Market Commentary 10th January 2022 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 10th January 2022
Equity Indices
UK
During a shortened trading week, the FTSE 100 gained 1.36%, with heavyweight banking and energy stocks boosting the large cap index. The mid-cap FTSE 250 index declined by 0.54%.

Speculation around further interest rate rises contributed to a rally in banking shares, with Barclays gaining 9.76% and Lloyds Banking Group rising by 10.54%. Oil giants Royal Dutch Shell (+7.19%) and BP (+9.70%) also experienced rallies, with strengthening oil prices providing a tailwind.

Prime Minister Boris Johnson pushed back against those in favour of stricter coronavirus related restrictions, but stated that the current ‘Plan B’ restrictions should remain in place beyond the end of January. Mr Johnson stated that the UK could “ride out” the current wave of infections without imposing harsher measures.

Europe
European equity markets were mixed last week, with the broad FTSE All World Index – Europe ex UK declining by 0.86%. Germany’s DAX index rose by 0.40%, with the Berlin stock exchange operating a shorter than normal trading week. The coronavirus infection rate worsened in most European nations. The Spanish government re-imposed a mask mandate, whilst Italy made vaccination mandatory for everyone over the age of 50.

Economic data was mixed last week. Inflation rose to the highest level recorded since the formation of the Eurozone, with the Consumer Price Index (CPI) recording a 5% year-on-year increase during December. A Purchasing Managers’ Index (PMI) covering both the service and manufacturing sectors suggested that the current wave of coronavirus infections is hindering the Eurozone economy, with business activity slowing in December.

US
All major US equity indices recorded declines last week, with investor sentiment impacted by the release of minutes from the Federal Reserve’s latest policy meeting. The S&P 500 moved 1.87% lower and the technology heavy NASDAQ 100 fell by 4.46%.

The Dow Jones Industrial Average suffered a much shallower decline of 0.29%, with the index having a considerable weighting to stocks which performed strongly last week. Banking stocks experienced a rally, with Goldman Sachs gaining 3.88% and JPMorgan rising by 5.61%. Industrial companies were also in favour, with Caterpillar rising by 8.47% and Boeing gaining 5.78%.

Minutes from the Federal Reserve’s December policy meeting showed that members of the central bank’s open market committee discussed the possibility of faster and more aggressive interest rate rises. The central bank could impose the first 0.25% rate hike as soon as March and is reportedly looking at ways of reducing their balance sheet after the first rate hike has been implemented.

Asia
The broad FTSE All World Index – Asia Pacific declined by 0.38% across the week. China’s Shanghai Composite Index moved 1.65% lower, whilst Japan’s Nikkei 225 experienced a decline of 1.09%.

The Chinese property sector continued to make headlines, with developer Evergrande requesting an extension for a repayment due on one of their domestically issued bonds. Evergrande has only missed payments on less senior ranking offshore debt so far, with the request for a payment delay on an onshore bond sparking further concerns about the developer’s finances.

Economic data for Japan remained encouraging, with PMI surveys indicating that both the manufacturing and service sectors were in expansionary territory during December, albeit with activity rising at a slightly softer pace than during November.

UK
The 10-Year Gilt yield rallied last week, rising from 0.97% to 1.18%. Whilst there was no significant newsflow regarding the Bank of England, expectations for an interest rate rise in February grew as a result of the minutes from the US Federal Reserve’s December policy meeting.
Europe
The 10-Year German Bund yield almost climbed into positive territory, with yields reaching the highest level seen since April 2019. Across the week, the 10-Year rose from -0.18% to -0.05%. Data showing that German Consumer Price Inflation (CPI) in December rose by 5.3% year-on-year appeared to contribute to the rise in Bund yields.
US
The 10-Year US Treasury yield climbed from 1.51% to 1.76% last week, with investors rotating away from US government bonds.

Speculation around the Federal Reserve implementing faster than expected interest rate rises and shrinking their balance sheet prompted bond traders to price in more hawkish monetary policy measures.

Currency
GBP / USD – Current 1.3588 Previous 1.3532

GBP / EUR – Current 1.1964 Previous 1.1893

The Pound gained 0.41% against the US Dollar and 0.60% against the Euro last week. Boris Johnson attempting to rule out harsher coronavirus restrictions appeared to provide some support for Sterling.

Commodities
Gold
The Gold spot price declined by 1.78% last week, with expectations for interest rate rises in the US appearing to contribute to the sell off.
Oil
Oil prices strengthened following an OPEC+ announcement which suggested that the oil producing group are confident on the outlook for demand. The group confirmed they will proceed with a planned production increase of 400,000 barrels per day in February. Across the week, the Brent Crude spot price rose by 5.10% to reach $81.75 per barrel.