Markets took a breather after a great run in 2021

Markets priced in 5 FED interest rate hikes this year
Better than expected fourth quarter earnings support stock prices

In January, comments from central banks and consequences of heightened probability of a military conflict in Ukraine forced investors to reevaluate their willingness to take risk and added extra selling pressure. The world equity index (MSCI World TR EUR) dropped more than 3.9% during the month.

It is worth noting, however, that emerging markets were not affected equally. The emerging market index contracted only by 0.5%. For the first time in almost two years, the Chinese central bank cut its key interest rate to help economy, which has been losing momentum due to the difficult situation in the real estate sector and consequences related to repeated COVID outbreaks. Such action clearly shows that priority shifted away from reining in financial risks towards supporting growth. The newest leading manufacturing sector data (PMIs) shows, that the country’s manufacturing sector is on a verge of contraction. Nonetheless, debt levels in the country are still concerning. For example, the debt (government, corporate, and household sectors) to GDP ratio is declining, yet still stands approximately 270%.

During the US central bank (FED) meeting in January 2022, the statement of the chairman Jerome Powell was not accepted by investors positively, who expected moderating language towards rate hikes. The chairman indicated that this cycle is different from the previous one and he believes that the US economy recovered enough to handle higher interest rates without threatening the labor market. Market participants expect the first interest rate rise in March 2022. Overall, the market is currently pricing in five rate hikes this year to reach about 1.35%. Meanwhile, investors expect two rate hikes in Europe this year, despite ECB governor’s Christine Lagarde’s statements that any move this year is "very unlikely".

US inflation and interest rates

Source: Bloomberg L.P.

Fourth quarter earnings announcements are the positive factor that is expected to help containing correction of share prices. Nearly half of S&P 500 companies already announced their quarterly results. Most companies were able to beat sales and earnings forecasts. On average, sales grew almost 16%, while earnings climbed roughly 27%.

“House view” update

A lot of bad news are already priced in, especially in growth stocks in developed markets. Although deterioration in the few closely followed technical indicators shows increased risks, a 5-10% correction was widely expected and is usually healthy in order to sustain a long term trend. We remain cautiously optimistic and maintain neutral risk allocation.

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