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Week in Review: A Positive Week for Markets Despite Volatility

Advice & Comments

7 Feb 2022

Stock market volatility continued this week despite recording positive gains. Shifting expectations around interest rates and economic growth remain central to this theme.

Announcements from the European Central Bank (ECB), the Bank of England (BoE), U.S. labour market data and one of the busiest weeks of companies reporting fourth-quarter earnings were all contributing factors.

The ECB kept its interest rate unchanged at a record low of -0.5% and reiterated its plans to reduce asset purchases this year. The surprise however came at the press conference following its meeting where ECB President, Christine Lagarde pivoted away from her December statement that it was “very unlikely” that the ECB would raise interest rates in 2022, to opening the door to possible rate hikes in the eurozone this year, as inflation continues to surprise.

Eurozone consumer prices increased to 5.1% from a year ago in January, up from 5% in December. The median estimate in a Bloomberg poll of 44 economists saw a reading of only 4.4% and none predicted inflation gaining pace. Meanwhile fourth quarter GDP advanced by 0.3% (quarter-on-quarter) in line with market expectations.

The Bank of England (BoE) raised rates by a further 0.25% this week, after its surprise hike of 0.25% in December last year. The Monetary Policy Committee voted 5 to 4 to increase the bank rate by a quarter point. The minority of the committee wanted a 0.5% hike, after the central bank forecasts that U.K. inflation could peak at 7.25% in April.

The U.S. Labor Department jobs report released on Friday, showed that the U.S. added 467,000 jobs in January, despite a record spike in Covid-19 infections and related business closures. This was nearly three times consensus expectations, reinforcing Fed Chair Jerome Powell’s description last week of the U.S. labour market being “strong”. Despite the uptick in jobs added, U.S. Unemployment increased to 4.0% in January due to an increase in the labour force participation rate, which rose to its highest level (62.2%) since the start of the pandemic.

It was another big week of companies reporting fourth quarter earnings, with 112 companies reporting this week including big names like Meta (Facebook) and Amazon. Meta Platforms reported a decline in Facebook’s average daily users and guidance for slower revenue growth resulted in a sharp decline in its share price whilst Amazon reported better-than-expected earnings.

According to FactSet, 56% of the companies in the S&P 500 have reported results for Q4 2021 to date. Of these companies, 76% have reported actual earnings per share (EPS) above estimates, which is equal to the five-year average of 76%. In terms of revenues, 77% of S&P 500 companies have reported actual revenues above estimates, which is above the five-year average of 68%. During the upcoming week, 83 S&P 500 companies are scheduled to report results for the fourth quarter.

After a tough January month, global equities were stronger this week. In the U.S., the Dow Jones (+1.05%), S&P 500 (+1.55%) and Nasdaq (+2.38%) were all stronger. Similarly, the FTSE 100 (+0.67%) and Nikkei 225 (+2.70%) ended the week in positive territory, with the Euro Stoxx 50 Index (-1.22%) being the outlier. The Shanghai Composite Index was closed for the Chinese New Year.

Market Moves of the Week

Locally, South Africa’s trade surplus (exports outweighing imports) fell to R30.1bn in December, following a trade surplus of R35.8bn in the prior month. Despite a slightly weaker December print, high commodity prices are currently benefitting South Africa’s terms of trade, supporting the rand.

In other news, British Prime Minister Boris Johnson announced that the UK Cabinet Office will probe "issues surrounding" consultancy Bain & Company's work in South Africa after the State Capture Inquiry found that Bain had colluded with former president Jacob Zuma, and others, to "capture" the SA Revenue Service.

The Johannesburg Stock Exchange (JSE) suspended South African state-owned defence company Denel’s bonds on Wednesday, after delaying interest payments on two notes and a capital redemption on one of them due Jan. 31. The cash-strapped company is in talks with the South African government, to finalise “the necessary approvals for the payments which will be made as soon as the approvals are in place,” it said in an announcement.

JSE listed companies posted strong returns for the week. The JSE All-Share Index ended the week up +2.38%, with all three of the major sectors including financials (+1.72%), resources (+2.18%) and industrial shares (+2.86%) well supported. By Friday close, the rand was trading at R15.43 to the U.S. Dollar.

Chart of the Week

After announcing that rate hikes in 2022 are unlikely for the eurozone at its December meeting, ECB President, Christine Lagarde delivered a far more hawkish message on inflation this week, leaving the door open for interest rate hikes in Europe this year. At the beginning of the year, the market was prepared to believe Lagarde when she said that even one 2022 rate hike was unlikely, now they are braced for four by year end. Whether the market is correct to pencil quite so many rate hikes is another matter. Unlike the U.S., the eurozone have a problem with persistent slower growth. Source: Bloomberg.

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