International Communique No. 324 – 8th of February 2022


The two sides of global equity markets had been in full show. In Europe, stocks ended the week down by more than 1%. In contrast, US markets gained, with the S&P 500 advancing by 1.5%, propelled higher by energy and consumer stocks. The Nasdaq also regained 2%. Notable focal points were the less dovish noises from central banks, continuing friction between Russia and Ukraine and the variable batch of quarterly results from listed companies. Bond yields shot up amid rising consumer prices. Eurozone inflation clocked in at 5.1%, while the price of crude oil also rallied.

Caution is also being exercised with the possibility of entering a new paradigm emerging as the prospect of reduced liquidity in Europe looms. The Bank of England unanimously increased the base rate to 0.5% in its effort to curb inflation (forecast to reach 7.25% in April), which it fears will dent purchasing power and trigger a slowdown in GDP growth. The bonds acquired under quantitative easing arrangements will no longer be rolled over when maturing. The European Central Bank continues to scale down its long-term refinancing operation (LTRO), i.e. a conduit for cheap loans, but is sticking to all-time low interest rates despite record-high inflation. In its view, half of the inflation is due to higher energy prices. A likely indication of no drastic tightening of monetary policy for the time being, although Christine Lagarde has left the door open to a rate hike in 2022 depending on economic figures. The euro also gained ground, strengthening to 1.14 against USD, which in turn weighed on
export-related stocks.

In the US, January’s robust employment report is stoking fears that the Fed will be more aggressive in raising rates to curb inflation, given that the labour market is no longer an issue. A total of 467,000 jobs were created in January, blazing past the consensus estimate for 150,000. Additionally, figures for November and December were revised up sharply. The average hourly wage edged up by 0.7% (to USD 31.60), driving expectations of more aggressive monetary tightening by the Fed to avoid a price-wage spiral. But even if tightening were enacted, this would not necessarily be disastrous. Higher interest rates need not necessarily worsen the stock market correction if accompanied by sufficiently strong economic growth.

In earnings reports, results were relatively good overall in terms of sales and earnings growth. But some stocks plunged in response to published figures. In some cases, guidance for Q1 2022 was not upbeat enough. Among the FAANGs, Netflix and Meta (Facebook) have lost some of their lustre.

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