Global Equity Prices Remain Highly Unstable

January 25, 2022

Five problems are contributing to stock market volatility around the world:

  • The highest geopolitical tensions between the United States and Russia since the Cold War ended.
  • A high probability that tomorrow’s Fed statement and press conference will signal a rate hike liftoff in March.
  • Uncertainty over how inflation will evolve in 2022 after last year’s much sharper-than-forecast spike.
  • Valuation concerns that prolonged free money lifted equity prices to ridiculously unsustainable heights.
  • The elusiveness of Covid-19. The hope is that Omicron has peaked. The 7-day case rate has slowed, but comparable death and hospitalization rates are still cresting. Yesterday alone produced over one million newly identified infections. Scientists warn that other variants will likely emerge, and January purchasing manager surveys revealed that adverse pandemic twists are still spilling over into economic activity.

Share prices closed down today by 2.6% in China and South Korea, 2.5% in Australia, 1.7% in Japan and Hong Kong, 1.5% in Taiwan and 1.3% in Indonesia. At yesterday’s low, the S&P fell into “correction” territory (i.e., over 10% below its prior cyclical high), and he DOW in intra-day trading yesterday lost over 1000 points only to recoup such entirely. U.S. futures trading prior to today’s open, put the Nasdaq and S&P down 2.1% and 1.4%.

The dollar continues to be well bid as a refuge currency in times of hyper risk aversion. The weighted DXY index has climbed 0.3% today, and the dollar is up that amount versus sterling and the Australian dollar. Even larger advances have occurred of 0.5% against the euro, 0.6% versus the Swiss franc and kiwi, and 0.4% relative to the Mexican peso, but a smaller 0.1% uptick is seen against the yen and loonie.

Ten-year British gilt and German bund yields are four and two basis points higher this morning, while their U.S. and Japanese counterparts remain unchanged.

Prices for WTI oil and gold have dipped 0.3% and 0.1%.

Australian consumer price inflation bounced upward to a 2-quarter high of 3.6% last quarter after falling 0.8 percentage points to 3.0% in 3Q 2o21. Measures of core inflation accelerated into the upper half of the Reserve Bank of Australia’s 2-3% medium-term target range.

Business confidence in Australia succumbed to new Covid restrictions, diving 24 index points to a 19-month low of -12 in December from readings of +12 in November and +20 in October. A +8 reading for business conditions last month was also lower than predicted.

Although at a 5-month high last month, New Zealand’s service sector purchasing managers index (49.7) remained below the 50 level between improving and deteriorating activity.

The Confederation of British Industries’ quarterly business optimism index fell six points to a one-year low, but a second CBI data release examining industrial trends revealed an unchanged +24 reading for December orders, which is just two points shy of its all-time high.

Spanish producer price inflation accelerated 3.7 percentage points to a record high of 35.9% in December, up from only 0.6% in February 2021. Consumer price inflation in Spain last month was revised downward by 0.2 percentage points to 6.5%, which still represents a 356-month peak.

South Korean real GDP expanded 1.1% last quarter, its fastest quarterly pace since the first quarter of last year. GDP was 4.1% greater than in the final quarter of 2020, and calendar year growth of 4.0% in 2021 after -0.9% in 2020 was the highest in eleven years.

Turkish business confidence revived 3.2% to a 3-month high in January.

Thanks to brightening expectations, the IFO Institute German business climate survey, conducted monthly, recovered 0.9 points to a 2-month high of 95.7 in January despite an 8-month low in current conditions. Sub-indices for manufacturing and services improved to 4- and 2-month highs, while those for trade and construction worsened to 11- and 5-month lows. Summarizing the report, IFO officials said Germany’s economy is starting 2022 with a “glimmer of hope.”

Consumer confidence in Brazil fell 1.9% to a nine-month low in January and has declined almost 10% since July.

The National Bank of Hungary unexpectedly stepped up its pace of interest rate normalization this month, lifting the base rate by a half percentage point to 2.9%, a 97-month high. This was the eighth consecutive monthly increase. From a starting base rate level of 0.6%, there had previously been two increases of 15 basis points and five increases of 30 basis points. CPI inflation has risen in Hungary from 2.7% a year ago to 7.4% as of December, when the pace failed to turn downward as officials had been hoping such would. Meanwhile, economic recovery in Hungary has been proceeding robustly and has now fully reversed the pandemic-related contraction.

The FHFA U.S. house price index rose 1.1% on month in November and posted a higher 12-month rate of increase (17.5% versus 17.4% in October) for the first time since July. On-year growth in the Case Shiller house price index of 20 metropolitan areas ticked down 0.1 percentage point to a six-month low of 18.3%.

U.S. data releases due shortly later this morning include the Richmond Fed manufacturing index and Conference Board index of consumer confidence.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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