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The Cambridge Weekly – 07 February 2022

The Lagarde pivot hits insecure markets

We made the case last month that we disagree with the market maxim that “How January goes, so goes the year”, at least for 2022. After a disappointing January for investors (see our January market review), February made a promising start, only to revert to last month’s wild down and up trading pattern towards the end of last week. This was despite the week not having been dominated by the US Federal Reserve (Fed) or Russian manoeuvres (admittedly Boris Johnson was still big news – but only in the UK).

January 2022: Capital market returns review

January was a difficult month for global equity markets, which declined 4.0% for £-Sterling investors, on the back of expectations of further tightening of monetary policy and geopolitical tensions. The US equity market returned -4.3% for the month. The US technology sector significantly lagged other markets, down 8.1% following uncertainty over the valuations of growth stocks.

UK leads the monetary tightening charge

In the UK, last week saw policymakers launching a coordinated offensive against surging prices. Andrew Bailey, Governor of the Bank of England (BoE) led the front line on Thursday, announcing the decision to raise interest rates by 0.25% to 0.5%. It marked the BoE’s first back-to-back rate hikes since 2004, and officials do not plan on stopping there. The entire Monetary Policy Committee (MPC) stressed the need for “further modest tightening […] in the coming months”. While the BoE looks to fight inflation head-on, the Treasury will tend to the wounded. To offset the cost-of-living crisis hitting households, Chancellor Rishi Sunak promised £9 billion toward energy prices, including a £200 government financed electricity ‘discount’ (repayable over four years) and a £150 council tax rebate for 80% of English homes.

Tech stocks brought back to (virtual) reality

The last two years have been good to America’s technology giants, but last week’s market action had a ring of ‘the bigger they are, the harder they fall’. Meta, formerly known as Facebook, plunged 25% in stock market trading on Wednesday afternoon. Chief executive Mark Zuckerberg warned investors that the current quarter would probably be Meta’s worst on record, prompted by competition from TikTok and a prolonged slowdown in user growth – culminating in the first-ever drop in active users. The plunge in value meant $200 billion was knocked off the company’s market capitalisation in a single trading session – the most any company has lost in one sitting.

 

Read the full commentary here

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