Stock Markets

Markets continued to exhibit unusual volatility over the past week but showed some resiliency due to the positive impact of optimistic economic news on otherwise dire geopolitical events. The Russian invasion of Ukraine is having a greater effect on certain areas of the market, particularly interest rates, inflation, and commodity prices. Overall, stocks ended lower for the week. The S&P 500 Index was weighed down by the technology, consumer services, financial, and consumer discretionary sectors, while other segments gained ground. Not surprisingly, the energy sector outperformed as international oil prices surged, trading at almost USD 120 per barrel on Thursday. It was only when news of a possible Iran nuclear deal emerged that oil prices corrected slightly. Although trading volumes were not pronounced, the Cboe Volatility Index (VIX) reached its highest level in more than a year.

Several developments related to the Ukraine crisis affected stock trading as the week progressed. First, the U.S., the U.K., and the European Union agreed to exclude several Russian lenders from the SWIFT (Society for Worldwide Interbank Financial Telecommunication) international banking network. Second, Western powers imposed more sanctions against Russia. The MSCI announced on Wednesday that Russian securities will be removed from its indices, even as the U.S. authorities put further restrictions on Russian imports. President Joe Biden on Thursday announced additional penalties focused on Russian oligarchs closely associated with President Vladimir Putin. Third, news on Thursday evening that Europe’s largest nuclear power station had been attacked pushed futures prices lower, although stocks appeared to stabilize when it was announced that no radiation had been released. Fourth, the ruble plunged to an all-time low despite the Russian Central Bank’s move to raise the policy rate from 9.5% to 20%. Market declines were cushioned, however, when Ukraine and Russia announced they would enter into another second round of negotiations.   

U.S. Economy

In light of the recent geopolitical developments, it is expected that the economy will not remain insulated and that some negative impacts will be sustained. Commodity-price shocks and some monetary policy tightening are almost certain to threaten the continued U.S. bull market, but it is unlikely that these threats will end the continued economic expansion altogether. The economy continues to deal with adverse developments from a position of strength, and despite the greater volatility ahead, stable underlying fundamentals will continue to provide the markets more resilience. So far, in 2022, interest rates have risen in tandem with a stubbornly elevated inflation and, therefore, a series of Fed rate hikes remains certain. There has, however, been a series of interest rate pullbacks in recent days due to a flight to safe-haven assets in response to the Ukrainian crisis. The purchase of U.S. Treasury bonds has therefore increased, pushing bond prices higher and bond yields lower. Some analysts anticipate a possible Fed-induced recession, but this is not likely as the markets have already priced in much of the pessimism and the broader bull market shows continued strength.

Metals and Mining

As Russia’s war on Ukraine enters its second week, a flight to safety by investors is only to be expected. Safe-haven investments currently consist of the U.S. dollar and precious metals, gold in particular. The war is wreaking a devastating impact on the two contending nations. A humanitarian crisis is developing as more than one million Ukrainian refugees have fled to adjacent European nations. Russia is also facing an economic crisis as other countries sever ties with the aggressor nation, further crippling its businesses. Oil supply disruptions have pushed crude prices to their highest level in 14 years and intensifying global inflationary pressures. The risk uncertainty in most financial markets is driving investors to seek safe assets where they could park their wealth until the crisis is resolved. Gold and precious metals are reaping the benefits of this flight to safety, with analysts speculating that the yellow metals will soon penetrate the $2,000 per ounce level.

Gold ended the week 4.31% higher than the week previous, surging from $1,889.34 to $1,970.70 per troy ounce. Silver ended the week at $25.70 per troy ounce, up by 5.89% from the previous week’s $24.27. Platinum rose from $1,059.35 the week earlier to this week’s $1,128.07 per troy ounce for a gain of 6.49%. Palladium gained an impressive 27.14% price increase, from the initial $2,368.72 to $3,011.50 per troy ounce. The 3mo base metal prices have also registered impressive gains. Copper, which closed a week earlier at $9,873.00, ended this week at $10,674.00 per metric tonne, rising by 8.11%. Zinc realized a surge of 11.86%, starting at $3,621.50 and ending at $4,051.00 per metric tonne for this week. Aluminum ended one week ago at $3,357.50 but closed this week at $3,849.00 per metric tonne for a gain of 14.64%. Finally, tin surged from $44,470.00 to end the week at $47,540.00 per metric tonne for an increase of 6.90%.

Energy and Oil

The Russian invasion of Ukraine set off the most volatile oil trading in recent memory. Wild trading not seen in 33 years, since Saddam Hussein attacked Kuwait, dominated over the past week. The prospects that Russia’s oil supply will likely be banned in international markets have sent crude prices northward of $100 per barrel to its highest level since 2008. On Thursday, WTI touched $116 per barrel while ICE Brent came within striking distance of $120 per barrel. U.S. President Joe Biden announced a fresh round of sanctions targeted at Russia’s refining sector, banning the export of specific refining technologies to Russia and its ally Belarus and hampering efforts by these two countries to modernize their downstream assets. Rumors of an imminent nuclear deal with Iran have somewhat tempered the wild swings, but the supply uncertainties are far from resolved, and speculative trading could be expected to continue for some time. The wild price fluctuations may find further impetus from the renewed riots and force majeure developments in Libya which may trigger another civil war. These geopolitical threats may very well send oil prices above the $120 per barrel mark in the weeks to come.

Natural Gas

With the ongoing disruptions over the report week beginning February 23 and ending March 2, the spot price movements of natural gas were mixed. The Henry Hub spot price increased to $4.65 per million British thermal units (MMBtu) at the end of the week, from $4.57/MMBtu where it ended the week prior. International natural gas spot prices surged during the week. At the Title Transfer Facility (TTF) in the Netherlands, which is Europe’s most liquid natural gas spot market, the day ahead prices rose $15.34 to a weekly average of $41.06/MMBtu in light of the Russian-Ukraine hostilities that has caused uncertainty in the European natural gas markets.

In the meantime, prices on the Gulf Coast were slightly elevated due to cooler temperatures. In the Midwest, prices fell slightly with warmer temperatures, as they did in the West. In the Northeast, prices increased due to higher natural gas consumption. The U.S. natural gas supply decreased from all sources this week, coinciding with an increase in U.S. natural gas demand in every consuming sector. U.S. LNG exports increased by six vessels this week compared to the week previous.   

World Markets

In Europe, shares plummeted as investors were caught in the uncertain implications of the ongoing Russian invasion into Ukraine. The pan-European STOXX Europe 600 Index lost 7% of its value in local currency terms even as the major indexes fell sharply. Italy’s FTSE MIB Index plunged by more than 12% while Germany’s DAX Index and France’s CAC 40 Index declined by more than 10%. The UK’s FTSE 100 Index lost 6.7%. Core eurozone bond yields likewise fell overall as volatile trading prevailed over the week. They contracted sharply when Russia and Ukraine failed to successfully pursue ceasefire talks and the hostilities intensified. Peripheral eurozone and UK gilt yields broadly followed the trend set by core markets. The EU, the UK, and the US agreed to impose sanctions on Russia for its intrusion into Ukraine. Russian access to their capital markets and financial systems was curtailed, and some Russian banks were excluded from the SWIFT payments messaging system. The EU shut down its airspace to Russia, tightened export controls on high-end technology, and adopted measures to freeze the financial assets of several prominent Russians among whom are Russian President Vladimir Putin and Foreign Minister Sergei Lavrov.

In Japan, equities registered losses also in reaction o the geopolitical and economic uncertainty emanating from Europe due to the Russian-Ukrainian conflict, not a minor part of which is the escalating global oil prices. The Nikkei 225 Index fell 1.85% while the broader TOPIX Index lost 1.67%. Also weighing in on investor sentiment is the possibility of aggressive monetary policy tightening by the U.S. Federal Reserve. As a consequence of the heightened risk, safe-haven demand pushed the yield on the 10-year Japanese government bond to decrease to 0.15% from 0.20% at the close of the week previous. The yen remained relatively unchanged at JPY 115.6 versus the USD despite the heightened intraweek trading volatility. Japan imposed more sanctions against Russia in coordination with the other Western nations, including freezing the assets of Russian oligarchs and blocking seven Russian banks from the SWIFT international payment system. Japan also intends to tighten exports of semiconductors and other technology products to Russia.

Also, in reaction to the Russia-Ukraine situation and negative economic pronouncements domestically, China’s markets retreated as investors’ risk appetite dampened. The Shanghai Composite Index slid 0.1% while the blue-chip CSI 300 Index lost 1.7%. The tightening sanctions against Russia and anticipation of pessimistic news during the coming weeklong annual meeting of China’s parliament beginning on Saturday diminished trading activity. Expectations are that China will announce that its official GDP target for 2022 will be within the range of 5.0% to 5.5%. This is possibly the first time since 1991 that the country’s annual economic growth target will fall short of 6%. Investors are keen to spot other signs of greater economic stimulus. Short-term interest rates may be cut further by the People’s Bank of China to stave off the likelihood of an economic slowdown. On the other hand, analysts expect a relatively unremarkable parliamentary meeting ahead of the meeting of the Communist Party in the fall. The meeting is held only twice every decade, underscoring the importance of maintaining a politically stable environment leading to the event. The yield on the 10-year Chinese government bond rose 2.861% from the prior week’s 2.806%, a reflection of tight onshore liquidity conditions. The Yuan currency remained unchanged at 6.3190 per USD.

The Week Ahead

In the coming week, important economic data expected to be released include inflation data, the Michigan Sentiment gauge, and jobless claims.

Key Topics to Watch

• Consumer credit
• NFIB small business index
• Foreign trade deficit
• Wholesale inventories (revision)
• Job openings
• Quits
• Initial jobless claims
• Continuing jobless claims
• Consumer price index
• Core CPI
• CPI (year over year)
• Core CPI (year over year)
• Real domestic nonfinancial debt (SAAR)
• Real household wealth (SAAR)
• Federal budget deficit
• UMich consumer sentiment index (preliminary)
• Five-year inflation expectations (preliminary)

Markets Index Wrap Up

Stock Markets

Despite the holiday-shortened trading week that passed, volatility reached a two-year high due to Russia’s invasion of Ukraine towards the week’s end, followed by Western countries imposing sanctions on the aggressor. Heightened geopolitical risk combined with the continuing inflationary pressures and increasing restriction in central bank policy weighed on equities. Stocks descended further into correction territory as indexes declined by 12% compared to their January 3 peaks, later to rebound and recover some lost ground. The major indexes still closed the week mostly higher from the previous week, mostly due to gains early in the week. On Thursday, the Nasdaq Composite Index swung by 6.8%, its largest intraday range since the start of the Covid pandemic in March 2020. Within the S&P 500, the consumer discretionary sector underperformed overall due to travel-related shares responding to the European turmoil. Communication services, on the other hand, exhibited resiliency due to support from the Internet counters such as Google parent Alphabet and Facebook parent Meta Platforms. Health care shares also outperformed.\

Commodities and traditional safe-havens, including bonds and the U.S. dollar, rallied as news of the attacks on Kyiv, the Ukrainian capital, sent stocks and fixed income markets lower. Investors rushed to assets that are perceived to remain stable during periods of uncertainty and high risk. As a result, longer-term U.S. Treasury yields moved lower and the U.S. currency moved higher in particular against the Russian ruble and other emerging market currencies. At the end of the week, after the Russian government representatives stated they were ready for negotiations with Ukraine and a delegation will be sent to the Belarus capital, Minsk, bond yields recovered and stocks rallied sharply. It also appeared to investors that sanctions against Russia, particularly in the energy sector, will not be as severe as first anticipated.

U.S. Economy

Despite the recent shocks to the markets resulting from geopolitical struggles and the pandemic situation, the underlying fundamentals continue to remain favorable and the present setback is only temporary. The broader economy remains on solid footing and the current volatilities only work to influence the markets to gravitate to more sustainable drivers of returns. There will continue to be challenges to investors’ confidence in the markets, however, particularly the inflationary and monetary-policy uncertainties. It is a given that the Feds are certain to embark on a series of rate hikes simultaneously with shrinking its balance sheet, which is important to factor in long-term investment strategies since the market recovery will be protracted. Currently, the S&P 500 is approaching the average non-recessionary drawdown and most asset valuations are returning to their five-year historical averages, the ideal response would be to move towards quality investments and to seek opportunities in attractive prices as they present themselves. Investors should resist the impulse to succumb to fear and panic, instead move towards rebalancing strategies and dollar-cost averaging during price swings. It is also wise to take advantage of short-term dips to diversify one’s portfolio.

Metals and Mining

Expectations of price appreciation among precious metals have once again been disappointed last week, particularly in the nearly $100 intraday swing in gold prices seen Thursday. Russia’s foray into Ukraine sent gold prices to a session high of $1,976.50 per ounce, the peak it has seen in the last 1.5 years. However, placing a bet on geopolitical uncertainties has shown its risky side when the Russian-Ukraine encounter failed to escalate and the parties instead made moves towards diplomatic negotiations. Betting on safe-haven strategies is unsustainable because the risky situation upon which it is premised is also unsustainable, and when the conflict is resolved, gold prices plummet to even lower levels than they were at previously. Gold remains an effective safe-haven asset, but it should not be chased upwards during geopolitical conflicts.

In the week just ended, gold fell week-on-week by 0.48%, from $1,898.43 to $1,889.34 per troy ounce. Silver rose 1.46%, from $23.92 to $24.27 per troy ounce. Platinum         corrected from the previous week’s close of $1,072.33 to the close this week of $1,059.35 per troy ounce, losing 1.21%. Palladium gained marginally by 0.76% for the week, from $2,350.75 to $2,368.72 per troy ounce. Base metals (3mo) were also mixed for the week. Copper, which closed the previous week at $9,956.00, ended this week at $9,873.00 per metric tonne for a loss of 0.83%. Zinc fared better, closing this week at $3,621.50 per metric tonne from the previous week’s close at $3,575.50, gaining 1.29%. Aluminum began at $3,262.50 and ended at $3,357.50 per metric tonne for an increase of 2.91%. Finally, tin moved up from the earlier week’s close at $44,140.00 to this week’s $44,470.00 per metric tonne, a gain of 0.75%.

Energy and Oil

The much anticipated, and feared, Russian incursion into Ukraine materialized this week, but instead of the string response expected from the international community, European leaders largely hesitated and argued among themselves. Oil prices rose slightly above the $100-per-barrel level on Friday, and gas prices surged to $50 per million British thermal units (mmBtu), a development which may have given rise to the benign response to the Russian invasion. It is well speculated that any severe sanction to be placed on the aggressor will send oil prices to much higher levels which none of the players dependent on Russian oil want. Fossil fuel flows from Russia are too important to the international markets for the Western countries to gamble on compromising. The lack of any serious sanctions on Russia’s energy exports are the principal reason that the sudden spike in oil prices largely recovered by the week’s end.   

Natural Gas

Not surprisingly, in light of the uncertainties in geopolitical affairs, spot prices for natural gas rose at most locations during this report week, February 16 to February 23. Hub spot prices increased from $4.39 per mmBtu when the week began, to $4.57 per mmBtu at the end of the week. International spot prices were mixed while that of futures decreased. The price of the March 2022 NYMEX contract slid by $0.094, from $4.717 per mmBtu on February 16 to $4.623 on February 23. Prices in the Midwest rose slightly with cooler temperatures while those in the Gulf Coast also increased despite forecasts that the warm weather will continue. In the West, temperatures fell and with it prices increased; those in the Northeast rose as another winter storm is anticipated. Total natural gas supply in the U.S. market declined slightly this past week, even as the total consumption fell slightly. U.S. liquid natural gas exports are down by five vessels this week compared to the previous week.

World Markets

Equities fell in Europe due to fears that the Russian invasion of Ukraine will give way to higher inflation and economic slowdown. The pan-European STOXX Europe 600 Index closed 1.58% lower. France’s CAC 40 Index also ended 2.56% down while Italy’s FTSE MIB Index slid 2.77%. Germany’s DAX Index, one of the bourses with the highest exposures in Russia, plunged 3.16%. By comparison, the UK’s FTSE 100 Index slipped by a marginal 0.32%. The core eurozone bond yields descended after the Russian invasion into Ukraine triggered a flight to safety. Likewise giving way were the UK gilt and peripheral eurozone bond yields.

Likewise impacted by the Russia-Ukraine conflict, Japan’s stock market returns were negative during the past week’s trading. The Nikkei 225 lost 2.38% and the broader TOPIX Index descended 2.50%. The yield on the 10-year Japanese government bond dropped to 0.20% from 0.22% during the close of the previous week. The Governor of the Bank of Japan, Haruhiko Kuroda, announced that Japan’s central bank does not have any immediate plans to reduce its monetary stimulus. If necessary, it would purchase unlimited quantities of bonds to keep yields within the target range. The yen weakened to approximately JPY 115.32 versus the U.S. dollar, compared to JPY 115.00 during the preceding week.

The Chinese bourses sustained a weekly loss also in response to the geopolitical situation between Russia and Ukraine, indicative of the investors’ depressed risk sentiment. The Shanghai Composite Index slid 1.1% while the large-cap CSI 300 Index lost 1.6%. The yield on the 10-year Chinese government bond descended to 2.806% compared to the previous week’s yield of 2.814%. Regarding currencies, the yuan strengthened against the U.S. dollar, ending around 6.3135 per dollar from 6.33 the earlier week as a result of higher foreign inflows into Chinese assets. Further dampening buying sentiment into stocks was the decision by the People’s Bank of China to maintain interest rates steady. The central bank maintained the one-year and five-year loan prime rates at the same levels they were the previous week. This surprised experts and analysts who forecast that the benchmark lending rate will recede.

The Week Ahead

In the week ahead, the important economic data scheduled for release include the hourly earnings growth and the unemployment rate.

Key Topics to Watch

• Trade in goods, advance report
• Chicago PMI
• Atlanta Fed President Raphael Bostic speaks, Feb. 28
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Atlanta Fed President Raphael Bostic speaks, March 1
• ADP employment report
• Chicago Fed President Charles Evans speaks
• St. Louis Fed President James Bullard speaks
• Fed Chair Jerome Powell testifies at House committee
• Beige Book
• Initial jobless claims
• Continuing jobless claims
• Productivity revision (SAAR)
• Unit labor costs revision (SAAR)
• Markit services PMI (final)
• ISM services index
• Factory orders
• Core capital equipment orders (revision)
• Fed Chair Jerome Powell testifies at Senate committee
• New York Fed President John Williams speaks
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Labor force participation rate, prime working age
• Chicago Fed President Charles Evans speaks

Markets Index Wrap Up

Stock Markets

In the week just ended, markets closed lower on concerns about the escalating tensions between Russia and the Ukraine. Volatility intensified and investors pulled back from equities in favor of safe-haven assets with perceived greater stability. The geopolitical tensions were only an addition to a market already contending with inflation levels not seen in four decades and expectations of rising Federal Reserve rates. In due time, attention may once more be channeled to economic fundamentals, although market volatility may continue to be a major challenge that investors will have to deal with for the rest of the year.

The large-cap indexes succumbed to its second straight week of losses, weighed down by the dramatic plunge of the Meta Platforms (Facebook’s parent) price, taking with it the rest of the communications sector. The consumer staples sector, which comprises the normally defensive industries, outperformed in the S&P 500 Index, particularly due to gains in Procter & Gamble and Walmart. In the face of market volatility and the upcoming long holiday (markets will remain closed on Monday, February 21, in observance of President’s Day), traded volumes were light as investors refrained from taking a position.

U.S. Economy

Conflicting signals associated with Federal Reserve indicators also fostered added caution among investors. Last, Monday, James Bullard, St. Louis Fed President, announced in an interview on CNBC that policymakers were dealing with the inflation increase, and questions may arise on the credibility of the central bank. Bullard indicated that it was his opinion and the consensus among fellow policymakers that a full percentage point increase in the federal funds rate may be expected by July. This ran contrary to traders’ expectation of a mere quarter-point increase in March, reflecting a more accommodative stance.

Other mixed economic data may also have suggested the unlikelihood of a more aggressive rate hike in the next Fed meeting. For the first time in a month, weekly jobless claims increased coupled with two lower-than-expected regional manufacturing indexes. On the other hand, retail sales grew 3.8% in January, which is above expectations, and the most it has recovered since spring. There is a caveat, however, that the sales data has not been adjusted for inflation, thus much of the increase may have been accounted for by the rise in prices. The Labor Department also reported on Tuesday that January’s producer prices increased by 1.0%, which is the highest in eight months and higher than forecasted. Housing numbers demonstrated no strong trends either way since housing starts rose less than expected but housing permits grew more than the consensus estimate.

Treasury yields fluctuated throughout the week due to the confusing signals from the Fed, Russia, and economic reports. The volatility in interest rates, together with outflows from municipal bond funds, weighed on the tax-exempt bond market. Light levels of supply, however, provided technical support to the market.

Metals and Mining

The same uncertainty in the geopolitical situation has also affected the precious metals sector but with increased optimism. Gold is riding the wave of fear and momentum that drives a flight to safe-haven assets. The price of the yellow metal touched $1,900 per ounce, an eight-month high. Although the gold rally surged by 3%, it is still uncertain whether the momentum will be sustained if and when the tensions between Russia and the U.S. will abate. While in normal times the price of gold may recede to prior levels, there is still the matter of inflation to contend with. The current inflation rate, which is the highest in four decades, may trigger monetary policy tightening that may move the global economy closer to a worldwide recession. The Bank of America chief investment strategist, Michael Hartnett, commented on Friday that the risk of a recession may be increasing. If this were to take place, it is an opportunity for gold to shine, providing a stable alternative to an increasingly uncertain monetary future.

Over the past week, gold increased by 2.13% from $1,858.76 to $1,898.43 per troy ounce. Silver rose from $23.59 in the preceding week to $23.92 per troy ounce in the week just concluded, gaining 1.40%. Platinum gained 4.03%, from $1,030.80 to $1,072.33 per troy ounce. Palladium climbed from $2,308.50 to end the week at $2,350.75 per troy ounce, a rise of 1.83%.  Among base metals. copper moved up slightly by 0.97%, from $9,860.50 to $9,956.00 per metric tonne.  Zinc fell from $3,626.50 to $3,575.50 per metric tonne for a loss of 1.41%. Aluminum rose by 4.02% from the previous week’s level at $3,136.50 to the past week’s close at $3,262.50 per metric tonne. Tin gained 1.36% week-on-week, from $43,549.00 to $44,140.00.

Energy and Oil

Oil prices have come down from their previous weeks’ highs. Oil price hikes that have taken place due to news about the Ukraine-Russian tensions have been offset by apparent progress in negotiations regarding the Iran nuclear talks. Improvement in the Iran situation is likely to assure a more stable supply of oil that would put to rest speculations of an oil supply shortage that a Russian embargo may trigger. The easing of sanctions on Iran is supposedly dependent on a sequence of steps, a matter which reportedly has been settled. The first step is for Iran to stop all enrichment of radioactive materials beyond 5% purity, simultaneous with the release of political prisoners. The Joint Comprehensive Plan of Action (JCPOA) members are then going to unfreeze Iranian assets frozen during the imposition of sanctions. If Iran shall agree to the deal, there is expected to be a more liberal flow of crude from this country beginning the third quarter of 2022. This should allay market fears about any supply tightness moving forward, bringing oil prices down. Should the Vienna talks successfully conclude, OPEC+ members have signaled their willingness to integrate Iran, which after all is a founding member of the OPEC, into their production curtailment deal.

Natural Gas

The spot prices of natural gas rose at most locations during the report week from February 9 to February 16. The Henry Hub spot price ascended to $4.39 per million British thermal units (MMBtu) from the previous week’s $4.06/MMBtu. International spot prices were mixed in the absence of more market-moving news. Regarding futures, the price of the March 2022 NYMEX contract rose $0.708, to end at $4.717/MMBtu for the week from the earlier week’s $4.009/MMBtu. The price of the 12-month strip averaging March 2022 through February 2023 futures contracts increased by $0.552 to $4.726/MMBtu.

In the U.S., prices along the Gulf Coast rose ahead of a cold front forecast for the central lower 48 states. Prices in the Mideast rose moderately, in line with the Henry Hub price. Prices also rose slightly in the West as a result of the cold weather front moving into the region. In the Northeast, prices are demonstrating some volatility as a result of the fluctuating weather patterns. The total natural gas supply in the U.S. is expected to rise in the coming week in tandem with increasing production. The total U.S. natural gas consumption is expected to substantially decrease across most sectors this week. This week, U.S. LNG exports are down by four vessels from last week.

World Markets

European equities slumped due to continued uncertainty in monetary policies and the tensions at the Ukraine-Russian border. The pan-European STOXX Europe 600 Index closed the week lower by 1.86%. France’s CAC 40 Index dipped 1.17%, Italy’s FTSE MIB Index descended 1.70%, and Germany’s DAX index lost 2.48% of its value. The UK’s FTSE 100 Index corrected by 1.92%. The core eurozone bond yields experienced some volatility but ended lower in the end due to intensified fears of a possible Russian invasion of Ukraine. Peripheral eurozone and UK government bond yields followed the direction taken by core markets. Christine Lagarde, the president of the European Central Bank, together with Governing Council members Pablo Hernandez de Cos and Francois Villeroy de Galhau, sought to reassure the markets that any adjustments to monetary policy would be gradual and guided by key economic data.

In Japan, the stock markets sustained week-on-week losses as sentiment continued to be affected by geopolitical developments in Ukraine and a possible shift to more aggressive monetary policy tightening by the U.S. Federal Reserve. The Nikkei 225 Index slid 2.07% and the broader TOPIX Index receded 1.95%. The fixed-rate Japanese government bond purchase operation of the Bank of Japan (BoJ) did not see any offers as market yields remain lower, successfully capped long-term interest rates, and kept the yield on the 10-year JGB unchanged at 0.22%. The yen moved higher against the U.S. dollar at JPY 115.18 compared to JPY 115.45 the previous week. The strength of the currency is dependent mainly on safe-haven demand in light of the worries over geopolitical issues.

Chinese equities climbed in response to positive signals from the government and lower-than-expected inflation figures that greatly buoyed investor sentiment. The Shanghai Composite Index gained 0.8% for the week, and the CSI 300 Index climbed 1.1%, in a week when most other international bourses were descending. The yield on the 10-year sovereign bond settled unchanged at 2.814%, while the yuan exchange rate against the U.S. dollar rose to 6.33 from 6.36 one week ago. An announcement by China’s Premier Li Keqiang stated that Beijing promised to rapidly implement measures that will strengthen economic support, particularly after the negative effects of COVID-19. Furthermore, corporate tax rates will be cut down, fiscal spending will be strengthened, and fiscal discipline instituted. Furthermore, the head of the People’s Bank of China (PBOC) indicated that supportive monetary policies will be maintained by the central bank for the rest of the year.

The Week Ahead

Among the important economic data scheduled for release in the coming week are consumer spending, consumer income, and consumer confidence.

Key Topics to Watch

• S&P Case-Shiller home price index (year-over-year change)
• FHFA home price index (year-over-year change)
• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• Consumer confidence index
• Initial jobless claims
• Continuing jobless claims
• Gross domestic product revision (SAAR)
• Gross domestic income (SAAR)
• New home sales
• Nominal personal income
• Nominal consumer spending
• PCE inflation (monthly)
• Core inflation (monthly)
• PCE inflation (year-over-year)
• Real disposable income
• Real consumer spending
• UMich consumer sentiment (final)
• 5-year inflation expectations (final)
• Pending home sales

Markets Index Wrap Up

Stock Markets

Volatility marked this week’s trading which saw large-cap indexes end lower and the S&P MidCap 400 and small-cap Russell 2000 indexes treading water with modest gains. Underperforming the rest was the technology-laden Nasdaq Composite Index that ended the week down 15% from its recent high and ending in correction territory. Investor sentiment continues to be dominated by the clash between robust earnings growth and worries about the impending monetary tightening. The possibility of a Russian invasion of Ukraine overshadows speculations, causing a sell-off at the week’s end. Pulling down the broader indexes early in the week were declines in the large-cap technology stocks such as Google parent Alphabet, Facebook parent Meta Platforms, and Microsoft, although lost ground was recovered by the middle of the week. Counters in the hospitality sector such as hotels, restaurants, casinos, online travel agencies, and air and cruise lines rallied with the continued opening of the economy.

U.S. Economy

On Thursday, it was announced that the inflation rate hit its highest level in forty years, jarring the markets and erasing the gains made by midweek. News released by the Labor Department showed the consumer price index (CPI) surged 7.5% for the year ending January. This is higher than consensus expectations, and topped annual gains going back to February 1982.  Core prices not including food and energy purchases climbed 6.0%, the highest since August 1982. Due to concerns about inflation, the University of Michigan reported that the preliminary benchmark for consumer sentiment came in at 61.7, well short of the expected 67 and the lowest it has been since October 2011.

The announcement of the upper-limit CPI and comments about more restrictive monetary policies by James Bullard, St. Louis Federal Reserve Bank president, propelled short-term rates upward on Thursday resulting in a flattening of the yield curve. As investors priced in a Fed rate hike accelerated schedule, the two-year U.S. Treasury note yield ascended to its highest point in two years. Investors included the plausible scenario of a 50-basis-point rate hike by the Fed’s policy meeting in March. The benchmark 10-year U.S. Treasury note yield exceeded 2.00% for the first time since mid-2019.

In the underlying fundamentals, there appears to be broad-based resiliency across goods and services. Price pressures are spreading beyond a few items that are still affected by supply-chain disruptions, resulting in higher food, electricity, used cars, and housing prices which led to price hikes. The most significant component in the consumer-spending basket, rents, is likely to accelerate further as a result of rising home prices, a tight labor market, and the lowest rental vacancy rate in 38 years. A descent to more moderate price increases is unlikely to take place soon with the services inflation picking up. This might prompt central banks to take more aggressive measures moving forward. The good news, however, is that GDP is expected to continue growing at an above-average pace for the year and the unemployment rate will remain at near-record lows. The economy does not need further support. The expected increases in interest rates will increase the cost of borrowing that may in turn temper consumer spending, thus balancing off supply and demand, slowing down inflation.

Metals and Mining

There is a breakout in gold prices above the $1,850 critical resistance level, closing the week at a three-month high. As tensions heightened between the U.S. and Russia, causing gold to surge late Friday. Triggering the rally was the White House announcement that recommended all U.S. citizens to leave Ukraine within 48 hours. The news sparked a 500-point sell-down in the Dow Jones Industrial Average for a 1% drop for the day. Simultaneously, gold gained 1% for the day, trading last at $1,863.80 per ounce. The continued volatility in equities is only seen to further help the precious metals market see substantial gains. When there is a lot to fear in the financial markets, gold becomes more attractive as a stable safe haven.

Gold gained 2.79% last week, from the earlier week’s close at $1,808.28 to the just-concluded week’s close at $1,858.76 per troy ounce. Silver, formerly at $22.52 ascended to close at $23.59 per troy ounce for a gain of 4.75%. Platinum rose slightly from $1,028.19 to $1,030.80 per troy ounce, an increase of 0.25%. Palladium also climbed from $2,294.06 to $2,308.50 per troy ounce to record a 0.63% price appreciation. Among the base metals, copper price increased from the previous week’s $9,841.50 to this week’s close at $9,860.50 per metric tonne, increasing by 0.19%. Zinc inched up 0.39% from $3,612.50 to $3,626.50 per metric tonne as aluminum climbed 2.03% from $3,074.00 to $3,136.50 per metric tonne. The price of tin went up 1.23% for the week, from $43,021.00 to $43,549.00 per metric tonne.

Energy and Oil

Over the past week, Iran was front and center in the oil market news, on the back of a potential breakthrough in the nuclear deal. Negotiations were expected to be successful by several market participants, resulting in oil prices descending over the week as a correction to the previous week’s climb to the mid-$90s per barrel. Even if a deal were to take place soon, it would take several months before Iran’s crude oil to reach the markets; thus, the sudden and unexpected rally was driven more by market optimism rather than realistic expectation. Taking a closer look at fundamentals, the underperformance of OPEC+ appears to suggest levels close to one million barrels per day (b/d) in February. The rumors have even prompted the International Energy Agency (IEA) to weigh in for more oil production. The IEA joined the ranks of countries such as India as well as other major importers in calling for OPEC+ to raise the supply in the crude market. The Agency urged Saudi Arabia and the United Arab Emirates to use their spare capacity to supplement the deteriorating underperformance of OPEC+. Volume shortage has totaled some 800,000 b/d since the beginning of 2021.  As if to add to the supply problem, global shortages of diesel have become more pronounced as Northwest Europe inventories descended to their lowest level since 2008 at least. Singapore gasoil stocks have also fallen to multi-year lows of approximately 8.2 million barrels.

Natural Gas

For the report week February 2 to February 9, spot prices for natural gas fell at most locations. The Henry Hub spot price descended from $6.44 per million British thermal units (mmBtu) at the start of the week, to $4.06/mmBtu by the end of the week. International natural gas prices also fell in the global market. The March 2022 NYMEX contract price dropped $1.492 to $4.009/mmBtu to $5.501/mmBtu week-on-week. The price of the 12-month strip-averaging March 2022 through February 2023 futures contracts slipped $1.019 to $4.174/mmBtu. All along the Gulf Coast, prices for natural gas fell as the effects of the cold front dissipate across Texas. The drop in the prices in the Midwest corresponded with the Henry Hub price, even as prices fell in the West in response to the rising temperatures. The U.S. total natural gas supply fell during this report week due to decreased dry natural gas production. The total consumption of natural gas throughout the U.S. fell in line with decreased consumption in most sectors, while LNG exports are up by five vessels this week from last week.  

World Markets

In Europe, share prices rallied on the back of strong corporate earnings. The pan-European STOXX Europe 600 Index closed 1.61% higher in local currency terms. The value-oriented stocks and cyclical industry stocks performed better compared to the market. This is seen to be in reaction to the inflationary pressures and the likely implications they have for the monetary policy initiatives of major central banks.  Germany’s Xetra DAX Index surged 2.16%, Italy’s FTSE MIB Index climbed 1.36%, and France’s CAC 40 Index rose 0.87%. The UK’s FTSE 100 Index advanced 1.92%, buoyed by positive investor reaction to better-than-expected economic data. The core peripheral eurozone government bond yields ascended in response to the higher-than-expected inflation forecast announced by the European Commission and an unexpected rise in U.S. inflation. After data was reported that the economic contraction was below expectations in December and grew 1% in the fourth quarter, UK gilt yields increased. The resilience demonstrated by the markets prompted investor expectations that the Bank of England may soon increase interest rates again. Overall, the EC lowered its 2022 outlook for EU economic growth from its previous forecast of 4.3% to 4.0%.

Despite last week being a holiday-shortened week for Japan, its stock markets posted gains as the Nikkei 225 Index rose 0.93% and the broader TOPIX Index climbed 1.66% in response to solid corporate earnings. The yen lost some of its value against the U.S. dollar, weakening to approximately JPY 116.02 from what was previously JPY 115.22. The higher-than-expected U.S. inflation rate sent the foreign currency upwards in response to expectations of a move by the Federal Reserve to aggressively tighten their monetary policy. The ten-year Japanese government bond yield ended the week at 0.22%, a 10% increase from the 0.20% at the end of the previous week, prompting the Bank of Japan to quickly move to curb rising yields and to ensure a more stable and favorable financial situation. BoJ Governor Haruhiko Kuroda continued to assure the market that monetary policy will remain at its current trajectory since inflation in Japan remains well below its 2% target.

Chinese equities gained on official assurances of support and a perception that the regulatory crackdowns by authorities have peaked. The Shanghai Composite Index added 3% in value while the CSI 300 Index gained 0.8% since January 28, the final trading day prior to the weeklong Lunar New Year break. In the past week, the People’s Bank of China (PBOC) announced that loans for affordable rental housing would not be included in the limited amount banks may lend to the property sector. In the Communist Party newspaper People’s Daily, an editorial stated that China’s economy still needed capital for growth despite requiring regulations on the use of capital to curb the tendency towards monopolistic behavior. It was also stated in another article that regulatory control on the internet sector will become increasingly rules-based, suggesting a possible easing of the government’s crackdown on the tech sector. PBOC data indicated that the country’s foreign currency reserves dropped in January by approximately $28 billion to $3.22 trillion. This is lower than expected during a month that saw the U.S. dollar strengthen. New loans and aggregate financing exceeded forecasts, rising to record levels in January, according to the central bank. China’s credit growth will possibly accelerate in the months to come amid reductions in borrowing costs, a more accommodative fiscal policy, and the relaxing of constraints on mortgage lending.

The Week Ahead

Among the vital economic data to be released in the coming week are the Leading Economic Indicators index and Industrial Production.

Key Topics to Watch

• Louis Fed President James Bullard interviewed
• Producer price index
• Empire State manufacturing index
• Retail sales
• Retail sales excluding autos
• Import price index
• Industrial production
• Capacity utilization
• Business inventories
• NAHB home builders’ index
• FOMC minutes
• Initial jobless claims
• Continuing jobless claims
• Building permits (SAAR)
• Housing starts (SAAR)
• Philadelphia Fed manufacturing index
• Louis Fed President James Bullard speaks
• Cleveland Fed President Loretta Mester speaks
• Chicago Booth School – New York Fed meetings
• Existing home sales (SAAR)
• Leading economic indicators
• Fed Gov. Christopher Waller speaks

Markets Index Wrap Up

Stock Markets

The equity markets continued to be volatile throughout the past week although overall gains were recorded for the second week in a row. Growth and value shares performed similarly while large-caps were outpaced by the medium and small-caps, a breakout of the pattern of value outperformance in place since November. There were 112 companies listed in the S&P 500 Index scheduled to release performance reports, making this one of the busiest weeks of the fourth-quarter earnings reporting season. Several large-capitalized stocks were included, thus driving the movement in broad benchmark indexes. Facebook’s stock price declined by 26% as a result of the announcement of a drop in its daily users and guidance for slower revenue growth. The event alone erased $232 billion off the company’s market capitalization on Thursday, a record-breaking development. On the other hand, a report of better-than-expected earnings for Amazon.com attributed to its Web services business bolstered the indexes back to higher levels on Friday. Among the sectors, energy outperformed the rest, building on their significant lead for the year. U.S. oil prices surged above $90 per barrel, mainly due to agreement among the major oil exporters to commit to a modest production increase despite the rising oil demand.

U.S. Economy

Good news on the economy accompanied last Friday’s release of the most recent monthly employment report. In the month of January, almost half a million (467,000) jobs, much higher than were expected, were added to the employment market. This is an optimistic development in the light of the omicron spread. It is a signal that the underlying labor market remains sufficiently robust to overcome the potential disruption posed by the current and future covid variants. There are signs that the worst of the coronavirus pandemic will end in January, and that public health conditions will continue to ease moving forward. Furthermore, the anticipated rate hike in March is generally accepted as a done deal and investors have discounted this development in the expectation that markets have recalibrated to a more aggressive monetary policy.

Also in January, the hospitality and leisure sectors reported a welcome growth in payrolls. These remained the last sectors to recover as a result of the lockdowns and mobility restrictions. The employment levels in this sector have still not recovered to their pre-pandemic levels, so a continued increase in hiring is expected as the economy continues to rebuild. Average hourly earnings have grown 5.7% on an annual basis, adding a positive note to the growth rate in consumer spending. There is a noticeable jump in the labor-force participation rate that has climbed to a new high post-pandemic amid the largest month-over-month increase in ten years. Posing a challenge is the continued labor shortage, although it is an optimistic sign that workers are eager to return to the labor force, possibly encouraged by the fading covid concerns and the lure of higher wages. Total employment is reported to be 1.7 million below the pre-pandemic level and is clearly on the road to better days ahead.

Metals and Mining

The gold market is presently at a standstill and failing to advance, but at least it maintains its level at $1,800 per ounce. Where it goes from here is uncertain. There are two equal but opposing forces impacting precious metals at present. The first is the escalating inflation which is the highest it has been in years. The second is the expectation that the Federal Reserve will adopt aggressive measures to cool down the overheating economy caused by the rising consumer prices. The workings of these two forces are keeping gold prices on hold. Investor surveys point to the likelihood that gold prices will remain stable at the current level, according to the London Bullion Market Association.

In the past week, spot gold price rose 0.93%, closing the previous week at $1,791.53 and this week at $1,808.28 per troy ounce. Silver began this week at the previous week’s close of $22.47 and ended Friday at $22.52 for a marginal rise of 0.22%. For platinum, the earlier week’s close at $1,013.50 ascended to $1,028.19 by week’s end, for a gain of 1.45%. Among the precious metals, palladium lost 3.57% of its value during the week, beginning at $2,378.88 and ending at $2,294.06 per troy ounce.

For the base metals, copper rose from $9,507.50 per metric tonne to close at $9,841.50, gaining 3.51% for the week. Zinc closed the previous week at $3,609.50 and this week at $3,612.50 per metric tonne for a sideways gain of 0.08%. Aluminum began at $3,082.50 and ended the week at $3,074.00 per metric tonne for a marginal loss of -0.28%. Lastly, tin commenced at the earlier week’s close of $41,684.00 and ended at this week’s close at $43,021.00 for an increase of 3.21%.

Energy and Oil

A severe winter storm that is moving across the U.S. has added another risk factor to the oil market. The storm has reached the Permian Basin and sparked concerns that potential supply disruptions may occur in the largest American shale source. Additionally, the OPEC+ commitments in its production increases into March 2022 have remained unchanged, signifying the inability or unwillingness of the group to meet rising demand. The Russian-Ukraine geopolitics add another dimension to the situation, prompting strong speculations that the $100 per barrel mark will soon be breached. Oil prices have been rising, bringing Friday’s Brent trading to $93 per barrel and the US benchmark WTI trending above $92 per barrel. In a 16-minute meeting, the OPEC+ signified that it would extend its 400,000 barrel per day increases into March 2022. The move ignores talks about continuous underperformance of production targets and depleting spare capacity.  

Natural Gas

At most locations for the report week January 26 to February 2, natural gas sport prices rose. The Henry Hub spot price increased from $4.37 per million British thermal units at the beginning of the week to $6.44/mmBtu by the week’s end. International natural gas prices were mixed during the week. Along the Gulf Coast, prices rose ahead of forecasts of freezing temperatures. In the Midwest, prices increased in line with those at the Henry Hub, while in the West, prices climbed in response to cooler temperatures increased consumption, and reduced supply. The U.S. natural gas supply was relatively flat this week, although U.S. natural gas consumption fell across all sectors. U.S. LNG exports fell by three vessels this week compared to last week’s exports.

World Markets

European equities fell after Christine Lagarde, President of the European Central Bank (ECB) issued comments that implied the likelihood of a possible rate increase this year. The pan-European STOXX Europe 600 Index closed the week down 0.73% while major indexes likewise slid lower. Although Italy’s FTSE MIB Index posted modest gains, France’s CAC 40 Index descended 0.21% and Germany’s Xetra DAX Index dropped 1.43%. The UK’s FTSE 100 Index saw a 0.67% gain. The core eurozone bond yields climbed on worries about inflationary pressures and the potential of a change in the accommodative policies of the ECB. Peripheral eurozone bond yields aligned with the core yields. Gilt yields moved higher on the back of an increase in interest rates by the Bank of England (BoE), the second such increase since December.

In Japan, the stock markets rose for the week on optimism that the government could present a policy by next week on potentially easing the ban on the entry of foreign nonresidents into the country. The Nikkei 225 Index rose 2.70% while the broader TOPIX Index gained 2.86%. The rally occurred late in the week, led by stocks that were likely to benefit from an economic reopening as a result of the lifting of the ban. The report failed, however, to detail what measures will be eased. With regards to monetary policy, the Bank of Japan (BoJ) reassured the markets that there were no plans to modify the current accommodative policy, boosting broad sentiments. Despite consumer prices remaining low, other major central banks are under inflationary pressure to raise interest rates and tighten monetary policy. This is fueling speculation that the BoJ will eventually be forced to follow suit. The yield on the 10-year Japanese government bond rose to 0.20% this week from 0.17% at the end of the preceding week. This is the highest level since the BoJ began its negative interest rate policy in January 2016. The exchange rate of the yen to the U.S. dollar strengthened to JPY 114.91 from the previous week’s JPY 115.26.

China’s financial markets remained close for the weeklong Lunar New Year celebration. In economic news, a moderation in factory production and services was indicated by government purchasing managers’ surveys for January. There was a decline in the official manufacturing Purchasing Managers’ Index (PMI) from December’s 50.3 reading to 50.1, while the nonmanufacturing rating, which measures construction and services sectors activity, dipped from 52.7 to 51.1. Expansion is separated from contraction at the 50.0 mark. Smaller private firms struggled last month in China’s manufacturing sector, as evidenced by the Caixin/Markit Manufacturing PMI for January which fell to its lowest level since February 2020.  In addition, there was more evidence of falling sales in China’s property sector, which continues to suffer from its cash crunch that began last year.  

The Week Ahead

For the week ahead, expect consumer credit, inflation, and jobless claims to be among the important economic data to be released.

Key Topics to Watch

• Consumer credit
• NFIB small-business index
• International trade
• Real household debt (year-over-year)
• Wholesale inventories (revision)
• Gov Michelle Bowman speaks
• Cleveland Fed President Loretta Mester speaks
• Initial jobless claims
• Continuing jobless claims
• Consumer price index (month-to-month)
• Core CPI (month-to-month)
• Consumer price index (year-to-year)
• Core CPI (year-to-year)
• Federal budget
• Richmond Fed President Tom Barkin speaks
• UMich consumer sentiment index (preliminary)
• UMich 5-year-inflation expectations (preliminary)

Markets Index Wrap Up

Stock Markets

The large-cap benchmarks recorded gains for the week on the back of a late-week rally, and only after the major indexes corrected by more than 10% from the recent peaks. Lagging behind the large caps is the small-cap Russell 2000 Index which closed the week down by almost 20% from its November high, barely avoiding a bear-market scenario. Volatility was at its highest since the introduction of the pandemic, as measured by the Cboe Volatility Index (VIX). There was a strong upward surge among energy stocks due to international oil prices rallying above $90 per barrel. Oil supply worries are impacted in part by the amassing of Russian troops at the border with Ukraine.

Also driving volatility are investor worries that the Federal Reserve may be compelled to raise short-term interest rates expeditiously to try to control a fast-rising inflation rate. Wall Street analysts are apparently focused on plans by the Fed to trim its balance sheet by selling off its holdings of Treasuries and agency mortgage-backed securities, more details of which Powell promised to disclose after the March meeting of the Federal Open Market Committee (FOMC). Currently, the Fed’s balance sheet amounts to $8.9 trillion which is larger than necessary, and therefore must be substantially reduced.

U.S. Economy

In March, the Fed is likely to raise rates for the first time since 2018 together with putting a halt to its balance sheet expansion. Overall, the economy shows signs of robustness with no recession foreseen. In the economic cycle, we are still in the midst of the current economic expansion. Economic growth will continue to remain above trend levels and corporate balance sheets are well-positioned to support an earnings growth rate in the range of 9% for the year. Credit markets, the traditional indicators of economic distress, are calm and credit spreads remain at low pre-pandemic levels. There is no sign of any likely corporate defaults, signaling a sound economic foundation despite the expected restrictive monetary policies and Fed balance-sheet tightening in the future. The underlying economic foundation is not likely to be derailed by any credit crunch, and the economic cycle may be expected to proceed through 2023, barring unforeseen systemic shocks.

Metals and Mining

If the past week were any indication, a volatile metals market lies in the future for investors. As the Federal Reserve adopted a hawkish stance on Wednesday, gold reacted to a possible rate hike in March. It should be remembered that a rise in interest casts a shadow over metals due to the expected opportunity cost of holding an asset that produces no yields. This early, the markets are pricing in a five-rate-hike for the year and a possible 50-basis point increase in March alone. On these speculations, gold fell roughly 3% since the Fed announcement. But analysts are wary of ruling off precious metals, because gold is traditionally a hedge against inflation, and presently the inflation rate is running at its highest in 40 years. This may provide a reason for profitable positioning in metals, as attested to by the World Gold Council which reported on Thursday that although investor demand for gold appeared dismal, demand still grew by 10% over the past year.

Last week, gold fell week-on-week by 2.39%, from the earlier week’s close at $1,835.38 to last Friday’s $1,791.53 per troy ounce. Silver also lost ground for the week, starting at $24.30 and ending at $22.47 for a decline of 7.53%.  Platinum began at $1,033.49 and closed the week at $1,013.50 per troy ounce, down by 1.93%. Palladium bucked the trend for precious metals, ending this week at $2,378.88 and the previous week at $2,111.19 per troy ounce for a gain of 12.68%. Among the base metals, copper lost 4.36% of its value, from the previous week’s close at $9,941.00 to this week’s close at $9,507.50 per metric tonne. Zinc ended the previous week at $3,635.00 and this week at $3,609.50 per metric tonne for a -0.70% dip. Aluminum began the week at $3,040.50 and ended at $3,082.50 per metric tonne for a gain of 1.38%.  Lastly, tin ended the week previous at $43,955.00 and this past week at $41,684.00 per metric tonne for a drop of 5.17%.

Energy and Oil

This week, Brent prices surged above $90 per barrel for the first time in the past seven years. The rally was pushed by several bullish factors, foremost among which is the low level of inventories. The low product reserve levels are the primary reason most banks forecast a target of $100 per barrel in the near term. This sentiment is spurred by the fact that US commercial stocks descended for the third time in a row. Next to inventories, a secondary reason is the possible escalation of the Russia-Ukraine confrontation which holds the attention of much of Europe. The scenario fuels speculation of the possible embargo of Russian oil from the market, thus hiking oil prices with another geopolitical premium. Additionally, the simultaneous scarcity of supply remains a concern in the global market, a concern that is confirmed by steep backwardation (this week, the Brent six-month market structure neared $7 per barrel). There is hardly any sign that the OPEC+ will be amenable to raising its production to more than it has committed to under the terms of the agreement. All in all, the outlook for the oil markets is bullish.

Natural Gas

Spot prices of natural gas fell at most locations for the report week from January 19 to January 26. The Henry Hub spot prices dropped to $4.37 per million British (mmBtu) thermal units at the beginning of the report week, to $4.74/mmBtu by the week’s end. International natural gas prices were mixed through the report week. The prices along the Gulf Coast plunged as liquefied natural gas (LNG) set a new weekly record for accounting for more than half of the total natural gas disposition in South Louisiana. Despite colder weather, prices in the Midwest also dipped, with the Chicago Citygate price sliding $0.39 from $4.65/mmBtu a week ago to $4.26 in the report week just concluded. The total supply of natural gas in the U.S. rose during the week due to increased imports. Total U.S. natural gas consumption increased across all sectors compared to one week earlier. US LNG exports are greater by five vessels this week compared to the week before.

World Markets

Share prices in European stock exchanges fell for the fourth consecutive week due to mounting concerns about interest rate hikes as well as the growing geopolitical tensions between Russia and the West. The pan-European STOXX Europe 600 lost 1.87% over the past week, while major indexes in Italy and Germany suffered similar declines. France’s CAC 40 Index also dropped 1.45%, while the UK’s FTSE 100 Index slid 0.37%. The yields on core eurozone, peripheral eurozone, and UK bonds rose on investor speculation that inflation will continue to rise and the monetary policy will continue to tighten. Regarding coronavirus restrictions, Denmark follows the lead of the UK, Ireland, and the Netherlands in lifting all COVID measures despite infections remaining at near record-high levels across the European continent. Sweden, Norway, and Finland have announced a similar easing of restrictions in the coming weeks.

Japan’s stock markets plummeted over the week as the Nikkei 225 Index lost 2.92% of its value and the broad TOPIX Index gave up 2.61%. Driving the correction was the announcement of the U.S. Federal Reserve to continue tightening its monetary policy. High-growth technology stocks led in the decline. Further weighing on investor sentiments in the decision by Japanese authorities to extend the quasi-states of emergency to more prefectures to address the record-high spread of COVID-19 cases and the omicron variant. The yield on the 10-year Japanese government bond ascended to 0.17% from the previous week’s 0.13%, mirroring U.S. Treasury yields which rose in response to the Fed’s hawkish outlook on interest rates. The exchange rate of the yen to the U.S. dollar weakened to JPY 115.55 from the earlier week’s JPY 113.68.

In China, stocks declined ahead of the weeklong Lunar New Year holiday. Also influencing sentiment was the hawkish tone of the Fed announcement by Jerome Powell, raising anticipation for a faster monetary tightening. The Shanghai Composite Index lost 4.6% during the week’s trading, while the CSI 300 slipped 4.5% as traders factored in as many as five trade hikes in the U.S. for the year. Such a development would impact many Chinese companies’ offshore borrowing plans. The CSI 300 plunged to a 16-month low during the week and has now entered bear market territory. It has descended by more than 20% from its peak in February 2021. Also triggering the market sell-off was a slew of profit warnings by mostly property sector companies. Many China-listed companies are set to release annual results next month, and the earnings announcements have further dampened investor sentiments. Reports on economic indicators showed profits of China’s industrial firms have grown at their slowest rate in more than 18 months due to a drop in demand.

The Week Ahead

In the coming week, among the important economic data to be released are the unit labor costs, hourly earnings, job openings, and job quits.

Key Topics to Watch

• Chicago PMI
• San Francisco Fed President Mary Daly speaks
• Kansas City Fed President Esther George speaks
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Job openings
• Job quits
• Construction spending
• ADP employment report
• Home ownership rate
• Initial jobless claims
• Continuing jobless claims
• Markit services PMI (final)
• ISM services index
• Factory orders
• Core capital equipment orders (revision)
• Nonfarm payrolls (month-to-month)
• Unemployment rate
• Average hourly earnings (month-to-month)
• Labor force participation rate 25-54

Markets Index Wrap Up

Stock Markets

The S&P 500 suffered its biggest decline in more than 14 months due to fears of rising interest rates and worries of economic growth challenges. Market closures on Monday in observance of the Martin Luther King, Jr. holiday truncated the trading week to four days. The Nasdaq Composite Index lost 7.5% by Friday, which is its deepest weekly plunge since the pandemic began. Technology stocks were weighed down by weakness in semiconductor shares. Similarly, the consumer discretionary sector was impacted by losses in the automakers and home improvement retailer stocks. Financial services shares were also dragged down by declines in financial heavyweights JPMorgan Chase and Goldman Sachs. Netflix shares plunged by more than 20% subsequent to its fourth-quarter earnings report.

Technical factors, rather than fundamentals, contributed to much of the week’s volatility in the exchanges. Many investors were trading equities as an overall asset class rather than trading on their earnings reports, as evident in the heavy flows in and out of index-focused exchange-traded funds or ETFs. Investors feared that more aggressive action might be taken by the Federal Reserve. Wall Street speculates that the Fed may announce at its March meeting that the federal fund’s target rate will be increased by 50-basis point (0.50%) instead of the incremental 25-basis point adjustments that have been the usual Fed action in the past. The increasing interest rate expectations have also tended to weaken growth forecasts.  

U.S. Economy

The broader path in 2022 appears to still be a positive one as the profit cycle does not seem to be at an exhaustion point. Corporate earnings will eventually become the main driver of stock market activity as the new interest rate regime will be discounted by investors, enabling equities to chalk moderate gains later in the year. The prospects of the 10-year Treasury rate rising to 2% is not seen to be a choke point for economic growth, since there has been no bear market in stocks that began with a 10-year Treasury rate below 4%, excluding the 2020 pandemic downturn. While eventually, a tighter monetary policy may precipitate the next economic and stock-market downturn, this is far from likely to occur in the short term. While sentiment may occasionally drive market activity, historically, earnings growth is a more powerful driver and reliable guide in the long term.   

Possibly the most likely adverse impact of higher interest rates will be a reduced expansion on valuations for equities, in the form of the price-to-equities (P/R) ratio. The prospects are not necessarily disastrous, however. A flat to slightly lower P/R ratio coupled with a tempered earnings growth rate could still yield modest dividends will be the likely scenario for 2022. Presently, corporate profit margins are treading record highs. Moving forward, profit margins may move slightly lower as a result of rising wage costs, but profit growth will continue to remain robust. It is critical, however, to pay attention to an unexpected slowdown in revenue gains or an accelerated pressure on expense growth resulting from continued inflation. These may pose threats to the current positive earnings-growth scenario.   

Metals and Mining

Oil prices are a key driver of inflation, which also in turn has an inverse relationship to metals. Therefore, as we monitor the price direction of metals, we must also keep a close eye on oil and energy. Oil prices have already increased by 10% this year, following a 55% surge in 2021. This is largely influenced by a downtrend in production and rising political uncertainty. While inflation, currently at its highest level in 40 years, is not a new development, investors are beginning to take it more seriously and factor it in as more than a temporary situation. This makes gold’s rise to above $1,830 per ounce as significant. In the past year, gold prices fell precipitously as real rates fell to record lows. Presently, investors are beginning to realize that the U.S. monetary policies will tighten with rising inflation, causing liquidity to dry up in the marketplace and earnings expectations to be driven down.

Over the past week, all precious and base metals prices ascended. Gold rose 0.96%, from the previous week’s close at $1,817.94 to the latest close at $1,835.38 per troy ounce. Silver climbed from $22.96 to $24.30 per troy ounce, a gain of 5.84%. Platinum rose week-on-week by 6.05%, from $974.53 to $1,033.49 per troy ounce. Palladium ascended from the earlier close at $1,881.50 to last week’s close at $2,111.19 per troy ounce for a gain of 12.21%. Among the base metals, copper gained 2.28% between the intraweek closes from $9,719.50 to $9,941.00 per metric tonne. Zinc increased by 3.24%, from $3,521.00 to $3,635.00 per metric tonne. Aluminum rose from $2,976.50 to $3,040.50 per metric tonne, a gain of 2.15%. Finally, tin surged from $40,351.00 to $43,955.00 per metric tonne for an intraweek gain of 8.93%.

Energy and Oil

In their outlooks for 2022, Morgan Stanley and Goldman Sachs forecasted crude oil prices to ascend to $100 per barrel this year, on the back of falling oil inventories and OPEC+ spare capacity erosion. The reports caused Brent to increase this week past the $90 per barrel level for the first time since 2014. The oil rally lost steam on Friday, though, as the geopolitical premium that was priced-in was discounted. Although forecasts of an expected oil shortage continue to recur, more crude supply is expected in the market in the coming weeks, particularly from Libya and Ecuador (after a month-long supply disruption, Libya will aim to maximize its output for 2022 at an average annual production level of 1.2 million barrels per day). In the futures markets, with the Brent M1-M12 spread at $8 per barrel, fundamentals in the oil market point to a drop from current prices rather than the resumption of the rally. By the end of last week’s trading, the global benchmark Brent came down to $88 from its earlier high, and WTI trended at $85 per barrel.

Natural Gas

During this report week from January 12 to January 19, natural gas spot price movements were mixed. The Henry Hub spot price increased from $4.59 per million British thermal units (MMBtu) at the start of the week to $4.74/MMBtu by the week’s end. International gas prices rose during this week, while the price of the February 2022 NYMEX contract decreased. Prices held steady along the Gulf Coast and the flows out of the region were moderate. In the Midwest, prices increased ahead of the anticipated winter storms. In the California market, reduced consumption and moderate temperatures resulted in lower prices, while prices in the Northeast are rising in response to the higher demand driven by the weather and tight supply to meet the heightened demand. U.S. liquefied natural gas (LNG) is down by five vessels this past week compared to the week earlier.

World Markets

Share prices in the European bourses closed lower this past week on the back of investor expectations that the European Central Bank (ECB) would raise interest rates in 2022, and that the Bank of England (BoE) may likewise adopt tighter monetary policies. The pan-European STOXX Europe 600 Index lost 1.40% in local currency terms. The major indexes mirrored this trend, with France’s CAC 40 Index weakening by 1.04%, Italy’s FTSE MIB Index sliding 1.75%, and Germany’s Xetra DAX Index giving up 1.76%. The UK’s FTSE 100 Index dipped 0.65%. Core eurozone bond yields slid lower as ECB President Christine Lagarde quelled concerns that interest rates will be increased this year. Intensified geopolitical tensions over Ukraine also influenced yields.  Peripheral eurozone bond yields followed core markets, but in the end, only moved sideways. UK gilt yields bucked the trend and rose slightly, as markets priced in the likelihood of a February BoE rate hike. This possibility firmed up as inflation recorded a 30-year high.

Japanese stocks ended negative for the week. The Nikkei 225 fell 2.14% and the TOPIX Index lost 2.62%. Weighing down investor sentiment was the new coronavirus spike nationwide, as a result of which Tokyo and 12 other prefectures were placed under a quasi-state of emergency by the government. The yield on the 10-year Japanese government bond dipped to 0.13% from 0.15% week-on-week. The yen gained strength, ending the week at JPY 113.96 compared to the previous week’s JPY 114.22 against the U.S. dollar. Japan kept its short- and long-term interest rates unchanged as the central bank maintained its quantitative and qualitative monetary easing with yield curve control. The bank will continue to pursue supportive monetary policies and will veer away from more restrictive measures.

Chinese markets posted gains for the week in response to the government’s stepping up monetary easing measures and signaled support for the troubled property sector. The Shanghai Composite Index inched up 0.1% while the CSI 300 chalked up a gain of 1.1%. At the start of the week, the People’s Bank of China (PBOC), without any prior announcement, reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%. This is the first reduction by the central bank since April 2020. Chinese banks responded by cutting their loan prime rates for one- and five-year loans. The MLF rate is set by the central bank of China, which in turn is the de facto benchmark by which domestic lenders adjust their loan prime rates for new loans. The yuan ended the week unchanged at 6.34 per U.S. dollar after it ascended to its highest level since May 2018 earlier in the week. China’s recent currency strength is due to inflows from bond investors positioning for further rate cuts.

The Week Ahead

Inflation and housing data are among the important economic reports to be released in the coming week.

Key Topics to Watch

• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• S&P Case-Shiller national home price index (year-over-year change)
• FHFA national home price index (year-over-year change)
• Consumer confidence index
• Advance report on trade in goods
• New home sales starts (SAAR)
• FOMC statement
• Fed Chair Jerome Powell news conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Gross domestic product (SAAR)
• Final sales of domestic product (SAAR)
• Durable goods orders
• Core capital equipment orders
• Pending home sales index
• Real disposable incomes
• Real consumer spending
• PCE inflation (month-to-month change)
• Core PCE inflation (month-to-month change)
• PCE inflation (year-over-year change)
• Core PCE inflation (year-over-year change)
• Personal income (nominal)
• Consumer spending (nominal)
• Employment cost index
• UMich consumer sentiment index
• UMich 5-year inflation expectations

Markets Index Wrap Up

Stock Markets

As the official start of the earnings season begins, the large-cap indexes posted their second consecutive weekly loss to start the year, and the Nasdaq Composite its third. At the close of the week, financial shares showed weakness on Friday as a result of major banking companies reporting lower fourth-quarter profits. JPMorgan Chase and Citigroup released their financial results on Friday as they are typically among the first companies to do so in the earnings reporting season. Also coming under pressure were utilities, health care shares within the S&P 500, while the energy sector outperformed the rest due real estate, and to the renewed rise in oil prices back to their peaks in October.

While the initial earnings reports from banks appear to put financial shares under pressure, the outcomes remain solid. The pessimism seems to be due to the bar for this and other sectors being set high. Over the past three consecutive years, above-average returns were reported by the listed companies, setting their recent valuations relatively high compared to their own history. Some retracement is not only possible but likely, particularly after the post-pandemic catch-up. The S&P 500 earnings forecast is at 21% growth over the fourth quarter, which marks the fourth quarter that growth exceeded 20%. The consensus expectation for 2022 is for a deceleration in earnings growth while still retaining a robust 9%. Valuations may decline slightly which is in line with the historical performance after Fed-tightening cycles. Overall, the current earnings estimates are within reasonable expectation and may even surprise investors with upside potential if the economy continues in its above-trend growth.

U.S. Economy

The bull market is still expected to continue despite slowing economic growth, high inflation, and anticipated Fed rate hikes. These developments may slow returns and increase volatility, but economic growth will remain robust. The principal economic concern is still the rising inflation and concerns surrounding rising interest rates, with more Wall Street analysts opining that the Federal Reserve may increase interest rates four times within the year. Fed Chair Jerome Powell, during his Congressional renomination hearing last Tuesday, conveyed his intention that the central bank will commit to contain inflation without hesitation.

Other data that were released during the week were largely in line with expectations. The Labor Department reported on Wednesday that overall consumer prices rose 7% year-on-year, which is the most significant gain since June 1982 based on a 12-month cycle. The core inflation, excluding food and energy, climbed 5.5% which is the highest increase since February 1991. On Thursday, the core producer prices were reported to rise 8.3%, also a record figure since 2011. Analysts and policymakers are mostly convinced that the current inflationary trend is still temporary, but there has been speculation of a possible wage-price spiral (i.e., when higher prices trigger workers’ demand for higher wages that in turn prompts companies to raise prices). This remains mainly guesswork, however, as retail sales have dropped by 1.9% in December, which some analysts attributed to the Omicron variant. The coronavirus does not seem to be the reason, however, since online sales have also receded sharply and retail inventories rose 1.3% in November, a possible indication of easing supply problems.

Metals and Mining

The gold market continues to be impacted by the inflationary trend, much like a double-edged sword. While inflation is expected to keep real interest rates low, increasing consumer prices are triggering increased speculation that the Federal Reserve will soon adopt aggressive measures to slow the economy. As the Fed aims to conclude its monthly bond purchases in March, this is also the month when markets anticipate seeing its first rate hike. While this may present some challenges for the precious metals market, there is currently still much bullish sentiment in gold and silver this early in 2022.

Over the past week, gold spot prices rose by 1.19%, from the previous week’s close at $1,796.55 to Friday’s $1,817.94 per troy ounce. Silver climbed 2.64% from $22.37 to $22.96 per troy ounce, and platinum also realized a 1.28% gain when it closed at $974.53 from $962.20 per troy ounce. Palladium bucked the trend of precious metals, ending lower by 2.77% when it began the week at $1.935.20 and ended it at $1,881.50 per troy ounce. Base metals were also mixed as copper ended the week 0.75% higher at $9.719.50 from $9,647.00 per metric tonne. Aluminum rose 2.13% from $2,914.50 to $2,976.50 per metric tonne. Tin gained 1.32%, closing the week at $40,351.00 from its start at $39.826.00 per metric tonne. Unlike the other base metals, Zinc closed lower by 0.34% to end the week at $3,521.00 from the earlier week’s $3.533.00 per metric tonne.

Energy and Oil

China announced that it would release crude from its Strategic Petroleum Reserve at about the Lunar New Year as part of the US-led initiative to bring runaway oil prices under control. Despite this news, there was little reaction in the oil market over the past week which largely ignored its implications. There is still a significant bullish sentiment in line with a weakening dollar, supply issues from Libya, and lower than expected output from OPEC+. Aside from these reasons, the oil price rally appears to have gained impetus in reaction to reports of multi-year lows among product inventories. At present, refineries are still cautious about bringing their production to full capacity. Stocks are unlikely to be met with quick replenishment, making the global situation quite bullish for oil prices. On Friday, the global benchmark price for Brent hovered at about $85 per barrel and WTI approached $83 per barrel.

Natural Gas

This report week ending January 12, natural gas spot price movements ended mixed. The Henry Hub spot price increased to $4.59 per million British thermal units (MMBtu) on the week’s end from $3.79/MMBtu the previous week. The U.S. total natural gas supply rose week-over-week due to higher net imports from Canada, while the U.S. consumption of natural gas also substantially increased across all sectors for the second straight report week. U.S. liquefied natural gas (LNG) exports increased slightly by one vessel during this report week over the week earlier. Elsewhere in the world, spot LNG prices in Asia proceeded to plummet this past week due to sufficient inventories and the above-average warm weather, slowing down buying activity. Delivery prices for March 2022 have already reached $25/MMBtu.

World Markets

European stocks retreated on speculation that the U.S. Federal Reserve is close to tightening monetary policy sooner than the market previously factored in. the pan-European STOXX Europe 600 Index closed the week lower by 1% in local currency terms. France’s CAC 40 Index lost 1.06%, Germany’s Xetra DAX Index slid 0.40%, and Italy’s FTSE MIB Index gave up 0.27%. Going in the other direction was the UK’s FTSE 100 Index which advanced 0.77%. The core eurozone bond yields pulled back, mimicking the U.S. Treasury yields. Peripheral eurozone bonds and UK gilts generally tracked the core markets. The decline in gild yields appeared to have been moderated by data showing better than anticipated economic growth in November in the UK. Elsewhere in the region, the Netherlands is poised to ease its nationwide COVID-19 lockdown beginning Saturday, according to local news sources. Establishments dealing in non-essential goods and services will be allowed to open, although a cap on customer numbers will be imposed. The self-isolation period for individuals testing positive for the coronavirus will be reduced in the UK, Switzerland, and Norway. Regarding the economy, the industrial output in the eurozone expanded 2.3% sequentially in November, well exceeding a consensus forecast of 0.5%.

In Japan, the stock market returns turned south for the week as the Nikkei 225 Index fell 1.24% and the broader TOPIX followed suit, losing 0.90%. The leading cause for the underperformance appeared to be investors’ worries about the U.S. Federal Reserve’s aggressive monetary policy tightening. This concern led investors to prefer value stocks rather than high-growth stocks, particularly technology counters. Investor confidence was also dampened by the extension of the ban by the Japanese government of nonresident foreigners’ entry into the country until the month’s end. There is also a possible sixth coronavirus wave likely to hit Tokyo, the country’s capital. The yield on the 10-year Japanese government bond (JGB) advanced to 0.15% from 0.12% in the week prior. The JGB yields broadly tracked the U.S. Treasury yields upward on concerns that the Fed may increase interest rates as soon as March in response to inflationary trends. This direction generally runs counter to the dovish signals by the Bank of Japan (BoJ) which continues to commit to monetary easing. The BoJ is not expected to raise its short-term interest rate in the near term. The rising JGB yields boosted the yen, strengthening it to JPY113.8 from the previous week’s JPY 115.6 against the U.S. dollar.

Chinese markets also followed Japan downwards during the week, with the Shanghai Composite Index losing 1.6% and the CSI 300 Index retreating 2% on the back of refinancing challenges faced by the country’s property sector. The largest banks have increasingly become more selective regarding the funding of real estate projects by local government financing vehicles. Some developers rushed to acquire the consent of their creditors for maturing extensions and exchange offers. Other developers have pursued more intensive fundraising campaigns since more traditional financing routes such as presales have become unsustainable. Yields on China’s 10-year government bonds dropped to 2.809% from the previous week’s 2.837%. The yuan closed in domestic trading at RMB 6.3435 per U.S. dollar, from the earlier week’s RMB 6.376. This was the currency’s strongest close since May 2018.   

The Week Ahead

The LEI index, building permits and housing starts are among the important economic data being released this week.

Key Topics to Watch

• Empire State manufacturing index
• NAHB home builders index
• Building permits (SAAR)
• Housing starts (SAAR)
• Philadelphia Fed manufacturing survey
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Existing home sales (SAAR)
• Leading economic indicators

Markets Index Wrap Up

Stock Markets

The stock markets started off the year with an impressive rotation where growth sectors, including technology and discretionary stocks experienced a sell-off while the value sectors such as energy and financials held steady. Overall, stock prices descended from their record highs at the start of the week’s trading. Simultaneously, longer-term bond yields ascended. The growth and technology stocks, particularly the Nasdaq Composite, reacted adversely to expectations of higher interest rates. The increase in the implied discount on future earnings caused the Nasdaq Composite to plummet to its biggest weekly loss in almost a year. Within the S&P 500 Index, the technology and health care shares suffered the most, whereas the energy shares surged upward due to the rise of domestic oil priced toward the $80 per barrel level. Financial stocks also outperformed the rest of the market.

Although the S&P 500 climbed to a new high on Monday, only five of its 11 sectors realized any gains. Tesla accounted for most of the gains due to having reported more fourth-quarter deliveries than expected. Heavy-weight stocks accounted for most of the S&P’s outperformance because without the gains recorded by Tesla, Apple, and Amazon.com, all mega-caps in the index, the S&P 500 would have been unchanged for the day. The stellar performance on Monday notwithstanding, investor sentiment headed south on Wednesday after the release of the minutes of the Federal Reserve’s meeting held on mid-December. The minutes disclosed that faster and more aggressive increases in the interest rates are contemplated by the policy-makers, with the first quarter-point hike in the official rate to be announced by March.

U.S. Economy

The 10-year Treasury yields rose by 0.40 percentage points over the past week, reaching around 1.75%. The rise in yields commenced early in the week, but it was enhanced when the Federal Reserve released its minutes on Wednesday. The minutes implied that not only was the Fed contemplating speeding up its balance-sheet tapering process, but it was also allowing the balance sheet roll-over and decline earlier than previously anticipated. The market was surprised by the possible sudden liquidity drop in the system, especially in areas with higher valuations. The move reduced the margin for speculative assets in the new environment.

The recent unemployment rate appears to be improving and getting near the natural rate of unemployment set by the FOMC. There appears, however, some underlying concerns by the Fed as to whether the recovery will be broad and inclusive (to bring down the elevated levels of the Hispanic and African American unemployment rates), the participation rate will pick up, and the effects of coronavirus uncertainty on labor. Given these concerns, the Fed cannot possibly conclude that the labor market is in the clear, and therefore might not want to aggressively restrict monetary conditions unless more conclusive labor data emerges.

When the Fed meeting took place on mid-December, it is important to note that the extent of the omicron spread was not yet factored in. Due to recent developments, there are indications that consumption may have slowed, as travel and leisure activities have decreased in reaction to the spread of the variant in the U.S. It is less likely that the Federal Reserve will be included to adopt more aggressive measures in light of the slowing economy and elevated virus impacts.

Metals and Mining

On Friday, gold prices moved up from their three-week lows, in reaction to slower-than-expected U.S. jobs growth data for last month. This was despite the Federal Rate signaling faster rate hikes that initially set gold up for a weekly fall. Gold prices are highly sensitive to rising U.S. interest rates, which tends to increase the opportunity cost of holding a non-yielding asset such as bullion. The reaction of gold prices implies that the market is more concerned about the coming inflation risks prior to the FOMC meeting. Surging COVID-19 infections also appear to take its toll on investor optimism about economic recovery.

The spot price of gold dipped this week by 1.78% from $1,829.20 to $1,796.55 per troy ounce, The spot price of silver also fell this week by 4.03%, from $23.31 to $22.37 per troy ounce.  Platinum slid 0.68% from $968.75 to $962.20 per troy ounce, and palladium gained slightly by 1.59% from $1,904.84 to $1,935.20 per troy ounce. Base metals were also mixed for the week. Copper lost by 0.76%, dipping from $9,720.50 to $9,647.00 per metric tonne. Zinc pulled back 0.03% to close at $3,533.00 from the earlier week’s $3,534.00 per metric tonne. Aluminum, on the other hand, gained 3.81% from $2,807.50 to $2,914.50 per metric tonne. Finally, tin rose by 2.49%, from the previous week’s $38,860.00 to this week’s close at $39,826.00 per metric tonne.

Energy and Oil

Positioning for their largest weekly gain in three weeks is oil prices. Protests that have taken place in Kazakhstan have highlighted the fragile crude supply situation. The uncertainty of the immediate impact of the riots has pushed Brent prices significantly higher than the $80 per barrel level, even if the actual results of the unrest are difficult to estimate. Supply disruptions appear to be firmly on the table, considering that Libya is not likely to resolve its political dilemma anytime in the near future. It will most likely keep one-third of its nominal output frozen for an extended period. The rising crude prices are progressively reflecting the current oil production constraints, with Russian crude production stagnating for the last two months already.

Natural Gas

In recent days, the liquefied natural gas prices have surged in reaction to the lifting of price caps by the Kazakh government on the first of January. This sparked the initial demonstrations in a remote oil town on the coast of the Caspian Sea. The town is located in the oil-rich Mangistau region that provides roughly 25% of the country’s oil production. Uncertainties linked to this location will certainly impact natural gas prices in the region and possibly the world.

In the closing weeks of 2021, natural gas deliveries to the U.S. liquefied natural gas export terminals reached record levels. As the LNG facilities increased production to meet the surging demand in Asia and Europe, natural gas deliveries averaged 11.8 billion cubic feet per day (bcf/d) in December.

World Markets

European shares corrected downwards in light of concerns that the central banks are likely to wind down asset purchases and increase interest rates at an accelerated pace to control rising inflation. The pan-European STOXX Europe 600 Index closed the week 0.32% lower, although the main equity indexes in Germany, Italy, and France realized subtle gains. The FTSE 100 Index in the U.K. rose by 1.36% on the back of a rally by banks and energy stocks, involving industries where some of the largest capitalized stocks are included. The core eurozone bonds rose in tandem with the U.S. Treasury yields The minutes of the Federal Reserve’s meeting in mid-December indicated that a faster pace of rate hikes is needed. This resulted in a broad sell-off in developed market government bonds. Core yields surged on Friday in speculation of the rise in eurozone inflation data. UK gilt yields followed tracked core markets. The peripheral eurozone bond yields also increased as part of the global sell-off, although it faced additional upward pressure from reports of new supply in Italy. Furthermore, the coronavirus infections in Europe reached record levels, forcing countries to reimpose COVID restrictions although they fell short of instituting lockdowns.

Japan’s stock exchanges ended mixed for the week. The Nikkei 225 Index dipped 1.09% and the broader TOPIX Index advanced 0.17%. On the coronavirus front, the government placed three prefectures under quasi-states of emergency due to rising COVID-19 cases. Restrictions were returned for the first time since September 2021. Regarding monetary policy tightening by the Federal Reserve, worries about more aggressive measures announced by the Fed weighed down the prices of technology and other growth stocks. The yield on the Japanese 10-year government bond climbed to 0.14% from 0.07% at the close of the week earlier. This tracked the general rise in bond yields, holding around the high levels seen in April 2021. The yen weakened against the dollar to approximately JPY115.83 from the previous week’s close at JPY 115.11. Continuing weakness in the yen due mainly to the divergent monetary policy stance of the Bank of Japan compelled the Japanese Finance Minister to underscore the need for currency stability and the careful tracking of market movements that impact the economy.

In China, stocks ended lower for the week, with the CSI 300 Index descending 2.3% and the Shanghai Composite Index losing 1.7%. Causes may be traced mainly to the turmoil in the property sector and the more restrictive measures announced by the Federal Reserve in the middle of the week. The yield on China’s 10-year government bonds climbed to 2.837% from the 2.793% one week earlier, as investors factored in a reduced yield premium between China and the U.S. In currencies, the yuan weakened against the dollar in its largest weekly drop since the middle of September, reflecting the anticipated U.S. monetary tightening. The Chinese currency fell to a three-week low of 6.3832 against the U.S. dollar before it recovered to 6.376.

The Week Ahead

The PMI index and hourly earnings growth are among the important economic data to be released in the coming week.

Key Topics to Watch

• Wholesale inventories (revision)
• NFIB small-business index
• Consumer price index
• Core CPI
• Federal budget
• Beige book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Producer price index
• Retail sales
• Retail sales excluding autos
• Import price index
• Industrial production
• Capacity utilization
• UMich consumer sentiment index (preliminary)
• Business inventories

Markets Index Wrap Up

Stock Markets

The major stock indexes generally ended on a strong note on the back of a Santa Claus rally, suggesting that the gains for the week are technical year-end seasonal moves. The broad S&P 500 Index ended on a record high although the technology-based Nasdaq Composite moved sideways and closed the week flat. Trading activity was light as many investors remained sidelined, with S&P 500 volumes remaining at less than half their recent averages. The sectors that outperformed were the materials, utilities, and real estate sectors within the S&P 500. Those that underperformed were the larger information technology and communication services sectors, which when combined accounted for more than one-third of the S&P 500 Index. Investors appeared to shrug off the rising number of coronavirus cases, indicating that fears of a resurgence is waning. Hospitalization rates remained stable and the Centers for Disease Control and Prevention (CDC) on Wednesday shortened the recommended quarantine period for asymptomatic individuals who have tested positive for the virus, from ten days to only five days. However, flight cancellations and declines in airline stocks led to the cancellation of several flights.   

U.S. Economy

In the face of the threat of the omicron virus, consumers proved resilient and economic activity appeared only moderately affected. Weekly jobless claims were reduced close to their fifty-year low while continuing claims drew back more than was expected, touching the lowest level since the pandemic began. Also showing accelerated growth was an index of manufacturing activity in the Mid-Atlantic region. Pending home sales, however, bucked the trend and ended on the downside, apparently due to high prices and limited inventory disincentivizing buyers.

 It appears, though, that customers were motivated to spend on goods, if not on housing and durables. MasterCard’s compiled data indicated that holiday sales increased by 8.5% in December as compared to year-ago figures, recording the most impressive gains in the last 17 years. Sales exceeded pre-pandemic 2019 levels by as much as 10.7%. These data are indicative of easing supply and labor shortages for retailers and enabling them to pass the higher costs to customers. While retail stocks did well as a result of the indicators, the consumer discretionary sector was weighed down as a whole by declines in Amazon.com and casino and cruise ship operators. The latter was a result of a Thursday CDC advisory against cruise ship travel, even for those who are fully vaccinated.

Concerning U.S. Treasury yields, technical factors caused a modest rise in rates, characterized by light trading volumes during a week of few economic data released during the week. The 10-year U.S. Treasury note yield rose to 1.55% on Wednesday, an intramonth high. It retreated to approximately 1.50% by Friday morning, consistent with the trend for rates to generally correct from their increases earlier in the week.

Looking back at the year, there is reason to expect a continuation of the overall robust performance going into the new year. On many fronts, 2021 showed above-average performance for the economy. Stock market returns, economic growth, policy stimulus, and inflation performed strongly even as volatility remained well under control. The coming year will see a moderation in economic growth and market performance, however, as Federal Reserve policy settings and economic trends assume greater consistency with mid-cycle conditions. All-in-all, the gains over the past year still suggest that the coming year will be optimistic.

Metals and Mining

As of December 31, 2021, gold prices suffered their deepest annual drop in the last six years. In the face of a strengthening dollar, the investors are anticipating a year of tightening money supply in the face of the resurgent omicron coronavirus variant. Indicators point to an acceleration of the adoption of more restrictive measures by central banks. This is necessary to mop up the massive liquidity released during the pandemic to jump-start the economy. As the recovering economy whetted investors’ appetites towards riskier assets and curbed interest rates for safe-haven assets such as bullion, gold prices have eased around 4% in 2021. While bullion is regarded as a hedge against inflation that typically follows the release of stimulus money, rising interest rates will amount to growing opportunity costs of investing in gold, since precious metals bear no interest income.

Over the past week, the spot price of gold moved up 1.5%, from $1,810.26 per troy ounce to $1,829.20. Silver also rose, ending the week at $23.31 per troy ounce from the previous close at $22.87 for an increase of 1.92%. Not all precious metals fared well during the week, however. Platinum lost 1.26% when it closed at $968.75 per troy ounce from a previous $981.10. Palladium fell 2.23% from $1,948/32 to $1.904.84 per troy ounce.

Base metals also went sideways in directionless trading. The power shortage in China and Europe impacted aluminum prices, driving them up 40% for a second consecutive year of gains. For the coming year, base metals are expected to outperform based on demand-driven by energy transition in a supply-chain-bottleneck situation. Copper was up by 21% across 2021. It is expected to expand further in the coming year as a result of governments’ willingness to prioritize clean energy. For the week, copper gained 1.13% and zinc rose 0.20%, while aluminum and tin each lost ground by 1.35% and 0.10% respectively.

Energy and Oil

As the impact of the omicron variant continues to influence the global oil demand, the oil markets are positioned to see a strong end to 2021. Supply disruptions across several continents pushed oil prices to higher levels. Libya continues to withhold 300,000 barrels per day (b/d) from the market due to the resumption of political infighting. Ecuador is still in the process of repairing its pipeline system damaged in the floods. Nigeria is also dealing with unavoidable problems at the Forcados Terminal. These developments combined with news that U.S. crude inventories are facing another week-on-week decline, brought the WTI to $76.5 per barrel and the Brent complex rose to $79.5 per barrel.    

Natural Gas

 A severe power crunch swept across Europe to India and China in the past year due to record coal and natural gas prices. At the same time, Asian liquefied natural gas (LNG) rose more than 200% and the region’s benchmark coal prices grew 100%. Researchers determined that global LNG increased by 20 million tonnes per year in 2021, driven almost entirely by Asian demand. Chinese growth in LNG demand surged to 20%, making China overtake Japan as the world’s top LNG importer. This appears to be unsustainable, however, as constantly high LNG spot prices will possibly tend to dampen overall growth in demand, particularly in South and Southeast Asia as they are more price-sensitive markets.  

World Markets

In Europe, share prices rose on thin-volume trading as worries about the impact of the omicron variant abated and investor optimism regarding the continued economic recovery solidified. In terms of the local currency, the pan-European STOXX Europe 600 Index closed the week with a gain of 1.09% for an annual surge of 22.0%. The major indexes also rose as the UK, France, and Italy ended near their highest levels for the year. Germany’s Xetra DAX Index climbed by 0.82% week-on-week, France’s CAC 40 rose 0,94%, and Italy’s FTSE MIB gained 1.22%. UK’s FTSE 100 Index moved sideways with hardly any change. The surge in coronavirus cases across most of Europe approached record levels. Tighter measures were reinstated in France, the U.K., Italy, Portugal, Denmark, and Greece, to head off an anticipated increase in the spread of the virus during the New Year festivities. The omicron is now the dominant strain in Portugal, for which reason work from home will become mandatory in that country come January. In France, the work from home mandate will cover three days a week, while in the U.K. any further mandates have been held off pending an assessment of the impact on that country’s hospital care capacity before additional measures are adopted.

Japan’s stock markets were quiet over the holiday-shortened trading week, with the Nikkei 225 Index gaining a slim 0.03% and the broader TOPIX rising by 0.28%. As with the other markets, the spread of the omicron coronavirus variant through community transmission posed a disincentive to establishing a stronger presence in the market. Despite the suspension of the entry of foreigners into the country, the continued spread of the virus does not appear to be contained. Comparatively, the total number of cases does remain small when set against the fifth wave that caused the government to declare states of emergency in different territories in the country. The yield on the 10-year Japanese government bond rose to 0.07% from 0.06% during the week before. In the currencies market, the yen fell against the dollar to around JPY 115.1 from the earlier weeks’ JPY 114.4.

In China, 2021 was a year of volatility although the week ended with modest losses for the bourses. The large-cap CSI 300 Index slid 0.2% while the Shanghai Composite Index declined 0.1%. Investor sentiment was boosted somewhat by the positive manufacturing data and encouraging comments by Chinese officials regarding the country’s struggling property sector. On an annual basis, the CSI 300 Index lost by 5.2%, its worst performance over the last three years. The Shanghai Composite Index gained 4.8%, while in Hong Kong, the benchmark Hang Seng Index fell by 14%, its worst showing in ten years. The Hang Seng China Enterprise Index plunged 23% over the last year. The yield on the 10-year Chinese government bond dipped to 2.793% from the earlier week’s 2.846% and a deep descent from the 3.19% yield at the end of 2020. However, the yuan strengthened against the dollar to 6.3672 from the previous week’s 6.3709. The Chinese currency chalked up an impressive performance as the best in the region for the year, with a gain of 2% compared to the other Asian currencies which recorded losses.

The Week Ahead

Among the important data to be released in the coming week are the Consumer Credit, Unemployment rate, and Job openings reports

Key Topics to Watch

• Markit manufacturing PMI (final)
• Construction spending
• ISM manufacturing index
• Job openings
• Job quits
• ADP employment report
• Markit services PMI
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Trade deficit
• ISM services index
• Factory orders
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Consumer credit

Markets Index Wrap Up