The 2022 stock market year is not even six weeks old, yet this short period has supplied enough material for discussion to last several months. At first equity markets seemed to be operating on the "same old, same old" principle, with the SMI etc. starting the year at new all-time highs. Around Epiphany, though, the mood turned. The growth and technology stocks in particular that had been traded so feverishly during the pandemic came under massive pressure, leading a market correction. Other sectors of the economy, meanwhile, were showing relative strength. Alongside value stocks, investors also began to focus on financials. There are several reasons for this sector rotation. The darkening geopolitical climate is playing a role, with the sabre-rattling on the borders of Ukraine causing considerable uncertainty in January. What actually put the most frighteners on stock markets, though, turned out to be the bond markets, where yields have risen markedly over the last few weeks. At 1.903%, the 10-year US Treasury is offering almost 40 basis points more than at the end of 2021.
The sharp rise in yields can be directly attributed to US monetary policy. Although the Fed did not turn the interest rate screw at its first meeting of the year, the Open Market Committee left no doubt that the era of generous injections of liquidity is over. Instead of kick-starting the economy in this way, all the attention of the US currency guardians will henceforth be focused on fighting inflation. In that regard, the latest figures from the U.S. Bureau of Labor Statistics speak plainly. In December the consumer price index (CPI) for the USA climbed 7.0% on the same month the previous year (see graph). Consumer prices are being driven primarily by energy costs, with the statisticians establishing a rise of 29.3% for the month under report. That means inflation is at its highest level since the start of the 1980s, well above the Fed's 2% target. Since the US unemployment rate also fell to a 22-month low of 3.9% in December, the change of track in monetary policy appears entirely logical.
The Fed is planning to stop buying securities at the beginning of March. The US central bank reckons it will then be ready to increase its key rate from the current 0.00% to 0.25% before the month comes to an end. According to Fed chairman Jerome Powell, there is "quite a lot of room" for a hike. He also wants to reduce the Fed's balance sheet, which has ballooned to nearly USDtn 9 during the pandemic However, Powell did not give any details on this. At any rate, there is now consensus on the capital markets that the USA will experience a series of interest rate rises this year. Meanwhile, the European Central Bank is still taking a wait-and-see approach. At its most recent meeting it left the base rate at a record low of 0.00%. Nevertheless, ECB president Christine Lagarde has adjusted the tone. Whereas just in December the Frenchwoman had called a rise in interest rates in 2022 very unlikely, she no longer wanted to repeat this statement. "The situation has changed", Lagarde said in reference to the inflation rate, which has risen sharply in the eurozone as well. At the same time, she referred to the next meeting in March, when the ECB will be presenting its updated projections. The ECB president is making the next steps dependent on this data. Ulrike Kastens, Europe economist at DWS, sees these statements as indicators that the debate about a faster exit from the ultra-expansive monetary policy is now gaining momentum in the eurozone too. "A first interest rate rise this year thus appears to be becoming a wholly realistic scenario", the economist explains.
To that extent it is not surprising that the change in favourites mentioned at the beginning was also observed on European stock exchanges. According to Berenberg, the correlation between the trend in US yields and the performance of the individual equity sectors is an international phenomenon in any case. Jonathan Stubbs, a strategist at the German private bank, has put the correlations over a five-year period under the microscope. A glance at the results of this analysis shows that the latest sector rotation did not come from nowhere. The heavily battered technology stocks had already come under pressure in the past as soon as USD yields rose. The same applies for shares in the retail and healthcare sectors. Meanwhile, bank and insurance stocks are among those benefiting from higher interest rates (see graph). And for good reason: rising yields make it easier for the financial industry to generate income. The Berenberg expert also discovered a very positive correlation for the energy sector. This pattern, too, was repeated recently, with the oil and gas sector earning themselves the sobriquet of outperformers in the first few weeks of the 2022 stock market year.
Source: Statista, U.S. Bureau of Labor Statistics; as at: January 2022. Past performance is not a reliable indicator of future performance.
Source: themarket.ch, Berenberg, as at: January 2022
Past performance is not a reliable indicator of future performance.
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