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Tuesday, November 29, 2022

Stocks bounce back but head towards worst January since 2016

Stocks bounce back but head towards worst January since 2016

LONDON – Stocks posted a modest gain on Monday as traders put aside fears of higher interest rates and a return of the crisis in Ukraine, but global equities are still heading towards their worst January since 2016 after a tough month.

The rise in European stocks followed a late surge on Wall Street on Friday after a string of better-than-expected earnings from companies including those from tech giant Apple helped stabilize investor sentiment after a series of volatile sessions.

However, investors say the backdrop for equities remains uncertain as central banks tighten policy (the BoE is expected to raise rates again on Thursday) and another surge in oil prices adds to inflationary fears.

By 1115 GMT, Euro STOXX was up 0.62%, Germany’s DAX was up 0.64% and Britain’s FTSE 100 was up 0.1%.

The lunar New Year holidays contributed to weakening trading conditions in Asia. The broadest MSCI Asia Pacific equities index outside of Japan closed up 0.68 percent.

S&P 500 futures were lower at the open, while Nasdaq futures were up 0.4%. The tech-based Nasdaq has taken the brunt of sales and is down 14% from last year’s all-time high.

The MSCI World Index, although up on Monday, is still down 6.2% in January – the worst start to the year since 2016. Before Friday’s rebound, the index was approaching its worst January since the 2008 global financial crisis.

“This is not a classic sell-off targeting underperforming, lower quality companies. This sell-off is not caused by fundamental factors, but by the actions of central banks at a time when growth is very strong,” said Flavio Carpenzano, chief investment officer of Capital One Group.

“For years you were like a spoiled child, you could get as much money as you wanted for free, and you could buy what you wanted, you didn’t really care about quality. Now it’s the other way around, you have to be more disciplined, so you need to look carefully at the grade.”

Meeting of the ECB and the Bank of England

The standoff over Ukraine also remains a thorn in the markets, as a Russian invasion could cut off vital gas supplies to Western Europe. Moscow denies any plans for an invasion.

Oil prices reached a new seven-year high on Friday, after rising for six consecutive weeks, as political tensions in Ukraine exacerbated fears of an energy shortage.

Brent crude rose 0.68% to $90.64 a barrel on Monday, not far from Friday’s high of $91.7, while US oil rose 0.89 percent to $87.06. dollar.

In terms of economic news, data showed that economic growth in the euro area slowed quarterly over the last three months of 2021, as expected.

Data released on Sunday showed factory activity in China slowed in January as a new spike in COVID-19 cases and tight lockdown measures hit production and demand.

Government bond yields in the United States have remained below recent highs, while in Germany, 10-year bond yields have risen above 0 percent again.

Yields have jumped this year in anticipation of faster rate hikes in 2022.

Markets have moved to five Federal Reserve hikes this year to 1.25 percent, though investors still see rates peaking at historically low 1.75 to 2.0 percent.

Economists at BofA believe this is not aggressive enough and expect seven 25 basis point increases in 2022 and four more in 2023.

“We note that markets underestimated the Fed’s hike at the start of the last two cycles of the increase, and we think it will continue to do so,” said chief economist Ethan Harris.

Like the Bank of England, the European Central Bank will meet this week but is expected to stick to its argument that inflation will come down over time.

This week’s big data releases include ISM manufacturing and services data, as well as the January jobs report.

Key payroll figures are expected to be weak given the spike in coronavirus cases and inclement weather. The median forecast is for a rise of just 155,000, while forecasts range from a rise of 385,000 to a fall of 250,000.

Fed Chairman Jerome Powell’s hawkish remarks last week supported the US dollar, which has jumped 1.5% this month against a basket of its major competitors to its highest level since July 2020. Last time it was 97.113.

The euro fell 1.8% in January, hitting its lowest level since June 2020. On Monday, it rose 0.1% to $1.1163.

The dollar rose against the safe-haven Japanese yen, rising 1.3% last week and another 0.2% on Monday to 115.51 yen.

Tommy Wilks

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