Equity markets surrendered in January to the pressures of soaring inflation, a monetary policy shift for the Fed, the Omicron variant, geopolitical tensions with Russia and Ukraine and the persisting supply chain issues drove the risk-off sentiment. The ASX 200 fell by -6.5%, the S&P 500 -by 5.26%, Dow Jones Industrial Average -by 3.32%. The high-beta indices saw the worst of it, with the Nasdaq 100 -8.93% and the Russell 2000 -9.66%.
Equity markets surrendered in January to the pressures of soaring inflation, a monetary policy shift for the Fed, the Omicron variant, geopolitical tensions with Russia and Ukraine and the persisting supply chain issues drove the risk-off sentiment. The ASX 200 fell by -6.5%, the S&P 500 -by 5.26%, Dow Jones Industrial Average -by 3.32%. The high-beta indices saw the worst of it, with the Nasdaq 100 -8.93% and the Russell 2000 -9.66%.The unemployment rate in Australia dropped to 4.2%, with 64,800 new jobs added in December, beating market expectations. Following the global trend, the quarterly inflation figures in Australia also came in slightly hotter than expected at 1.3% (1.0% Trimmed Mean CPI), bringing the annualised rate to 3.5% for the calendar year and above the RBA medium-term target range of 2-3%. This may bring about speculation that the RBA will have to move sooner than the 2024 lift-off date previously mentioned.
The change in monetary policy stance from the US Federal Reserve was the most notable event in the month. The major US equity markets dropped following the release of the December FOMC meeting minutes on Jan 5. The hawkish shift was attributed to a robust economy, a tightening labour market and persistently high inflation. Futures markets are now pricing in a March increase in the federal funds rate and faster subsequent increases than previously expected. The Nasdaq 100 and the Russell 200 both declined by more than -3% following the release of the FOMC minutes.
This price action really set the tone for January and largely confirmed expectations for a March lift-off at the next FOMC meeting. Fed Funds interest rate futures are now pricing a 100% probability for a March increase (89% probability for a 25-50 basis point increase and 12% for a 50-75 basis point increase). Market economists are now forecasting five rate increases for 2022, with some saying up to seven.
January 2022 Summary
- Australian inflation is above the RBA's target range at 3.5%
- US inflation is at 7%, which is the highest rate of increase since 1982
- The US Fed is expected to raise interest rates at the March FOMC meeting
- Global equity markets declined in January, hitting 'technical correction' territory
- The Volatility Index measure by the VIX hits a 1-year high
- Crude oil continues to push higher with rising demand and geopolitical tensions
- The US annual GDP figures came in at 6.9% in December
US Equity Markets
Major US equity indices sold off heavily in January, with many moving into correction territory (when prices decline more than 10% from the recent highs). Most markets suffered their largest sell-offs since the pandemic began in March 2020. The Value sector outperformed Growth, although both were negative overall on the month. Large tech names were amongst the worst performers in January, alongside small-caps which both broke through long term support (200-day moving averages).
US Treasury Markets
Yields spiked higher in January, with the benchmark US 10Y yield pushing to a high point of 1.87%, after trading around 1.52% to start the month. The US 2Y yield jumped from 0.74% to 1.24%, and the 10s/2s yield spread flattened to new 1-year lows following the FOMC statement. The 10s/2s yield spread is the difference between the 10Y yield and the 2Y yield, with a negative spread said to be the precursor to a recessionary period.
US Corporate Earnings
Q4 US Corporate Earnings have been solid so far, but the post-pandemic momentum could be starting to fade. FactSet data shows that 35% of S&P 500 companies have now reported Q4 earnings, with over 78% beating consensus EPS expectations below the 1-year average (84%) but still above the 5-year average (75%).
Market Volatility
Unsurprisingly, market volatility kicked up a gear in January, as commentary from US Fed officials around tapering, interest rates, and inflation sent markets into a nosedive. The volatility index (VIX) pushed to a new 1-year high in the last week of the month, close to 39.0. The index consolidated in the month's final days but still closed January up 45%.
Crude Oil Prices
Crude oil prices pushed to 7-year highs in January, rounding out a 20% increase for the month. Crude oil futures traded above $88 per barrel, which we haven't seen since mid-2014 on the back of Russia/Ukraine tensions, rising inflation and demand. Some market analysts expect prices to climb back above $100 per barrel later this year.
The US Dollar
The US Dollar has been on the front foot in the last few months, with a rising interest rate environment in the US contributing to its strength. The US Dollar Index (DXY) reached a high of $97.45 late in January before giving back some gains to close out the month +1.01%.
Cryptocurrency
Digital currencies were on the nose in January, with Bitcoin losing over 17% for the month and over 50% in the last three months. It has been a wild ride in the cryptocurrency space, with Bitcoin (BTC) experiencing 14 separate 'technical bear markets' since its beginnings in 2009 (a fall of over 20% from the recent highs). The Biden administration is expected to release new regulations in February as a matter of national security, weighing on the digital asset space.
The Months Ahead
There are many factors to watch in the first weeks of February that will impact markets. Over 20% of S&P 500 companies will report earnings this week, and there is a heavy economic data calendar. Continued Fed watching will be in focus around the trajectory for interest rates for the remainder of the year.