![](/sites/default/files/styles/1086x410/public/architecture-buildings-city-316137.jpg?itok=nuzfiWyS)
Global Markets Weekly Update: January 21, 2022
U.S.
Interest rate fears weigh heavily on markets
Rising interest rate fears and growth worries pushed the S&P 500 Index to its biggest decline in more than 14 months over the holiday-shortened week. (Markets were closed Monday in observance of the Martin Luther King, Jr., holiday.) The Nasdaq Composite index slumped roughly 7.5%, its biggest weekly drop since the start of the pandemic. Weakness in semiconductor shares weighed on technology stocks, while weakness in automakers and home improvement retailers dragged down the consumer discretionary sector. Declines in financial giants JPMorgan Chase and Goldman Sachs took a toll on financial services shares. A more than 20% decline in Netflix shares following its fourth-quarter earnings report contributed to the indexes’ losses on Friday.
T. Rowe Price traders noted that much of the week’s volatility appeared to be due to technical factors. Heavy flows in and out of index-focused exchange-traded funds (ETFs) indicated that many investors were trading equities as an overall asset class rather than based on the week’s earnings reports or other fundamentals. Further selling appeared to be prompted on Thursday by the Nasdaq crossing below its 200-day moving average for the first time since April 2020. The declines left the Nasdaq in correction territory, or down more than 10% from its mid-November highs.
Fed to move more aggressively?
Fears that the Federal Reserve will need to act aggressively to curb inflation loomed large over sentiment. Our traders reported increasing speculation on Wall Street that the Fed will announce a 50-basis-point (0.50%) increase in the federal funds target rate at its March meeting, instead of the incremental 25-basis-point increases that have characterized Fed action in recent years. According to CME Group data, futures markets are currently pricing in a nearly two-thirds chance of official short-term rates increasing by at least 100 basis points in 2022.
Growth forecasts weakened even as interest rate expectations increased. The trading week began on Tuesday with a report showing a surprise drop in factory activity in the New York region, the first since early 2020; a related gauge of activity in the mid-Atlantic region, released the following day, surprised on the upside and indicated solid expansion, however. The latest housing market data were mixed. Housing starts and permits in December surprised to the upside, while existing home sales slumped over the month. An unexpected jump in weekly jobless claims seemed to have the biggest impact on markets. Claims rose to 286,000, the most since mid-October.
Many observers attributed the increase in claims to the spread of the omicron variant of the coronavirus. The week brought encouraging news of a nationwide decline in cases, particularly in New York and other large cities. Experts warned that the variant’s spread to the Midwest and other less populated and vaccinated regions presaged a slower decline in the U.S. than in Europe, however. Continued Ukraine-related tensions between the U.S. and Russia also weighed on sentiment.
Yields fall back on jobless claims data
The jobs data appeared to result in the flattening of the Treasury yield curve—or the relationship between short- and long-term yields. The yield on the benchmark 10-year U.S. Treasury note hit 1.90% on Wednesday—its highest level since late 2019—but fell back sharply in the wake of Thursday morning’s weaker-than-expected jobless claims report.
The broad tax-exempt bond market produced losses through most of the week and underperformed Treasuries amid outflows from municipal bond mutual funds industrywide, which marked the first week of negative net flows for the asset class since March 2021. T. Rowe Price municipal traders observed weakness in the primary market, with several new offerings repricing to higher yields. A U.S. District Court approved the debt restructuring plan put forward by Puerto Rico’s Financial Oversight and Management Board, which will allow the territory to exit a process similar to bankruptcy that began in 2017.
Technical factors support corporate bond market
Our traders noted that investment-grade corporate bond spreads widened initially in response to mixed macroeconomic sentiment, earnings reports, and an active primary calendar. However, a move in rates contributed to heightened overnight demand, which supported the asset class from a technical perspective. Several U.S. banks came to market with new issuance, which was generally well subscribed.
High yield bonds traded lower amid broad risk-off sentiment due to equity weakness and the sell-off in the Treasury market. Our traders noted, however, that the below investment-grade space remained orderly, with buyers showing healthy interest in new deals and preferring higher-quality and short-dated paper.
U.S. Stocks1
Index |
Friday’s Close |
Week’s Change |
% Change YTD |
DJIA |
34,265.37 |
-1646.44 |
-5.70% |
S&P 500 |
4,397.94 |
-264.91 |
-7.73% |
Nasdaq Composite |
13,768.92 |
-1124.83 |
-11.99% |
S&P MidCap 400 |
2,594.48 |
-188.15 |
-8.71% |
Russell 2000 |
1,987.95 |
-174.50 |
-11.46% |
This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.
Source of data: Reuters, obtained through Yahoo! Finance and Bloomberg. Closing data as of 4 p.m. ET. The Dow Jones Industrial Average, the Standard & Poor’s 500 Stock Index of blue chip stocks, the Standard & Poor’s MidCap 400 Index, and the Russell 2000 Index are unmanaged indexes representing various segments of the U.S. equity markets by market capitalization. The Nasdaq Composite is an unmanaged index representing the companies traded on the Nasdaq stock exchange and the National Market System. Frank Russell Company (Russell) is the source and owner of the Russell index data contained or reflected in these materials and all trademarks and copyrights related thereto. Russell® is a registered trademark of Russell. Russell is not responsible for the formatting or configuration of these materials or for any inaccuracy in T. Rowe Price Associates’ presentation thereof.
Europe
Shares in Europe ended lower, as expectations grew that the European Central Bank (ECB) would raise interest rates this year and that the Bank of England (BoE) would also need to tighten its monetary policy. In local currency terms, the pan-European STOXX Europe 600 Index fell 1.40%. Among the major indexes, Germany’s Xetra DAX Index slid 1.76%, Italy’s FTSE MIB Index lost 1.75%, and France’s CAC 40 Index weakened by 1.04%. The UK’s FTSE 100 Index slipped 0.65%.
Core eurozone bond yields fell as ECB President Christine Lagarde squashed expectations for an interest rate increase this year and as geopolitical tensions over Ukraine intensified. Peripheral eurozone bond yields broadly tracked core markets but ended almost flat. UK gilt yields ended slightly higher, as inflation at a 30-year high led to markets pricing in the higher likelihood of a BoE rate hike in February.
France, UK relax most coronavirus restrictions
Despite increasing numbers of COVID-19 cases, a decline or stabilization in the number of hospitalizations prompted some countries to ease restrictions that had been implemented to curb the spread of the coronavirus. In France, most controls will no longer apply from early February, although citizens will be required to show vaccine passes and wear masks indoors. The UK also scrapped most measures.
ECB’s Lagarde stands firm on policy stance; minutes show deep split
ECB President Christine Lagarde rejected calls for the central bank to raise interest rates more quickly than planned to curb record inflation. She said, on France Inter radio, that the cycle of economic recovery in the U.S. is ahead of that in Europe. Earlier, data showed that surging energy and food costs drove eurozone inflation to a record 5% in December—well above the ECB’s 2% target. Lagarde reiterated that inflation would stabilize and “gradually fall” back below target by the end of the year.
Deep divisions in the ECB’s rate-setting Governing Council emerged at the December meeting, minutes showed. The majority agreed that “substantial monetary support was still needed” for inflation to stabilize at the central bank’s targeted level in the next three years. However, some members warned that inflation might stay higher for longer and said that they could not support the “overall package” of adjustments to the bank’s asset purchase programs.
BoE’s Bailey concerned by high inflation
BoE Governor Andrew Bailey told a committee of lawmakers that he was concerned that elevated UK inflation might last longer than previously forecast, due to surging energy costs and signs that wage demands are rising. Earlier, data showed inflation hit 5.4% in December, the highest level since 1992.
Japan
Japan’s stock market returns were negative for the week, with the Nikkei 225 Index falling 2.14% and the broader TOPIX Index down 2.62%. Amid record new coronavirus infections nationwide, the government placed Tokyo and 12 other prefectures under a quasi-state of emergency, which weighed on sentiment. Against this backdrop, the yield on the 10-year Japanese government bond fell to 0.13%, from 0.15% at the end of the previous week, while the yen strengthened to around JPY 113.96 against the U.S. dollar, from the prior week’s JPY 114.22.
BoJ maintains dovish stance; shifts view on inflation risk
As widely expected, the Bank of Japan (BoJ) maintained its dovish stance at its January monetary policy meeting, keeping short- and long-term interest rates unchanged. The central bank said that it will continue with quantitative and qualitative monetary easing with yield curve control, aiming to achieve the price stability target of 2%, as long as it is necessary for maintaining that target in a stable manner, and it will not hesitate to take additional easing measures if necessary.
The BoJ upgraded its forecasts for economic growth in fiscal year (FY) 2022, expecting gross domestic product (GDP) to expand year on year in real terms by 3.8% (compared with the 2.9% expansion it projected in October 2021), mainly on the back of the effects of the government's economic measures and a recovery in production to catch up with demand. The central bank also upgraded its forecasts for the consumer price index (CPI) in FY 2022 to 1.1% from October’s projected 0.9%, mainly reflecting a rise in commodity prices and the pass-through of that rise to consumer prices. Notably, the BoJ shifted its view on the risks to prices for the first time since October 2014, stating that they are “generally balanced,” whereas they previously had been “skewed to the downside.” Japan’s core CPI rose 0.5% year on year in December, matching the previous month’s rise, largely due to the impact of rising energy prices.
Separate economic data showed that exports rose 17.5% year on year in December, boosted by an easing of supply bottlenecks toward the end of 2021. Imports rose 41.1% year on year over the same period, on higher raw material costs and a weaker yen.
Kishida emphasizes digitization and investments in green technology and human capital
In a special address to The Davos Agenda 2022 virtual event, Prime Minister Fumio Kishida emphasized that Japan’s economic recovery will be driven by digitization and investments in green technology and human capital. The key to digitization is investment in infrastructure, and Kishida advocated the use of optical communication technology that is much faster and has electricity-reducing benefits. He said that investment in green technology would be doubled, and there will be a focus on the development of next-generation grids, as well as the introduction of a carbon pricing system and support for the Asian emissions trading market.
China
Chinese markets posted a weekly gain as the government stepped up monetary easing measures and signaled additional support for the beleaguered property sector. The Shanghai Composite Index edged up 0.1%, and the CSI 300 Index added 1.1%.
Last Monday, the People’s Bank of China (PBOC) unexpectedly reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%, the central bank’s first reduction since April 2020. In response, Chinese banks cut their loan prime rates for one- and five-year loans. China’s central bank sets the MLF rate, upon which domestic lenders set their loan prime rates, or the de facto benchmark for new loans.
Following the rate cut, PBOC Vice Governor Liu Guoqiang said that China will roll out additional policy measures to stabilize the economy and preempt downward pressures. His comments triggered a rally in Chinese government bonds, sending the yield on the 10-year sovereign bond down to 2.736% from last week’s 2.809%.
At the end of the week, the PBOC cut the interest rates on its standing lending facility (SLF) loans—another key monetary policy tool—by 10 basis points for overnight, seven-day, and one-month loans, Reuters reported. The SLF program allows financial institutions to obtain temporary liquidity from the central bank. Additionally, the PBOC is drafting rules to make it easier for cash-strapped property developers to access funds from sales still held in escrow, according to Reuters.
Regulatory pressure on China’s tech sector continued as ByteDance, the owner of TikTok, said that it was disbanding its group-level strategic investment team. China’s state planning agency, the National Development and Reform Commission, issued a policy document containing opinions targeting monopolies, unfair competition, and user data issues in online platform companies.
In economic readings, China’s gross domestic product expanded at better-than-expected 4% in the fourth quarter of 2021, slowing from the third quarter’s 4.9% expansion pace. The data suggest worsening downward pressure, especially in consumption and property trends, though infrastructure investment showed some improvement.
The yuan currency ended the week steady at 6.34 per U.S. dollar after rising to its highest level since May 2018 earlier in the week. Some analysts have attributed China’s recent currency strength to inflows from bond investors positioning for further rate cuts and predicted that they would slow as valuations become less attractive and imports increased.
Other Key Markets
Turkey
Turkish shares, as measured by the BIST-100 Index, returned about -3.0%. As expected, the central bank left its one-week repo auction rate at 14.0% at Thursday’s scheduled monetary policy meeting. However, the central bank has recently been active in other areas.
According to T. Rowe Price sovereign analyst Peter Botoucharov, Turkey’s foreign exchange (FX) reserves resumed a downward trend in the fourth quarter of 2021, particularly in December, when the lira was plunging in response to a central bank rate cut as well as comments from President Recep Tayyip Erdogan about Turkey’s “new economic model.” The decline in reserves continued into January, indicating that the central bank has been intervening in the FX market, even though there have been no official announcements about it.
In an attempt to stabilize the Turkish lira in the FX market, Turkey’s central bank has been establishing FX swap lines with central banks of other countries, including Qatar, China, and, in an agreement reached during the week, the United Arab Emirates (UAE). The nominal size of the new FX swap deal is 18 billion UAE dirhams (USD 4.9 billion) or 64 billion Turkish lira. Similar to previous swap deals, this one also aims to strengthen bilateral trade, and it is not in hard currency. The FX swap deals are not available to be used for other FX needs, though they allow Turkey and Turkish corporates to reduce demand for FX when executing trade transactions with counterparties from the respective countries (Qatar, China, and the UAE). In addition, there are reports that the central bank is considering an injection of funds into some state-owned Turkish banks. If it happens, it would be the third round of capital injections since 2019.
Latin America
Major Latin American markets were mixed, as pressures from rising U.S. Treasury yields early in the week were countered by news that emerging markets heavyweight China was accelerating some infrastructure projects and reducing certain interest rates to stimulate its economy. Growth in China usually bodes well for demand for commodities produced by Latin American countries.
Brazilian shares, as measured by the Bovespa Index, returned about 1.9%. Chilean shares, as measured by the S&P IPSA Index, returned about 3.5%. Investors seemed generally satisfied with President-Elect Gabriel Boric’s cabinet appointments announced on Friday.
However, Mexican stocks, as measured by the IPC Index, returned -4.0%. The market was hurt in part by Mexico’s proximity to the weak U.S. equity market. Sentiment was also hurt by news that Mexico’s economy, which contracted in the third quarter of 2021, seems to have contracted also in December, raising concerns that the country may already be in a recession. A conventional definition of a recession is two consecutive quarters of negative GDP growth.
The mutual funds referred to in this website are offered and sold only to persons residing in the United States and are offered by prospectus only. The prospectuses include investment objectives, risks, fees, expenses, and other information that you should read and consider carefully before investing.
© 2022 T. Rowe Price. All Rights Reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the Bighorn Sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. All other trademarks shown are the property of their respective owners. Use does not imply endorsement, sponsorship, or affiliation of T. Rowe Price with any of the trademark owners.
T. Rowe Price Investment Services, Inc., Distributor.