In the first month of the year we saw a wave of selles on all the global stock markets, with substantial drops in both the equity and bond markets. The prospect of tighter monetary policies, geopolitical uncertainties and high valuations pushed investors to take profits on a part of the profits recorded in the last year. This volatility has led to losses that have exceeded the levels observed during the most difficult phases of recent financial market history. Let’s analyze the reasons for this nervousness.
Concern about the rise in interest rates: in December, inflation in the United States stood at around 7%. The FED, through its president Jerome Powell, has indicated that rates could be raised for the first time as early as March 2022 and that there could then be further increases during the year (there is talk of 4-5 increases) and close QE from March. This line could be followed by many central banks, such as the Bank of England which says it is ready for a second rate increase in less than three months. The Chinese Central Bank, on the other hand, has lowered its reference rates with the explicit intention of providing support to an economy that is showing signs of slowing down.
Geopolitical risks: the escalation of tensions between NATO countries and Russia does not seem to diminish with Russia, which has deployed over 100,000 soldiers on the border with Ukraine. An escalation of military tensions in the region would further increase volatility on the markets.
The MSCI World stock index lost over 5% in January. In the US, losses of 5.30% were recorded for the S&P500 index and 9% for the Nasdaq. The Nasdaq technology index was penalized by sector rotation from growth to value stocks due precisely to the above-mentioned prospect of an increase in interest rates and the consequent worsening of financing conditions, a situation that mainly disadvantages growth-oriented companies such as technology companies. The same trend was seen in Europe, with the Euro Stoxx 50 index falling by over 3%. The Swiss SMI market was also down 5%. On the other hand, the price of oil continued to rise, reaching USD 88 compared with USD 75 in the previous month.
The problems listed at the beginning, together with the difficulty in supplying raw materials and the increase in energy prices will continue to fuel inflation, putting pressure on central banks to tighten their monetary policies. That is why we expect continued volatility on financial markets at least for the next coming months.