Investors fret over Fed’s hawkish comments

Blog
Friday 28th January 2022

Investors fret over Fed’s hawkish comments

Blog
Friday 28th January 2022
Written by Chris Lioutas

Markets:

  • Equity markets were mixed this week, with Australian and Asian equities showing the most weakness, as global investors sought out safety across equities and currencies.
  • A UK court approved BHP’s plan to exchange its UK shares for Australian ones as it consolidates on the ASX. The move will see BHP’s index weight increase significantly from its current weighting.
  • Serbia has revoked Rio Tinto’s lithium exploration licenses, bowing to protestors who opposed the project on environment grounds. The project is worth about US$2.4 billion with the lithium deposits very close to Europe’s manufacturing and electric vehicle epicentre. It wasn’t all bad for Rio, with the company and its partners in Mongolia agreeing to terms to start work at a US$7 billion copper mine.
  • Oil prices rose this week as Ukraine / Russia tensions boiled over into the oil and gas market. A strong rise in the US dollar also impacted oil prices for the week. Attention now turns to the February 2 OPEC+ meeting where the group of oil exporting countries are likely to stick with a planned rise in their oil output target for March.
  • The Aussie dollar flirted with dropping below the US70c mark this week as the US dollar soared on hawkish US central bank comments regarding their pressing need to fight off inflation.

Economics:

  • Australian headline inflation rose by 1.3% in the December quarter, with the annual rate lifting to 3.5%. Transport (fuel), clothing, housing, and recreation drove the increase. The central bank’s preferred inflation measure increased by 1% in the quarter, well above the bank’s and consensus forecasts, to see the annual rate move up to 2.6%, well within the bank’s 2-3% target range. This print will put additional pressure on the bank regarding their current policy path, however, wages growth remains too weak for any serious policy reversal. One to watch.
  • New lending for housing lifted in the final months of 2021. However, higher fixed rates, as banks increased rates to cover their higher funding costs, saw the share of fixed rate lending fall particularly for owner occupiers. Lending for household goods and holidays picked up over the same period.
  • Australian goods export prices rose by 3.5% in the 4th quarter whilst goods import prices rose 5.8%, which will see terms of trade record a fall in the quarter and hence detract from economic growth. The strongest price rises on the import side came from fuel and fertiliser, whilst the export side was hit by falling iron ore prices but supported by strong rises in coal and LNG export prices.
  • The US central bank said it will soon be appropriate for it to raise its benchmark interest rate striking a fairly hawkish tone on fighting inflation. The bank decided to continue to reduce the monthly pace of its asset purchases (ie. money printing) which will see it end in early March. This gives the central bank an earlier start date to start raising rates, which may put them on track for 2-4 rate rises in 2022. Worth noting that headline inflation is running at 7% in the US currently.
  • The US economy grew at an annualised rate of 6.9% in the December quarter, the biggest one year jump since 1984, with consumer spending, business investment and efforts to rebuild inventories contributing to the strong print. Economists were forecasting 5.5% growth.
  • French and German data showed a better than expected rise manufacturing activity while the services sector showed signs of continued pressure from government imposed covid policy responses, hitting its lowest reading since April, with rising costs the key concern. UK data showed that firms aggressively raised prices in January in an attempt to cover input costs.
  • China’s local authorities are expecting their economies to expand at least 5% this year, providing clues on where the national government will set its growth target in coming months. Most economists are currently forecasting a much lower 2-3% growth for the Chinese economy this year.

Politics:

  • China has vowed to curb tech giant’s influence on governments as it reaffirmed its push to break ties between money and power….obviously only in the private sector. Their aim is to root out corruption that has enabled disorderly growth and monopolies, which is fair enough.
  • Russia has proposed banning crypto mining and trading, with the central bank citing the dangers posed to the country’s financial system and environment and going a step further in saying that digital currencies bear all the hallmarks of a pyramid scheme and undermine the sovereignty of monetary policy. In contrast, a new report from the US central bank has mapped out what a wholly digital version of the US dollar could look like.
  • The US has ordered family members of diplomats in Ukraine to leave due to the continued threat of Russian military action, obviously not wanting to repeat the mistakes of their exit from Afghanistan. The move came after talks failed to end the standoff. The situation isn’t good for Ukraine with Europe unable to act due to the need of gas supplies from Russia whilst the US has too many issues at home and President Biden can’t afford another foreign policy disaster. 


Author 

Chris Lioutas, Director, Insight Investment Consultants

Chris holds the position of asset consultant for Maxim Advisors and is a current sitting member of Maxim's investment committee. 

With permission of the author, this article is presented by Maxim Private Clients Pty Ltd ASFL No. 511972

Maxim Private Clients Pty Ltd ABN 47 611 614 398 AFSL No. 511972

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