(Bloomberg) — Volatility gripped financial markets, with investors recalibrating their strategies amid growing calls from prominent voices for higher interest rates to fight inflation.
The S&P 500 fell, while bond yields climbed alongside the dollar. Disappointing trading results from JPMorgan Chase & Co. and Citigroup Inc. weighed on banks, though Wells Fargo & Co. rallied on a bullish projection for a measure of lending. Traders also monitored geopolitical news, with the U.S. warning Russian actors are preparing potential sabotage operations against their own forces and fabricating provocations in social media to justify an invasion into Ukraine if diplomacy fails.
JPMorgan chief Jamie Dimon said the Federal Reserve could lift rates as many as seven times, warning that tightening won’t necessarily be as “sweet and gentle” as some might expect. He didn’t specify how quickly that might happen. Fed Bank of New York President John Williams noted that given the signs of a strong labor market, the central bank is approaching a decision to begin gradually hiking. His San Francisco peer Mary Daly said officials are “going to have to adjust policy” as there aren’t a lot of signs that inflation is going to remedy itself. Some officials this week said the central bank may have to hike as many as four times to get inflation under control.
“It’s clear the ground is shifting under investors’ feet,” wrote Callie Cox, U.S. investment analyst at eToro. “After all, the Fed’s expectation went from no hikes in 2022 to four in a matter of a few months. This could be a big change in how investors view the risk and reward of different markets. And change can be uncomfortable.”
U.S. retail sales stumbled at the end of 2021, factory output weakened and consumer sentiment deteriorated at the start of the new year, illustrating a loss of traction that many analysts view as temporary. The economy will take an early hit in 2022 from the omicron variant of coronavirus — but the damage shouldn’t last beyond the first quarter, according to Bloomberg’s latest monthly survey of forecasters.
Equities offer the best opportunity to outperform inflation, Goldman Sachs Asset Management said in an Investment Ideas 2022 report. Cyclical shares — like financials, energy and resources companies — are especially well-suited to benefit from rising prices, it said. These firms typically excel when the economy is doing well, or recovering from a crisis.
For more market analysis, read our MLIV blog.
Some of the main moves in markets:
Stocks
- The S&P 500 fell 0.5% as of 1:58 p.m. New York time
- The Nasdaq 100 rose 0.2%
- The Dow Jones Industrial Average fell 1%
- The MSCI World index fell 0.8%
Currencies
- The Bloomberg Dollar Spot Index rose 0.2%
- The euro fell 0.4% to $1.1411
- The British pound fell 0.2% to $1.3672
- The Japanese yen was little changed at 114.11 per dollar
Bonds
- The yield on 10-year Treasuries advanced seven basis points to 1.77%
- Germany’s 10-year yield advanced four basis points to -0.05%
- Britain’s 10-year yield advanced four basis points to 1.15%
Commodities
- West Texas Intermediate crude rose 2.2% to $83.92 a barrel
- Gold futures fell 0.3% to $1,816.60 an ounce
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