17th January 2022

Global stock markets remained under pressure last week, with growth stocks selling off fairly heavily on concerns about rising inflation and faster US interest rate hikes. The inflation spotlight is on the UK this week, with our data out on Wednesday – which will likely impact the currency and the bond market ahead of the next Bank of England meeting in early February. Earnings season is very much to the fore this week, with some key banks reporting along with Netflix; this will give the markets something to focus on after a likely quiet start to the week as US markets are closed today for Martin Luther King Day.

Last Week

  • Global stock markets had a choppy week and finished down about 0.5%
  • “Value” markets such as Emerging markets and the UK did better
  • US inflation came in at a near 40-year high
  • Oil prices rose to close to their 1-year highs
  • Bond markets were mixed and remain fairly challenged so far this year
  • Chinese economic data out this morning was solid

This Week

  • The UK is in the spotlight this week as we have unemployment data out tomorrow and then the inflation numbers out on Wednesday. It is expected (by Bloomberg economists) that CPI will tick up to 5.2%. UK Retail sales numbers are due out on Friday.
  • The Bank of Japan also have their monetary policy decision meeting tomorrow.
  • It’s also a busy week on the corporate calendar, with 39 US S&P companies reporting. The key ones to note would be Goldman Sachs and Bank of America (Tuesday), Morgan Stanley (Wednesday) and Netflix and American Airlines (Thursday).

Last Week’s Highlights​

Global stock markets had a pretty choppy week and finished down by about 0.5%. Consistent with the theme for this year, it was the cheaper areas of the market that fared best, with Emerging market shares doing the best: up by about 2.4%, whilst the more expensive markets struggled. The US market continued to struggle and markets such as Japan (-1.2%) and Continental Europe (-1.4%) were also dragged lower.

The UK stock market continues to be one of the bright spots amongst stock markets this year, with the FTSE All Share up by 0.2% last week and up by 1.2% for the year-to-date. This is in keeping with the general outperformance of “value” stocks, with this style outperforming its growth counterpart by nearly 7% so far this year. Within the UK market, it was very much the larger stocks that did best, with the FTSE 100 up by 0.8% on the week, whilst the FTSE 250 was down by 2.6%. The FTSE 100 is about 5% ahead of the FTSE 250 so far this year, with both the Banking sector and the Energy sector each up by over 14%. British American Tobacco was the best performer in the 100 last week, up by 7.6%, with Standard Chartered (+7.4%) and BP (+7.2%) also near the top of the leader board.

The US earnings season kicked off last week, with several of the big banks reporting. Results were generally solid, but the bar was high given the strong recent performance that the sector has had. This generally made for pullbacks, with JP Morgan being amongst the hardest hit, falling about 6% on Friday despite reporting record full year profits as they cited higher costs (wages) in the year ahead. Although it is very early days in the earnings season, more than half the companies that have reported so far have cited a negative impact from higher labour costs and staff shortages, which has put a dampener on the outlook.

The big driver for the choppiness in markets last week was likely centred around inflation and the prospect of higher interest rates. US CPI inflation came out last Wednesday at a level of 7% which made for its highest level since June 1982. Although it is expected that inflation will trend lower this year, it is still likely that US inflation will end the year closer to 3% than 2% (the Fed’s long-term target) and rate hikes are therefore expected. In fact, the bond futures market moved last week to price in four rate hikes for this year, with the first one coming at the 16th March meeting (currently priced in with a 90% probability). This was backed up by Fed Chair Powell in his renomination hearing before Congress last week, where he assured them that the Central Bank would not hesitate to control inflation.

Oil prices continued to climb higher last week, with both Brent oil and WTI crude oil closing the week comfortably above $80 and having their 4th consecutive week of positive gains. They are both now close to the recent highs that they reached in late October. Commodities as an asset class have very much continued where they left off last year, up by 1.7% last week and now up by 3.5% so far this year, with the energy complex driving the bulk of the gains.

Bond markets continued to be challenged, with US Treasuries falling by 0.2% on the week, although UK gilts fared a little better, up by 0.5%. Each of these assets remain underwater for the year-to-date, having felt the pressure of rising yields. 10-year UK gilt yields closed the week at 1.15%, with the US 10-year yield closing the week at 1.8%. Credit markets were a mixed bag, with the UK market doing okay as yields fell and other markets giving up a bit as spreads moved out a little.

China had a big data dump this morning which was generally pretty solid. 4th quarter growth numbers came in higher than expected (at 4%) and 2021 growth came in at 8.1%. Retail sales and industrial production both fell shy of expectations, whilst fixed asset investment came in a touch higher than expectations.

Asset Returns

Equities & Oil: returns are all in base currency, save for Global and Emerging which are in GBP. Bond returns are all shown in GBP. Gold in GBP. Source Bloomberg.

Oil markets have enjoyed four consecutive weeks of gains and are now back at the highest levels they’ve been at in the last year.

Source: Psigma / Bloomberg

Rory McPherson, CFA
Head of Investment Strategy