Global markets started off 2018 on a positive note in January with global stock markets continuing to make gains and emerging market inflows continuing amidst major sovereign debt issuances earlier in the year. However, the month ended giving way to what has been a global equity sell-off in early February, sparked by higher US Treasury yields that have reached multi-year highs. The sell-off started on February 2nd when US yields increased after US payrolls data indicated the highest wage growth since 2009, opening the door for higher inflation and thereby justifying US rate hikes.
On 8th February, the benchmark S&P 500 and the Dow industrials confirmed they were in correction territory, both falling more than 10% from the Jan. 26 record highs. While some analysts have called this sell-off the start of a new era, ending the period of low volatility enjoyed by markets, others see it as closing the gap between elevated asset prices and more sluggish fundamentals.
Emerging markets experienced $4 billion in outflows, mostly from equities, since January 30th according to the Institute for International Finance (IIF) – the largest outflow since the election of President Trump in 2016. South Korea, Indonesia, Thailand have suffered the worst losses so far as of 6th February. However, compared to previous global sell-offs most emerging markets have been faring better, despite the fact that higher US yields make EM risk assets less attractive.
These market movements are in the context of a US Federal Reserve that confirmed its projected rate hike path last week and Jerome Powell being sworn in as the new chairman on the 5th of February. Powell now faces the challenge of ensuring that the economy neither overheats nor goes cold. Moreover, January was also the first full month since the European Central Bank implemented the promise to halve the quantity of its monthly bond purchases to Euros 30 billion.
Brent crude prices were near four-year highs as prices reached $70 a barrel mark early in the year driven by continued optimism that the supply glut was ending this year and due to drops in US stockpiles. However, prices moderated slowly throughout the month, leading to prices reaching $62 a barrel on the 9th of February amidst the ongoing stock market turmoil and a scare about rising global supplies. Iran has announced plans to increase production and US production has surpassed 10 million barrels per day; a level surpassed only by Saudi Arabia and Russia.
Source: Frontier Blog