miners.

Household borrowing in November increased for the first time since the start of the pandemic, according to official data, pointing to a possible strengthening of the economy prior to the spread of the Omicron coronavirus variant.

The UK government is coming under increasing pressure to scrap planned tax increases given rising inflation and soaring energy bills.

US

The S&P 500 fell 1.6% over the week while the Nasdaq Composite dropped 4.1%, marking the worst annual debut for the tech-heavy index since fears of a slowdown in China sent shockwaves across global financial markets six years ago. The sell-off included some of the largest stocks in benchmark US indices, including Apple and Google-owner Alphabet (Apple started the year by becoming the first $3 trillion company).

Minutes of the Federal Reserve’s latest meeting revealed officials were considering a faster timetable for interest rate rises than investors had anticipated, to combat elevated inflation.

Non-farm payrolls increased by 199,000 in December 2021, less than half the number expected by analysts and well below the monthly average of 537,000 in 2021. The unemployment rate fell to 3.9% in December, dropping below 4% for the first time since the start of the pandemic. Average hourly earnings rose 4.7% on a year-on-year basis.

The ISM manufacturing purchasing managers’ index fell to 58.7 in December from 61.1 in November and the weakest growth in factory activity since January.

The ISM non-manufacturing PMI fell to 62.0 in December from a record high of 69.1 in November as companies continue to struggle with inflation, supply chain disruptions, capacity constraints, logistical challenges and shortages of labour and materials.

Europe

The FTSEurofirst 300 eased 0.1% over the week.

Eurozone inflation rose to 5.0% in December, marking a fresh record high since the single currency was created more than two decades ago. Excluding food and energy, core inflation held steady at 2.6%.

Harmonised German inflation eased to 5.7% in December, from 6.0% in November. The government has promised aid for poorer households as energy prices continued to surge at double-digit rates.

Japan

The Nikkei 225 declined 1.5% over the week.

Pacific Basin ex Japan

Shimao became the third Chinese property developer (after Evengrande and Kaisa) that has failed to make a loan repayment in recent months.

Emerging markets

Turkey’s consumer price index rose 36 per cent year on year in December, the highest level since Recep Tayyip Erdogan came to power almost two decades ago.

Bonds

The yield on the 10-year US Treasury note rose as high as 1.8% before closing the week at 1.74%, a rise of around 12 bps over the seven days. The two-year Treasury yield climbed to 0.87%, its highest level since March 2020, after the release of the minutes of the Fed’s latest meeting.

European government bonds were swept up in the sell-off. Germany’s 10-year bond yield moved as high as -0.03 per cent, its highest level since May 2019, before closing the week at -0.11%. Riskier eurozone debt was also hit, with Italy’s 10-year yield rising above 1.3% for the first time since July 2020.

Currencies

The US dollar jumped to a five-year high against the Japanese yen as traders cranked up their bets on Federal Reserve interest rate rises.

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Image by Gerd Altmann from Pixabay