Volatility Spikes as Fed Leaves Door Open For Faster Rate Hikes

Newer
31/01/2022
Older

Archived Article

This article was correct at the time of publishing however the information contained within it will no longer be current. It may also no longer reflect our views on this topic.

Share

Volatility Spikes as Fed Leaves Door Open For Faster Rate Hikes

Market volatility hit its highest level since the early stages of the pandemic [1] last week as investors digested the Federal Reserve’s monetary policy meeting. Comments from Chairman Jerome Powell suggested that rates may need to be lifted more than three times this year to fight inflation whilst also signalling that the first increase will come in March. The strength of the US economy which grew sharply in Q4’21 was also cited as a reason to commence policy tightening with labour conditions also in a strong place. US equities, which had entered correction territory (-10.0% fall from recent highs) ultimately closed out the week on a positive note with the S&P500 rising by +0.8%.

Other major equity markets fared much worse with a sea of red gripping European indices. In the UK, the FTSE100 and FTSE250 fell by -0.4% and -2.8% respectively, the later impacted by a bout of weakness in the value of Sterling. The German DAX and French CAC40 also shed ground with the former retreating by -1.8% and the latter by -1.5%. In Japan, the Nikkei 225 declined by -2.9% despite Bank of Japan Governor Haruhiko Kuroda reiterating his commitment to ultra-loose monetary policy.

Sovereign yields inched higher following the Fed’s meeting with the US 10-year Treasury yield rising by 3 basis points (bps) to 1.78%. The equivalent duration domestic gilt yield jumped by 7bps to 1.24% whilst in the Eurozone, the 10-year benchmark index rose by 2bps to -0.10% as it continued to inch closer to positive territory.

Moving to commodities, oil prices maintained their upwards trajectory with Brent Crude rising by a further +2.3% to $89.97 a barrel. It had briefly moved beyond the $90.00 mark for the first time in years as tensions along the Ukrainian-Russian borders continued to rise. Gold meanwhile came under selling pressure from last week’s spike in the US Dollar with the precious metal declining by -2.6% to $1,785 an ounce. Copper slumped by -4.3% to $9,557 a tonne, impacted by a combination of Dollar strength and weak demand in China ahead of its new year celebrations. [2]

 

Week Ahead

The Bank of England (BoE) hosts its latest monetary policy meeting on Thursday with the MPC expected to increase interest rates for the second time in two months, this time by 25bps to its pre-pandemic level of 0.5%. In terms of domestic data, the BoE also publishes its monthly consumer borrowing statistics covering the likes of mortgage approvals and credit card lending. Friday’s Labour Market Report in the US will provide insight into the current state of employment in the country, including the jobless rate, job creation and wage growth. The Institute for Supply Management also releases its PMI equivalents which are expected to reveal a moderation in the rate of growth during January.

Moving to the Eurozone, flash Q4’21 GDP is forecast to show quarterly economic growth of 0.4%, a slowdown from the +2.2% printed for the prior quarter. CPI inflation, unemployment and final PMI’s for January are also released in what is busy week on the Continent. The European Central Bank meeting on Thursday is not expected to yield any changes on this occasion. PMI’s, both official and from media group Caixin are also due from China whilst in Japan, industrial production, unemployment, and retail sales are worth keeping an eye on. [3]

[1] T. Rowe Price 31/01/22

[2] Refinitiv, 31/01/2022

[3] Forex Factory 31/01/2022

The value of an investment may fall as well as rise. You may get back less than the amount invested.

The value of investments may fall as well as rise purely on account of exchange rate fluctuations.

Past performance is not indicative of future performance.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). © LSE Group 2022. FTSE Russell is a trading name of certain of the LSE Group companies. “FTSE Russell®” is a trade mark of the relevant LSE Group companies and is used by any other LSE Group company under license. All rights in the FTSE Russell indexes or data vest in the relevant LSE Group company which owns the index or the data. Neither LSE Group nor its licensors accept any liability for any errors or omissions in the indexes or data and no party may rely on any indexes or data contained in this communication. No further distribution of data from the LSE Group is permitted without the relevant LSE Group company’s express written consent. The LSE Group does not promote, sponsor or endorse the content of this communication.

© S&P Dow Jones LLC 2022. All rights reserved.

The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations.

Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

Rowan Dartington is part of the St. James’s Place Wealth Management Group. Rowan Dartington & Co. Limited is a member firm of the London Stock Exchange and is authorised and regulated by the Financial Conduct Authority. Registered in England & Wales No. 02752304 at St. James’s Place House, 1 Tetbury Road, Cirencester, England, GL7 1FP, United Kingdom.