Monthly Market News January 2022 – Market Trends

Alexandre Gauthy - Economist

In January, equity markets were underwhelmed by fears of faster and more aggressive monetary tightening in the United States. No region was spared.

Our expert, Alexandre Gauthy, analyzes the market trends in January 2022.

Equity markets: falling equities

In January, U.S. markets fell by 5.6% in euro terms. Other regions of the world had to give up less ground than U.S. equities in January: European stock markets yielded 3.6% and emerging market equities went down 1.3%. Sector-wise, the energy sector in the United States was the only one to remain in the green since the beginning of the year. In Europe, financials, communication services and real estate also did well. Technology stocks, on the other hand, underperformed the indices over the past month. The NASDAQ took a hit of 7.6% in euro terms. In January, the S&P 500 index recorded its strongest monthly decline since March 2020. The performance of so-called value stocks was clearly higher than that of growth stocks. The major US tech companies all had to cave in, including Amazon (-10.3%), Microsoft (-7.5%) and Meta Platform (-6.9%). Tesla (-11.4%) and Netflix (-29.1%) also suffered steep declines.

The change in direction in U.S. monetary policy and the speed and magnitude of the subsequent rise in bond yields, fueled the already present concerns about the valuation of some of the market's riskiest segments. While monetary policy attracted all the attention, the unwinding of supportive fiscal policy was perceived to be a problem. The slowdown in high-frequency indicators, due in part to Omikron, also weighed on sentiment. Finally, the high level of geopolitical tensions had a negative impact on investor sentiment over the past month.

The release of corporate results could not bring relief in January, even though the profits of the S&P500 index seemed to be on track for a fourth consecutive quarter; growth reached over 20% in Q4 and companies from a wide range of sectors were still able to pull up on strong demand. Continued supply chain pressure and component prices remained front page news. Wage pressures also received increased attention and a number of companies, including some large banks, came under scrutiny for publishing higher expenses. The weaker momentum of earnings revisions was a negative factor for stock markets.

Equity markets	January	3 months	since 31/12	12 months
MSCI EMU NR	-3.5%	-2.1%	-3.5%	19.5%
MSCI EUROPE NR	-3.2%	-0.4%	-3.2%	22.0%
MSCI USA NR	-4.3%	0.1%	-4.3%	30.5%
MSCI JAPAN NR	-3.7%	-2.6%	-3.7%	5.7%
MSCI EM. MARKETS NR	-0.5%	-1.0%	-0.5%	0.5%
MSCI AC WORLD NR	-3.5%	-0.4%	-3.5%	22.7%
Performances in EUR dd. 31/01/2022				Source : Bloomberg

Bond markets: rise in long-term interest rates

The performance of bond markets was also negative during the month. US and German 10-year yields rose by 0.28% and 0.14%, respectively. Spreads of the southern eurozone countries remained broadly stable during the month. Corporate bonds (-1.2%) performed slightly below Eurozone government bonds (-1%). In the United States, the performance gap was wider: corporate bonds had to surrender 3.7% in January, compared to a -2% performance for US government bonds. The rise in risk-free rates is mainly due to the Fed's change of course, for which the fight against inflation has become the main priority. Long-term interest rates showed signs of stabilization at the end of the month.

Government Bond Yield 10 yr	Current	January	3 months	Since 31/12
Belgium	0.35	0.16	0.11	0.16
France	0.43	0.23	0.16	0.23
Germany	0.01	0.19	0.12	0.19
Italy	1.29	0.12	0.12	0.12
Greece	1.89	0.55	0.56	0.55
Spain	0.75	0.18	0.14	0.18
United States	1.78	0.27	0.22	0.27
Japan	0.18	0.11	0.08	0.11
Evolution until 31/01/2022				Source : Bloomberg

Central banks: Fed prepares market for more restrictive monetary policy

The Fed's changed tone was the main cause of investors' declining risk appetite throughout the month. The minutes of the December Fed meeting, published in early January, showed that Fed members have begun talks on reducing the central bank's balance sheet size. This is expected to begin relatively early after the first-rate hike, and in any case sooner than during the final phase of the central bank's asset reduction. As expected, the January Fed meeting paved the way for a first-rate hike in March. Moreover, Fed Chairman Powell's comments were generally perceived as less conciliatory. At the end of the month, markets were assuming five 0.25% interest rate hikes this year. The European Central Bank did not meet in January. The next monetary meeting is scheduled for February 3.

Central Bank Rates	Current	Latest adjustment	Date
Fed funds	0.0-0.25%	-1.00%	Feb. 2022
ECB deposit rate	-0.50%	-0.10%	dec. 2021
Situation on 31/01/2022			Source : Bloomberg

Currency: Dollar Rises

Updated market expectations regarding future interest rate hikes in response to these announcements supported the dollar. The dollar became 2% more expensive against the euro in January. The Brazilian real rose nearly 5% against the euro during the month. Brazil's central bank indicated that inflation will be above the 2022 target, but also confirmed that an aggressive cycle of interest rate increases will help to bring the cost-of-living increase below 5%. At the first monetary policy meeting of the year, it announced that a third consecutive 1.50% increase in the policy rate should be expected in February. The central bank has raised its policy rate by 7.25% to 9.25% since March 2021.

Currencies	Current	January	3 months	Since 31/12
USD	1.122	1.3%	2.9%	1.3%
GBP	0.835	0.8%	1.1%	0.8%
JPY	129.16	1.3%	2.0%	1.3%
CHF	1.043	-0.6%	1.4%	-0.6%
Evolution versus EUR until 31/01/2022				Source : Bloomberg

Commodities: oil price continues steep climb

The oil price rose 17.3% in January. The oil price closed its sixth consecutive week of increase at the end of this month. As a result, oil prices are flirting with their highest levels in the past seven years. The two main reasons for the price increase seem to be geopolitical risk and concerns over only slowly rising production. Gold fell slightly by 2.1% in dollar terms during the month, while industrial metals moved 2.5% higher.

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