Turbulence!

Ladies and gentlemen, please fasten your seatbelts: we are currently experiencing turbulence. A glance at the Bloomberg terminal is enough to realise that we are in a risk-off period. Here are some examples in several markets.

On equities to begin with: the VIX index, nicknamed the ‘fear index’ and which measures volatility, has doubled in ten days and reached a high not seen since November 2020. After a largely positive year in 2021, the world’s stock markets are down since the beginning of the year: the SMI, the Euro Stoxx 50, the S&P500 and the Nasdaq have fallen 7%, 5%, 9% and 13%, respectively.

The beginning of the week was turbulent, with Monday in particular being an extremely volatile day: the main European stock markets closed in the red and while the Nasdaq lost 4.9% in the middle of the session, and then finished in the green after a comeback not seen since 2008. The following day, the European markets followed the lead of the United States and rebounded, driven in particular by the surprise improvement in business sentiment in Germany. From a sectoral point of view, we note that technology stocks are being particularly affected by inflation concerns. In some cases, the movements have been drastic:  Netflix, for example, has lost 50% of its value in two months (and 20% in a single day) as new subscriptions have declined. Some investment funds specialising in so-called ‘disruptive’ technology stocks – which have performed impressively in previous years – are now experiencing year-on-year declines of 50% and are attracting short sellers.

The bearish equity market is being fuelled by concerns that central banks will tighten monetary policy more firmly than expected to counter inflation. At the moment many companies are releasing their fourth quarter results. We are waiting for Tesla and Apple in particular to see if tech can get a second wind. Last night, Microsoft reported better-than-expected results with a strong performance in the cloud sector.

On the commodities side, US oil is at $85 per barrel. Oil prices have also been volatile this week with profit taking occurring in tandem with the fall in equity markets and then rebounding in the last two days. The factors guiding the price evolution are still the same: the Russia-Ukraine tensions as well as the attacks in the United Arab Emirates are stoking fears of a tightening of the supply. OPEC+ is also struggling to meet its production increase targets. ‘It is not easy to restart production after a well has been shut down’, said Pavel Zavalny, head of the Energy Committee in the lower house of the Russian parliament.

The ounce of gold, thanks to its safe-haven status, briefly passed the $1,850 mark before falling back slightly. It thus hit a two-month high which also corresponds to a technical resistance. Despite an environment conducive to a fallback to safe-haven assets, gold did not go higher as investors preferred to remain cautious ahead of the Fed meeting.

On the currency side, safe havens are in demand. The dollar continues to appreciate. The euro-dollar exchange rate, which was 1.1480 a little less than two weeks ago, has fallen back below 1.13. The DXY index, which measures the strength of the greenback against a basket of currencies, is almost at its highest level since the beginning of the year. The Swiss Franc also continues to rise, having reached its highest level against the single currency since 2015 (1.03). The Japanese yen is also in demand: one dollar now buys JPY 113, compared to JPY 116 at the beginning of the year. Conversely, the pound is suffering from poor economic figures in the UK and the ‘Partygate’ scandal which is destabilising the government. The rouble is trending downwards, despite high oil prices. It is paying the price for the geopolitical tensions with Ukraine: it is now almost 90 roubles for a euro and just under 80 for a dollar. It should be noted that the Russian stock market has also fallen by 15% since the beginning of the year. Cryptocurrencies have crashed again: Bitcoin has lost 50% in three months and other tokens are falling even more. This is due to the prospect of rate hikes, increasing regulatory pressure in the US and the risk of a mining and trading ban in Russia.

Today we are waiting for news from the US and Canadian central banks. The Fed is not expected to touch its monetary policy at this meeting but could warn of a first rate hike in March, and with it the end of quantitative easing. Observers will be looking for indications of the pace and extent of monetary tightening to come. Of course, in the long run, normalisation will depend on how inflation moves in the coming months. For the Bank of Canada (BOC), the situation is much the same except that the first hike could take place today. It is worth noting that yesterday the Hungarian central bank decided to increase its key rate by 50 basis points to 2.90%, a jump not seen since 2011. Monetary tightening in Hungary began in the middle of last year and inflation stood at 7.4% year-on-year in December.