It was a wild week for global stocks, with sharp falls mostly followed by equally steep rebounds as lower valuations attracted buyers.

Bond yields rose as the Federal Reserve appeared to indicate that the pace of US interest rate hikes is likely to be quicker than many investors had expected.

UK

The FTSE 100 eased 0.4% over the week.

The flash IHS Markit/Cips UK composite purchasing manager index dipped to an 11-month low of 53.4 in January from 53.6 in the previous month. The continued high level of coronavirus infections weighed down on the services sector, but manufacturing activity rebounded to the fastest pace since August, helped by an improvement in the availability of materials. Factories also reported a slowdown in input prices thanks to some easing of supply chain disruptions and a reduction in the cost of raw materials.

US

The S&P 500 slid 0.3% over a volatile week, while the tech-heavy Nasdaq fell 1.0%. US stocks are on track for their worst January performance since 2009. Having touched a fresh high at the start of the year, the S&P has now fallen around 7%, while the Nasdaq is down 15% from its record high in November.

Jay Powell refused to rule out that the Fed may be more aggressive in raising interest rates than markets had been expecting and indicated that the first increase would be implemented in March. The Fed chair declined to rule out consecutive rate increases later in the year and said a rate rise would “soon be appropriate”. He added there was “quite a bit of room” to tighten monetary policy without harming the labour market. Futures markets have now priced in about five quarter-point interest rate rises this year, starting in March.

US fourth-quarter GDP expanded by a faster-than-expected 6.9% on an annualised basis, up from an annualised expansion of 2.3% in the third quarter, as consumers increased spending and businesses stocked back up. For the full year, the economy grew 5.7%, the fastest rate of increase since 1984.

The core personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation, increased 4.9% in December from the year before and marking the fastest rise since September 1983.

The University of Michigan’s consumer sentiment index fell to 67.2 in December, the lowest since 2011. Inflation was deemed biggest economic problem by 75% of households. Meanwhile, the Conference Board’s consumer confidence index slid for the first time in four months in January, dropping to 113.8.

Apple provided a strong quarterly update from Apple and forecast lighter-than-expected coronavirus-related semiconductor supply chain glitches. Tesla reported a record profit but warned of supply chain constraints.

Europe

The FTSEurofirst 300 dropped 1.7% over the week.

French GDP rose 7.0% in 2021, the country’s fastest expansion for 52 years, as it rebounded back above pre-pandemic levels of output thanks to higher consumer spending. In contrast, German GDP grew 2.8% in 2021. For the fourth quarter, the French economy expanded 0.7% while the German economy shrank 0.7%.

The IHS Markit flash eurozone composite purchasing managers’ index (PMI) fell to 52.4 in January, down from 53.3 in the previous month. Businesses also reported that average prices charged for goods and services had risen at the fastest rate since the survey started in 2002, indicating that inflation was likely to remain high. Services activity fell to a nine-month low of 51.2, but manufacturing activity rose to a five-month high of 59.0, helped by an easing of the supply chain problems.

The flash German composite PMI rose to 54.3 in January, its highest level since September, helping to alleviate fears that Germany will fall into recession this winter. However, the flash French composite PMI fell to 52.7 in January from 55.8 the previous month, due to weaker growth in both services and manufacturing.

The Ifo index of German business confidence rose to 95.7 in January, the first increase in seven months.

After a week-long stalemate, Italian lawmakers re-elected incumbent president Sergio Mattarella as head of state, ensuring the survival of Mario Draghi’s government.

Japan

The Nikkei 225 tumbled 3.0% over the week.

Pacific Basin ex Japan

Stock markets in Asia tumbled to their lowest point in nearly 15 months after the Fed indicated that rates may rise more quickly than previously thought. Mainland China’s CSI 300 share index dropped into a bear market, closing more than 20% below its most recent high of February last year.

Chinese manufacturing and services activity edged close to a contraction in January as lockdowns in several major Chinese cities as well as travel restrictions compound a slowdown in the property sector. The official manufacturing PMI eased to 50.1 in January, from 50.3 a month earlier, but the Caixin manufacturing PMI, which focuses on smaller manufacturers, fell to 49.1, from near its lowest points since the start of the pandemic. The official non-manufacturing index, composed of the services and construction sectors, slid to 51.1. but down from 52.7 a month earlier.

Australian inflation rose to 3.5% in the fourth quarter, up from 1.3% in the previous quarter, due to elevated housing and energy costs. The increase was higher than expected and increased the likelihood of an interest rate rise in the second half of the year.

LG Energy Solution surged on its market debut, propelling the electric battery maker to become South Korea’s second-most valuable company after Samsung Electronics. LGES supplies batteries for Tesla, General Motors and Volkswagen.

New Zealand’s annual inflation rate topped a three-decade high of 5.9% in the last three months of 2021.

Emerging markets

Turkey’s president Recep Tayyip Erdogan sacked the head of the national statistical institute after he had served just 10 months in the role amid reports of tension between them over the country’s inflation data. Turkish manufacturers halted production after problems with the country’s gas supplies forced the state to impose electricity cuts on industry.

Russian stocks continued to fall as fears grew that Russia would invade Ukraine. Russian bond yields rose to their highest level in six years, as the potential for swingeing western sanctions prompted investors to dump Russian assets.

In Brazil, presidential candidate Luiz Inácio Lula da Silva made it clear that his priority was battling inequality rather than sticking to a rule limiting public expenditure, arguing that a way to fix Brazil’s problems is to “put the poor in the budget” and “tax the rich”.

Argentina secured a deal with the IMF to restructure $44.5bn of debt, removing the threat of an imminent default.

Bonds

The yield on the benchmark 10-year Treasury note rose as high as 1.85%, while the yield on the two-year Treasury note climbed to 1.22%, its highest level since February 2020.

German sovereign debt yields closed the week little changed but the iTraxx Crossover index, which measures the cost of hedging against a default by European junk bonds, rose as high as 295 bps, a level not reached since November 2020. The spread has increased around 50 bps since the end of 2021.

Currencies

The US dollar index climbed to its highest point in almost 18 months.

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Image by Gerd Altmann from Pixabay