Closing Report 21.01.2022

pboc may take more measures to stimulate the economy

AMERICAN MARKETS MID-DAY

While Wall Street was closed on Monday for Martin Luther King Day, bond yields continued to rise on Tuesday on almost all global stock markets, after treasury bills fell on Friday on rising concerns that rates would rise quickly in March to combat inflation. The US stock market indices are down by half a day, with the Nasdaq 100 losing 1.78%, the Dow Jones down 1.47%, and the S&P 500 down 1.50%. In the wake of the poor results announced by US banks last Friday, Goldmann Sachs lost 8% on Tuesday with the announcement of weaker-than-expected fourth-quarter results for the year 2021, with earnings per share of $10.81, 11% lower than expected ($12.08). The U.S. stock market indices closed lower for the second time on Wednesday in an uncertain environment ahead of the upcoming FED meeting on January 25 and 26. Wednesday’s good news on bank earnings is supporting investor confidence. Morgan Stanley shares were up 1.83% after the bank reported a rise in trading revenues, while Bank of America Corp was up 0.17% following growth in consumer and business loans. The International Energy Agency said on Wednesday that oil demand remained resilient in the face of oil price variations, leading to a seven-year high in oil prices. West Texas Intermediate crude is up 1.25% on Wednesday. On Thursday, US equities rallied during the session, with gains in technology companies boosting the Nasdaq 100, and all S&P 500 sector indices were also up during the session. The indices still closed lower, but not as high as the previous day. The Nasdaq ended the session down 0.53%, the Dow Jones industrial average down 0.13%, and the S&P 500 down 0.32%. The US labor market data released today showed an increase in jobless claims, indicating that the wave of the Omicron variant has had a considerable impact on the labor market. The quarterly results of US companies are not satisfactory for the markets at the beginning of the year, in an inflationary context with rising wages. Netflix lost more than 20% at the opening of this session after a considerable drop in the number of subscriptions. The expectation of other FAANGs’ results following Netflix’s is becoming more pressing. With the Fed meeting next week, rate hike speculation continues to grow. According to Paul Ashworth, chief economist for North America at Capital Economics, with Omicron cases rising globally and wage pressure increasing, the Fed is said to be hinting next week that it will raise rates next March. US stock indices are down at the halfway point, with the Nasdaq losing 1.11% while the S&P 500 is down 0.68%. The 10-year Treasury yields are down by four basis points on Friday.

EUROPEAN MARKETS CLOSING

In Europe, the European indices closed higher with the announcement of Chinese GDP growth of 8.1% in 2021, exceeding expectations of 8% growth. The CAC 40 closed up 0.82%, the FTSE gained 0.81% while the DAX gained 0.32%. The closure of the US markets on Monday for Martin Luther King Day explains the low trading volume in CAC 40 shares. With the growth data for the Chinese economy, luxury stocks were the best performers on the CAC 40 on Monday with Hermès up 2.5% and Kering up 2%. The rise in bond yields, above 1.8% for the 10-year US Treasury yields, had a negative impact on the evolution of stock market indices on Tuesday. The CAC 40 fell 0.91% at the close, while the DAX and FTSE 100 lost 1.01% and 0.63% respectively. As inflationary pressures continue, the prospect of a Fed rate hike is negatively affecting technology stocks, which are the hardest hit in this session. Teleperformance is down 2.4% and STMicroelectronics is down 2.20%. The German 10-year bund is approaching positive territory, settling on Tuesday at 0.02%. The strengthening of European currencies against the falling dollar strengthens European stocks on Wednesday. The Pan-European Stoxx 600 index closed up 0.23% in midweek trading. Russia’s central bank said on Wednesday that the risk of inflation in the country deviating from its 4% target remains high in the short term, but expects inflation to be between 4% and 4.5% by the end of the year. On the Paris stock exchange, luxury stocks continue to stand out with the best performance in the index. LVMH shares are up 3.67%, Hermès is up 2.39% and Kering is up 1.9%. German 10-year bond yields crossed the positive mark during the session on Wednesday, something that has not happened since May 2019. On Thursday, the fall in German and British bond yields and the reassuring speech of Christine Lagarde, President of the European Central Bank, about inflation, are driving European equities higher. The CAC 40 closed up 0.30% and the DAX gained 0.65%, only the FTSE 100 fell slightly by 0.06%. In an interview with France Inter radio on Thursday, the ECB president said that inflation in Europe will gradually decline this year, adding that the ECB would not adopt as aggressive a monetary policy as the FED, as the US economic cycle is different from that of Europe. On Friday, European stock indices are down sharply in an environment affected by increased speculation about the Fed’s response at next week’s meeting and geopolitical tensions between Ukraine and Russia. The CAC 40 fell by 2% on the day and closed the session down 1.75%, while the FTSE 100 lost 1.20% and the DAX 1.94%. Arcelor Mittal shares were the biggest loser on the Paris index, falling 7.44%, down 11% in the five days since the group announced the cancellation of 45 million treasury shares. The automotive sector was also among the biggest decliners of the day, with Stellantis losing 3.59% after the Chinese group Dongfeng Motor sold 1.2% of the French group’s capital, reports Les Echos, while Renault fell 2.1%.

ASIAN PACIFIC MARKETS CLOSING

On Monday, growth data for the Chinese economy was released and showed a higher than expected increase in growth. The Chinese economy grew by 1.6% in the last quarter of 2021 against a forecast of 0.7%, and is up 8.1% for the full year 2021, also buoyed by an interest rate cut by the People’s Bank of China. Retail sales, however, fared less well, with an annual increase of 1.7%, the slowest pace since 2020, hit by the spread of covid-19 in the country. On Tuesday, the Nikkei 225 lost 0.27% as the Bank of Japan announced an increase in its inflation forecast to around 1.1% by April 2022. Governor Haruhiko Kuroda tried to reassure investors by saying that the central bank had no intention of raising rates as inflation would remain below the 2% target. With US bond yields rising, the Kospi lost 0.89% at the close on Tuesday, while the Hang Seng was down 0.43%. In Japan, Microsoft’s takeover of Activision Blizzard, which caused Sony’s share price to fall, amplified the plunge in the Nikkei 225, which closed Wednesday’s session down 2.80%. On the same day, the Bank of Japan called for vigilance on inflationary risks that could increase if the cost of materials does not decrease. This would push companies to increase their prices. The bank forecasts core consumer inflation at 1.1% for April 2022 and next year, which remains below its 2% target. However, its outlook could change depending on the response of consumers to higher prices. Asian stock indices are rallying on Thursday after the Chinese government cut the benchmark mortgage rate (base rate for one-year loans) by 10 basis points. The 5-year LPR was cut by 5 basis points to 4.60%. These cuts are expected to stimulate the economy as they reduce the cost of borrowing for loans. For some analysts, these measures are necessary as December’s economic data showed a decline in the level of consumption and a weakening in the housing sector. The Hang Seng ended Thursday’s session up 3.42%, while the Nikkei 225 and the Kospi gained 1.11% and 0.72% respectively. The wave of declines on Wall Street is dragging down Asian stock indices on Friday, with the Nikkei 225 and the Kospi closing down 0.90% and 0.99% respectively. The Hang Seng was the exception to the rule, closing slightly higher by 0.05%. China’s central bank cut lending rates the previous day to make it easier for households and businesses to get credit, in a bid to boost the economy. Some economists are betting that the central bank will take additional measures in the coming months to boost consumption in the Chinese economy.

COMMODITIES & FOREX MARKETS

• Oil prices reached their highest level since 2014, with OIL Brent trading at $87.28 a barrel, up 1.42%, and OIL WTI trading at $85.24 a barrel, up 1.72%. In its report last month, the Organisation of Petroleum Exporting Countries warned that the spread of the Omicron variant would have little impact on global oil demand.
• The USD/EUR rate is down 0.32% mid-week. This decline is partly due to investors losing confidence that the currency will strengthen in the future. The U.S Dollar Currency Index closed down 0.6% last week after FED Governor Jerome Powell said that the U.S. economy was ready for tighter monetary policy and the release of inflation figures. Goldmann Sachs said that we are entering a transition in the money market for the next two years, saying that the Eurozone could outperform the US economy.
• The fall in the dollar, geopolitical tensions between Ukraine and Russia, and the rise in oil prices due to inflation have contributed to the rise in the price of precious metals, considered safe havens by investors. On Wednesday, gold was up 1.67% while palladium gained 5.11%.
• The SEC on Thursday rejected an application to list bitcoin ETFs from First Trust SkyBridge Bitcoin ETF Trust, the latest rejection following those in November and December. These ETFs on bitcoin aim to give investors easier access to the digital currency. For the authority, this application does not meet the requirements of investor protection and fraudulent practices. At the same time, bitcoin is down almost 9% over the weekend, falling below its lowest level in five months.

Economist’s are betting PBOC will open its toolbox

In a bid to ease the pressure on the economy, threatened by falling household and business consumption, inflationary pressures, and the spread of the variant omicron, China’s central bank this week introduced measures to support the economy by cutting prime lending rates. On Thursday, the PBOC lowered the prime lending rate for one-year loans by 10 basis points and for five-year loans by 5 basis points, easing the cost of access to bank credit.

Some economists believe that the measures put in place by the central bank could be multiplied over the course of this year, and are betting that the PBOC’s toolbox will be opened in order to calm the economy. Among these measures, there are first of all the traditional procedures. It is expected that the PBOC will continue to lower interest rates, including the one-year medium-term lending rate and the seven-day repo rate. For Citigroup, a total cut of 25 basis points could be expected over the course of the year, and a cut in the banks’ reserve requirement rate of 50 basis points. Other analysts expect the PBOC to take a structural approach by making it easier for commercial banks to lend to small businesses and agricultural enterprises.

To facilitate lower borrowing costs, the central bank could use lower deposit rates. PBOC deputy governor Liu Guoqiang said this week, according to Bloomberg, that high deposit rates could slow the decline in borrowing costs. Julians Evans-Pritchard of Capital Economics Ltd said deposit rates could fall by 10 basis points in the coming months.