Global equities and bonds generally weakened as speculation grew that the Federal Reserve would raise rates more than three times in 2022 after US inflation hit the highest level in almost 40 years.

Talks between the US and Russia failed to allay fears that Russia is about to invade Ukraine.

UK

The FTSE 100 rallied 0.8% over the week.

UK GDP expanded by a faster-than-expected 0.9% in November, meaning the UK economy was 0.7% larger than in February 2020 when the pandemic started to hit growth. However, the Omicron variant is expected to have depressed growth again in December.

Prime Minister Boris Johnson faced a growing number of calls to resign after he admitted he had attended a party at Number 10 when the country was under strict lockdown measures.

GlaxoSmithKline rejected a £50 billion bid from Unilever to acquire its consumer health joint venture with Pfizer.

US

The S&P 500 slid 0.7% over the week, while the tech-heavy Nasdaq lost 0.8%.

S&P 500 earnings growth of nearly 22% is forecasts for the final three months of 2021, following an increase of almost 40 per cent in the previous quarter. Energy, industrials and materials are expected to see the highest rates, while earnings growth may shrink in the utilities and financials sectors.

Federal Reserve Chair Jay Powell reassured investors that the central bank would act to curb inflation before it gets out of control. In an appearance before the Senate banking committee on Tuesday, Powell said high inflation had taken a “toll” and the central bank would act to prevent it from “becoming entrenched”.

US inflation increased to 7.0% year-on-year in December, the fastest pace of price increases in almost 40 years. Core inflation rose 5.5% year on year. The news increased speculation that the US Federal Reserve would raise rates more than three times in 2022.

US retail sales fell 1.9% in December, the biggest decline since February 2021.

The University of Michigan’s consumer sentiment index fell to 68.8 in January, the second lowest level in a decade. Respondents cited inflation as a more serious problem than unemployment.

JPMorgan warned that rising costs would hurt profits in 2022.

Europe

The FTSEurofirst 300 dropped 0.8% over the week.

Initial estimates of German GDP growth suggest that the economy shrank by as much as 1% in the final quarter of 2021 as the latest coronavirus restrictions and supply chain bottlenecks kept output below pre-pandemic levels.

Japan

The Nikkei 225 declined 1.2% over the week.

Pacific Basin ex Japan

South Korea raised interest rates to 1.25%. Its third rate rise since the pandemic takes interest rates to where they were before the pandemic.

China’s inflation rate fell to 1.5% in December from a 15-month high of 2.3% in November. Producer price inflation eased to 10.3% year-on-year in December compared to 12.9% in November and the lowest reading since August.

Emerging markets

Russian markets were hit by rising worries over the potential invasion of Ukraine. Russia’s benchmark MOEX stock index suffered its worst daily decline since April 2020, while the Russian rouble fell to a nine-month low against the US dollar after President Vladimir Putin’s spokesman said talks with the US and NATO in Geneva and Brussels had been “unsuccessful” at addressing Moscow’s security demands.

The president of Bangkok’s stock exchange warned that a proposed tax on securities transactions in Thailand will depress trading. Thailand’s government has said it was planning to levy taxes on trading stocks and cryptocurrencies after the country struggles to revive growth given the pandemic’s hit to the tourism sector.

Bonds

In the US, the yield on the two-year note closed the week at 0.97%, its highest level since February 2020, while the 10-year bond yield climbed to 1.76%.

The 10-year German Bund yield climbed to -0.05% its highest level in nearly three years. Longer-dated borrowing costs for German sovereign debt have turned positive.

The amount of global negative-yielding debt fell to $10 trillion for the first time since April 2020. Overall, the amount of negative yielding debt has fallen by $2 trillion since the start of the year.

Commodities

European gas prices jumped after the breakdown in security talks between Russia and the US deepened concerns about supplies.

Nickel climbed to its highest level in a decade amid a ramp up in the production of electric vehicles.

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Image by Gerd Altmann from Pixabay