American and European futures are trading lower today as investors await a crucial inflation report to be released this week. Investors should understand that rising inflation is the main reason the Federal Reserve turns hawkish and winding down its quantitative easing measures faster. If inflation numbers come in high, the Federal Reserve could become even more aggressive and increase the number of interest rate hikes carried out this year. Moreover, better than expected employment data released last week also supports the Fed’s narrative could turn more hawkish in the coming months.
In addition to the inflation report, a consumer sentiment survey published by the University of Michigan is scheduled to be released Friday. Moreover, earnings reports for Pfizer, PepsiCo, Coca-Cola, and Amgen are also expected to be released this week. These events are likely to cause volatility in stock markets in the coming days.
The Dow Jones Industrial Average slumped 0.06% in Friday’s session, and the S&P 500 index jumped 0.52%. The Nasdaq, the tech-savvy index, hopped 1.58%, and the Russell 2000 rose 0.57%.
Investors should note that stock markets finally achieved gains last week after the waves of volatility we saw in January. The massive sell-off was caused by investors adjusting their stock portfolios in anticipation of higher interest rates in the coming months, hence moving away from growth stocks to value stocks. This is why the Nasdaq, in particular, sheds points as valuations and stock prices of technology companies take a hit when interest rates rise.
A better-than-expected jobs report boosted investor confidence. According to the report released on Friday, 467,000 jobs were added last month, far exceeding the 150,000 expected rise. Furthermore, the report was very upbeat because job gains in November and December of 2021 were revised by 709,000. In addition, wages jumped by nearly 5.7% year-on-year last month. These figures have investors concerned about how the Fed will react and whether it will become more aggressive, eventually raising the number of interest rate hikes scheduled for 2022.
All eyes are now on the inflation reading, released this week. Inflation is expected to rise by nearly 0.4%, less than the 0.5% rise seen in December. Despite the projected decline in inflation, it is likely to be an unbelievable 7.2% on a year over year basis. As a result, these readings are only expected to reinforce the Fed’s decision to raise interest rates as early as March. Consequently, the futures market has begun to price in six interest rate hikes for 2022, while we expect four to five interest rate hikes this year.
Considering the current environment and future outlook of stock markets, stock traders should become more selective about the stocks they choose as a bullish tide is no longer expected to raise all boats in stock markets. Hence, investors that pick stocks backed by solid fundamentals are the ones that are likely to book profits in 2022.
The king of cryptocurrencies, Bitcoin was finally able to break through the critical $40,000 mark and is currently trading at around $42,000. Earlier, crypto prices were under pressure because of growth, and risky assets were under fire because of the forecasted interest rate hikes. Furthermore, Facebook’s earnings report further dented investor sentiment. However, crypto traders became optimistic following Amazon’s earnings report, which came in better than expected, similar to Google, Apple, and Microsoft. The positive earnings of these companies helped revive investors’ risk appetite and helped push cryptocurrency prices up.
Crude oil prices took a breather last week after the surfacing of reports suggesting progress being made between the U.S. and Iran regarding their nuclear talks. This is because if the United States were to lift sanctions on Iran, the oil-rich nation could potentially increase its oil output and help bring crude oil prices down. However, an agreement between the U.S. and Iran is unlikely to be straightforward, and hence, markets are still expecting oil supply to be tight in the short term. Moreover, oil demand is likely to rise as economies continue to expand, and geopolitical tensions in the Middle East and Ukraine may also drag oil supply down in coming months, making a case for $100 per barrel a realistic scenario for 2022.
The precious metal’s price is likely to remain volatile this week because of the highly anticipated inflation report. Historically, gold was considered a hedge against inflation. However, the interest rate hike to be carried out by the Federal Reserve is likely to push gold prices lower. This is because when interest rates rise, the opportunity cost of holding the precious metal also rises, making it less appealing to investors.
Investors should keep in mind that if markets believe the Fed will raise interest rates by 50 basis points in March, the U.S. dollar may rise further in the coming months. This could be the case if inflation is higher than expected, causing the Fed to become more hawkish and tighten the brakes to prevent consumer prices from rising further. This scenario is also plausible because the job numbers came in better than expected, indicating that the American economy can likely thrive without additional support from the Fed.
Asian Pacific Markets
China’s stock market indices climbed higher after investors returned from their week-long Lunar New Year holidays. As of 11.47 p.m. EST, the Nikkei fell 0.74% and the Shanghai index hopped 1.91%. The Hang Seng index in Hong Kong dropped 0.31%. The ASX 200 index rose 0.02%, and the Seoul Kospi declined 0.49%.