A volatile start to 2022

Bears

Widespread declines in January

Leading equity markets generally fell during January amid concerns over the prospect of higher interest rates in the US, the impact of the Omicron variant, and mounting tensions between Russia and Ukraine. The Vix Index – which tracks expectations of future volatility – rose to its highest level in over a year.

IMF cuts its growth forecasts

The International Monetary Fund (IMF) expects global economic growth to drop from 5.9% in 2021 to 4.4% in 2022, citing the inflationary impact of higher energy prices, disrupted supply chains, and rising wage demands. The IMF cut its forecast for US growth from 5.2% to 4% – having stripped out the impact of President Biden’s stalled “Build Back Better” fiscal policy package from its previous forecast – and reduced its forecast for China from 5.6% to 4.8%, citing the effects of slowing private consumption and disruption to the country’s real estate sector.

Hawks circling in the US

Following a hawkish statement from the Federal Reserve (Fed) saying that an increase would “soon be appropriate”, Fed officials are widely expected to raise the key federal funds rate in March. Consumer prices increased at an annualised rate of 7% during December, fuelled by higher costs for housing, food and cars and representing their fastest growth since June 1982. The Dow Jones Industrial Average Index fell by 3.3%

Prices continue to rise in Europe

The eurozone’s economy expanded by 5.2% during 2021 as a whole; however, the rate of growth flagged towards the end of the year, hampered by mounting inflationary pressures, supply chain problems, and the impact of Omicron. The eurozone’s rate of inflation reached 5% year on year in December; energy prices posted an annualised increase of 25.9% during the month. President of the European Central Bank (ECB) Christine Lagarde expects inflationary drivers to ease during 2022 but reiterated the ECB’s intention to “take any measures necessary” to deliver on its medium-term inflation target of 2%. The Dax Index fell by 2.6% over the month.

No sign of tightening in Japan

The Bank of Japan (BoJ) increased its inflation forecast for the next fiscal year from 0.9% to 1.1% but BoJ Governor Haruhiko Kuroda commented: “We are absolutely not thinking about raising rates or modifying our easy monetary policy”. Over January as a whole, the Nikkei 225 Index fell by 6.2%.