Closing Report 28.01.2022

unsurprising speech for the fed

AMERICAN MARKETS MID-DAY

On Monday, stock market indices continue their weekend slide behind, in anticipation of a Fed rate hike after the Tuesday and Wednesday meeting this week. In the US, the S&P 500 is down 2.31% and is down more than 10% from its January 3 high. The Nasdaq is down 2.63% as Apple and Microsoft report earnings this week, while the USD/EUR is up 0.13% due to the geopolitical conflict in Europe between Russia and Ukraine, as President Vladimir Putin earlier this week denied planning an attack on Ukraine. To deter a new Russian invasion in Ukraine, The North Atlantic Treaty Organization said it would boost its deployments with more chips and fighter jets in Ukraine, reports Bloomberg. For Gary Black, managing partner at The Future Fund Active ETF, this situation is a cherry on top of the current problems, while worries are about the Fed’s reaction, the Ukrainian-Russian conflict adds even more uncertainty. The US CBOE market volatility index is up 21% on Monday, reaching its highest level in a year. As we await the results of the FED’s minutes on Wednesday, inflation in the United States has reached its highest level in 40 years, driving stock prices down. In addition to this, the IMF released a forecast for global economic growth in 2022, which was revised downwards. The volatility index, Cboe Volatility Index (VIX) continues to rise, recording a successive increase of over 40% in 5 days. The S&P 500 is down 1.99%, the Nasdaq 100 is also down 2.95% as tech companies’ quarterly results are still expected, and the Dow Jones Industrial Average is down 1.15%. On Wednesday, the announcement of a tightening of the Fed’s monetary policy undermined the prospect of a strong rise in US stock market indices. Before Powell’s speech, the S&P 500 was up more than 2% and closed the session down 0.15% after the Fed’s speech. Among technology stocks, strong results from Microsoft and Texas Instruments lifted the Nasdaq, which was up 2.15% before the Fed’s speech. Intel issued a weaker-than-expected forecast for 2022 while Tesla announced that supply chain issues will slow production this year. The Nasdaq closed slightly higher by 0.17% on Wednesday. In his speech, Jerome Powell announced that in order to stop inflation, the central bank would be ready to raise rates in March, and then begin a process of reducing the size of its balance sheet. This would be the first-rate hike by the FED since 2018. On Thursday, U.S. economic data showed a rise in output and a drop in unemployment for the fourth quarter of 2021. GDP growth came in higher than economists expected, rising 6.9% annually versus the 5.5% forecast by economists in a Bloomberg survey. The core inflation index, which excludes volatile items such as food and energy, is however up 4.9% annually and would be watched closely by the FED, but this did not prevent consumer spending from rising by 3.3% in Q4. In the US, consumer spending accounts for a large share of GDP. On the labor market, the unemployment rate fell below 4%, with the first drop in four weeks in unemployment insurance claims. On Friday, the good results of Apple (+5.83%) higher than the expectations of analysts carry the American stock exchange indexes, in particular the Nasdaq 100 in rise of 1.58% at the half-day, outperforms its compairs. The S&P 500 gained 0.92% and the Dow Jones 0.33%. Inflation data is still to be watched for the FEd, the PCE consumer spending index is up 5.8% year-on-year, and 4.9% excluding food and energy, its highest level since 1983. On the labour market, the cost of labour rose by 4% year-on-year and by 1% in the fourth quarter. The 10 year bond rate is down two basis points at the end of the week.

EUROPEAN MARKETS CLOSING

The geopolitical conflicts in Europe between Russia and Ukraine added to the uncertainty of the Fed’s reaction agitated the markets at the beginning of the week. The European stock market indexes are down sharply at the close of the session, the index of the Paris stock exchange, the CAC 40 falls by 3.97% and goes back under the 7,000 point mark, while the DAX falls by 3.80% and the FTSE 100 by 2.63%. As we await the Fed meeting minutes this week, the British central bank is planning to raise rates next week on February 3rd. This would be a second consecutive rate hike in less than two months, while inflation has reached a 30-year high in the country. Economists surveyed by Reuters last week except for a rate hike to 0.5% by February 3rd. The GBP/EUR was down 0.59% on Monday. Despite the ongoing Ukrainian-Russian conflict in Eastern Europe and a lowered IMF forecast for global economic growth in 2022, coupled with a rise in inflation, European stock indices closed slightly higher on Tuesday after yesterday’s sharp declines. The CAC 40 gained 0.74%, driven by banking stocks, the DAX gained 0.75% and the FTSE 100 was up 1.02% at the close. The EUR/USD rate is however down 0.32% on the day. In anticipation of the Fed committee meeting on Wednesday, stock market indices rose sharply in Europe and the US. The CAC 40 closed up 2.11% on Wednesday, while the DAX and FTSE gained 1.33% and 2.22% respectively. On the Paris stock exchange, Renault stood out with a 5.93% rise ahead of the press conference of its alliance with Nissan and Mitsubishi Motor, during which it is expected to announce a 23 billion investment plan in electric vehicles according to Reuters. With the price of Brent crude oil approaching $90 a barrel, TotalEnergies shares gained 4% over the same period. Jerome Powell’s 8 pm speech did not rule out a rate hike by the Fed in March which would precede a process of reducing the size of its balance sheet. The US indices fell on the announcement and European stocks are expected to follow suit. The CAC 40 futures are down 1.9% before the opening on Thursday, while Asian markets are already seeing sharp declines at the close. While the European stock market indices started Thursday’s session lower following the FED’s news, the announcement of better than expected GDP growth allowed the indices to rise during the session. The CAC 40 closed up 0.60 and back above 7,000 points, while the FTSE 100 gained 1.13% and the DAX 0.42%, buoyed by the announcement of good fourth-quarter results from Deutsch Bank. The euro’s value against the dollar, however, fell by 0.88% at the end of the day, due to ongoing geopolitical conflicts in Eastern Europe. In the stock market, STMicroelectronics was up 2.02% after announcing its good results for the fourth quarter. The group expects a 16% increase in sales this year, driven by strong demand from its customers. On Friday, The European stock market indices are down sharply, due to an increasingly galloping inflation, marking a rather volatile week. The CAC 40 closed down 0.82%, despite the good results of LVMH (+3.23%), which recorded a turnover and a net profit record for the year 2021. Orange (+1.41%) is the second-best performer of the day on the Paris stock exchange with the appointment of Christel Heydemann as CEO from April 2022. The DAX and FTSE fell by more than 1% over the session, while the Stoxx 600 sector indices fell by more than 2%, including technology (-2.9%), basic resources (-2.7%), and automotive (-2.4%).

ASIAN PACIFIC MARKETS CLOSING

In Asia, the fall in indices, like in the United States and Europe, is less pronounced. Monday, The Nikkei 225 is up 0.24%, while the CSI 300 is up 0.16%. Declining indices were the Kospi which lost 1.49% and the Hang Seng 1.24%. On Tuesday, the IMF published its economic growth forecast for developed and developing countries for the years 2022 and 2023. Due to uncertainties related to inflation, the spread of the Omicron variant, supply disruptions, and monetary policy in the US, the IMF has revised its forecast downwards. China’s growth has been revised down by 0.8 percentage points this year to 4.8% after an 8.1% annual increase in 2021, before recovering to 5.2% in 2023, the authority said. Only a few countries, such as India and Japan, have seen their growth forecasts increase. The IMF also sees inflation rising globally, with prices rising by an average of 3.9% in developed economies and 5.9% in emerging economies. The Central Bank of Singapore on Tuesday announced a tightening of monetary policy in response to inflationary pressures in the region caused by tight global supply constraints and strong economic demand. The Asian stock indices are being hit hard by the FED’s speech on Wednesday evening. The Nikkei 225 and the Kospi closed down by more than 3% on Thursday, while the Hang Seng fell by 2.52%. On Wednesday, an unidentified source said that Chinese authorities had received a proposal to break up the Chinese group Evergrande. The restructuring plan aims to sell some of the group’s assets, except for its property management units and electric vehicles valued at $9 billion, which could be sold later, to pay off the group’s creditors. The plan is however awaiting approval by the Chinese authorities, which if approved, would be implemented by March 2022. On Friday, Haruhiko Kuroda, Japan’s central bank governor, said that the central bank would maintain its ultra-flexible policy until it is appropriate to raise rates, which is when inflation has reached the 2% target. For companies, this situation allows them to access credit at low borrowing costs, while the situation is not positive for commercial banks which see their margins on loans decrease. Short-term rates are currently at -0.1% while 10 years (long term) rates are at 0%. For the BOJ governor, this policy is adequate to keep the yield curve stable at low levels. The IMF has suggested that the BOJ consider a shorter term to mitigate the negative impact on bank margins. On the markets, Asian stock indices are recovering from the previous day’s sharp declines. The Nikkei 225 closed up 2.09%, the Kospi gained 1.87, while the Hang Seng closed down 0.97%.

COMMODITIES & FOREX MARKETS

• Oil prices are down on Monday while production forecasts are up. The U.S. Energy Administration is forecasting annual barrel production to average 11.8 million BPD by the end of the year and 12.4 million BPD by 2023. A prediction confirmed by Vicki Hollub, Petroleum’s Western Managing Director, is for a slight increase above 12 million BPD. Brent crude is down 2.10% on Monday, while WTI is down 2.29%.
• The euro is down on Tuesday as the Ukrainian-Russian conflict continues in the east of the continent. EUR/USD is down 0.32% while EUR/CAD is down 0.40%.
• U.S. 5-year Treasury rates rise 10 basis points to 1.655% while 10-year rates approach 1.9% as the dollar rises on Wednesday.
• Following FED chief Jerome Powell’s press conference on Wednesday night, bitcoin is down nearly 9%, reversing the gains of the past two days, and trading in the $35,000 – $38,000 range on Thursday.

Is 2022 really the bank’s year?

As the US Federal Reserve announced on Wednesday a rate hike in March, to be followed by a reduction in the size of its balance sheet in order to combat inflation, US banks are certainly preparing for a year of growth in their lending activities. The current low-interest-rate environment is having a negative impact on the margins earned by commercial banks, which have endured this situation since the start of the pandemic. In addition to low-interest rates, there has been a slowdown in economic activity, which has led to a considerable drop in lending by businesses and households, and a decline in net interest income for banks.

Net interest income was only 60% of revenue in the fourth quarter for the median bank among a dozen of the largest banks in the US, the lowest level in six years, according to Barclays analyst Jason Golberg. With rates set to rise, JP Morgan Chase & Co. told analysts earlier this month that net interest income could rise 12% in 2022, while Wells Fargo & Co. expects an 8% increase. The ability of banks to take advantage of this situation would depend on the weighting of their portfolios with floating-rate loans.

For some banks, including JP Morgan, the rise in rates would not be the only factor in the growth of bank activity this year, but especially in the growth of loans. Banks are aiming to lend massively to companies that want to rebuild stocks following sales losses due to supply chain problems.