Inflation runs hotter

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Markets struggled to find direction last week as investors digested another red hot inflation report, threats of a new Cold War and fourth-quarter corporate earnings reports.

The FTSE 100 (+2.2%) was one of the strongest performers, followed by the Euro Stoxx 50 (+1.5%), whilst US stocks whipsawed between gains and losses – the S&P 500 declined 0.2%.

Wall Street banks Citigroup and JPMorgan Chase got the quarterly earnings season off to a shaky start and pulled the Dow Jones 200 points lower in Friday’s trading session.

Citigroup’s fourth-quarter profit declined by 26% due to restructuring costs, including USD 1.1 billion in after-tax expenses to divest its overseas consumer banking businesses, and although JPMorgan reported record full-year earnings of USD 48.3 billion, management warned costs will jump in the year ahead. Bank stocks have been strong beneficiaries of expectations of higher interest rates which boost net interest margins.

US consumer prices increased 7% from a year earlier in December, the fastest pace since June 1982, fuelled by higher accommodation, food and used-vehicle costs.

Central banks spent much of last year insisting inflation is transitory and will ease once pandemic-related disruptions fade but the narrative has changed and the Federal Reserve is scrambling to regain control of its price stability mandate.

At last week’s Senate confirmation hearing, Fed Chair Jay Powell acknowledged high inflation is a “severe threat” to jobs and futures markets are pricing in four US interest rate hikes for this year.

Emergency central bank stimulus and safe haven flows swelled the global aggregate amount of negative-yielding bonds to more than USD 18 trillion in December 2020, shortly after the Delta Covid variant emerged, but higher inflation and interest rate expectations has triggered a sharp reversal in recent weeks.

In mid-December 2021, the figure was still more than USD 14 trillion but outflows, focussed mainly on high-grade government bonds, pushed the amount of bonds with sub-zero yields below USD 10 trillion for the first time since April 2020.

Energy markets are on a tear in the early weeks of 2022. European natural gas prices are trading back towards record highs as fears mount that Russia will attack Ukraine and Brent Crude climbed to a more than 7-year high of USD 86 a barrel.

Members of the Opec+ group, which includes Saudi Arabia, Iran and Russia, have thus far resisted calls from President Biden to ramp up production.

Concerns over Omicron, inflation and interest rate hikes have weighed on cryptocurrencies and Bitcoin is now almost 40% lower than its all-time high reached in mid-November. However, the fallout hasn’t dampened the enthusiasm of some high profile backers, including Twitter and Block co-founder Jack Dorsey. Last week he revealed Block is building an open Bitcoin mining system and posted a job listing on Linkedin for an expert to lead the project.

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