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First Plus Market Update 2H January 2022

2H January Global Market Recap

 

16th January 2022 – 31st January 2022

FULL REPORT ACCESS LINK: First Plus Market Update 2H January 2022

Macro:

The U.S. economy advanced at a 6.9% annual rate in the fourth quarter and 5.5% in the year of 2021, the fastest growth rate since 1984, mainly driven by private inventory build. Durable-goods orders in the U.S. fell 0.9% in December, the largest drop since the 2020 slump and below the consensus of a 0.5% drop. On January 26, Federal Reserve Chair Powell declined to rule out raising interest rate at every policy meeting this year and reaffirmed plans to end its bond purchases to battle inflation. The market now priced in four to five quarter-point rate hikes in 2022 and expects it could happen as soon as the March meeting.

In China, both the manufacturing and service sectors grew at a slower pace in January. The official manufacturing PMI fell to 50.1, partly due to production pause of some factories during the Lunar New Year holidays. The government’s order to limit steel output to prevent air pollution ahead of the Winter Olympics also impacted manufacturing activities. The official non-manufacturing PMI was 51.1 in January, down from 52.7 in December, as China deals with a resurgence of COVID-19 outbreaks, which are affecting consumer confidence.

 

Stocks:

The U.S. stock markets have been notably volatile recently as investors are worried that the Fed might tighten policy considerably more than predicted. We expect markets to remain choppy as the Fed withdraws stimulus programs that have lifted the stock markets since March 2020. In January, the blue-chip S&P 500 index plummeted 7%. The Nasdaq Composite index, which is heavily weighted toward technology stocks, fell 12%, while the Dow fell 5%.

The A-share market remained weak after a two-week selloff in the first half of the month. Both the CSI 300 and the SHCOMP fell 7.6% and the ChiNext Index plunged 12.5% in January. The market turnover dropped slightly from previous highs, with a daily average of Rmb920 billion in the second half of the month.

 

Rates:

The 10-year U.S. treasury yield increased by 39bps in the month as the Federal Reserve policymakers say they will likely raise interest rates in the March 15th to 16th meeting. The Bank of England (BOE) is expected to impose back-to-back rate hikes for the first time since 2004. The market is expecting the base rate to increase from 0.25% to 0.5%, with the likelihood that at least two more increases would follow during 2022. Investors are betting that persistently high inflation will force the European Central Bank (ECB) to raise interest rate more than once this year. The People’s Bank of China (PBoC) cut the one-year loan prime rate (LPR) from 3.8% to 3.7% and the five-year LPR from 4.65% to 4.6% and the market is expecting the PBoC to cut interest rates further and reduce the reserve requirement ratio in the coming months.

 

Credit:

The US investment-grade bond market is expected to suffer its worst January on record for total returns, as concerns about rate hikes sparked worries the US central bank would drain the ample liquidity that has supported corporate credit. China’s central bank has pledged to use more monetary policy tools to spur the economy and drive credit expansion, sending its clearest signal yet of an easing bias to boost market confidence. Debt levels among China’s local government financing vehicles (LGFVs) are an issue of growing concern for authorities and Beijing has begun tightening bond issuance criteria for LGFVs and ordered local governments to clear existing credit by 2028.

 

FX:

The Dollar Index rose by 0.9% in the month, reaching levels last seen in July 2020 as the Federal Reserve said it could deliver faster and larger interest rate hikes in the months ahead. The Chinese Yuan remains resilient despite the strengthening of the Dollar. The AUD fell by 2.7% as the Reserve Bank of Australia (RBA) pushed back against expectations for near-term rate hikes until inflation is higher. China’s official digital yuan app, e-CNY, had 261 million unique users at the end of 2021, nearly twice what it had in October.

 

Commodities:

Brent and WTI crude oil prices rose by 17.3% and 17.2% as rising tensions between Russia and Ukraine, together with supply disruptions and rising demand led to the surge in oil prices. US natural gas prices rose by 31.4% as cold weather in many parts of the US boosted demand and the Russia-Ukraine conflict spooked the market into fearing disruptions to the flow of natural gas from Russia to Europe. US Gasoline prices rose by 14.6% as well on the back of the rise in crude oil prices. Commodity prices continues to surge with the CoreCommodity CRB Index gaining 9.8% in the month, with these levels last seen at the end of 2014.