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Market Report: Stock sell off as rate hike worries surge and fresh volatility expected
| LONDON (Capital Markets in Africa): Investors are waking up to a stark realisation that the Fed’s work is not done, and that interest rates may have to be hiked even higher to cool hot inflation. Wave of exuberance, which have propelled equities higher since the start of the year, have turned into tides of disappointment and apprehension about the difficulties that still may lie ahead for the mighty US economy. High hopes that the Federal Reserve could cut rates by the end of the year have been dashed, replaced by worries that up to three hikes in quick succession may be needed to tame the price spiral. The decision by the Reserve Bank of New Zealand to hike rates to a 14-year high of 4.75%, with warnings of more to come, highlights the extent to which inflation is still a thorn in the side of many economies across the world. Stocks shed 2% on the S&P 500 with the sell-off extending into trade in Asia, with the Nikkei also down 1.3%, the Shanghai Composite 4% lower and the Hang Seng in Hong Kong down 0.3%. Volatility is set to continue at least until central banks tightening monetary policy press the pause button on rate rises.
Fears about potential escalation of the Ukraine war, which were background noise, have been amplified after Russia ripped up the remaining nuclear treaty, ahead of the anniversary of the invasion. The Vix index, dubbed the ‘fear gauge’, which assesses volatility potential, rose above 23, to the highest level since early January. This is an indication that traders expect greater fluctuations on the S&P 500 over the next month. The pound has slipped a little against the dollar but has largely hung on to yesterday’s gains, hovering above $1.21, after a slightly rosier picture emerged about company resilience. The more conciliatory tone the UK government has taken in negotiations with striking public sector workers may also help support sterling going forward, given that it’s so sensitive to investor sentiment. With inflation starting to fall, but the government also having more money in the coffers with tax receipts for January surprising on the upside, there could be more room for compromise. Although the strikes haven’t had a big impact on spending patterns, with consumers finding a way round the disruption, there are still some lingering worries about the hit to productivity if the walkouts continue. Commodity stocks have already been under pressure this week and Rio Tinto’s results showing the extent to which China’s lockdowns ate into demand for iron ore has seen its share price slip. . Rio posted a 37.9% drop in annual profit and halved the dividend. The company has also been grappling with higher labour costs and the spikes in energy prices. But the dip could be short-lived given that iron ore prices are climbing sharply, surging to eight-month highs. It’s clearly been affected by short term headwinds, but as China’s economy reopens, after the relaxation of the zero-Covid policy and infections subside, demand for steel is expected to rebound. Looking further ahead the company’s pivot towards metals which contribute to the green shift and the EV revolution should make it resilient over the longer term. On Wall Street, Walmart was a ray of light in a pretty dismal day. Margins will clearly be hit as shoppers increasingly sniff out bargains and the company copes with hikes from suppliers who are passing on the unwelcome effects of high input price. But its value proposition still puts it in good stead in terms of market share and if new cautious customers can be persuaded to hang around once inflationary pressures subside, there could be longer term benefits from short-term pain. Susannah Streeter, head of money and markets, Hargreaves Lansdown |