Business & Investing: The risk of a European war, oil prices, inflation, Omicron, Hong Kong and Chinese tech crackdowns – the risk factors mount up

As fighting in Ukraine intensified this past week and the prospect of a protracted military offensive by Russian forces looked increasingly likely, risk appetite on global markets withered.

Market technicians also warned of a potentially significant tipping point after various attempts at a rally in recent weeks had been largely snuffed out as stocks continued to track lower.

Is it any wonder? The market bulls have become noticeably absent in recent weeks, the buy-the-dippers are increasingly wary and good news has been in short supply since the start of the year.

Skyrocketing oil prices, ballooning food costs and rampant inflation are squeezing businesses and consumers hard around the globe, while the damaging impact of Omicron, particularly on staffing, shows no signs of easing.

US Federal Reserve set to begin hiking rates

And now, after months of stalling, the moment of truth has finally arrived for the US Federal Reserve later this week as it looks set to announce its first interest rate hike since December 2018.

However, the timing and circumstances for rate increases are hardly ideal.

Central banks are increasingly facing the worst of all possible scenarios: having to hike rates at a time both businesses and consumers face unrelenting cost pressures.

Trading in futures markets on Friday indicated Wall Street expected the Fed to lift rates to about 1.75 per cent by the end of the year. That’s up from roughly 1.3 per cent at the start of the month, with investors signalling their belief that the Fed could also deliver at least one supersized 50 basis point rate increase this year.

Don’t discount the possibility the RBNZ here may be forced to follow suit if inflation continues to accelerate.

ANZ chief economist Sharon Zollner forecast a 50-basis point rate hike in the OCR in both April and May this year resulting in a doubling of the official cash rate in just two months, adding in a note “there aren’t any low-risk policy options anymore.” 

“The RBNZ would prefer to look through oil price shocks, but right now, with inflation expectations so high and rising, they just can’t.”

Equity markets continue to lose ground

This week the NZX50 slid a further 2.6 percent to 11,821, its worst week since late January after multiple attempts to push back above the 12,000 level were firmly rebuffed. Once again, the NZX50 is now back in correction territory having fallen more than 10 percent from its previous high in early January. The local market also recorded a new 52-week intraday low of 11,723 on Wednesday.

It’s been a similar story in the US with the benchmark S&P500 index sliding almost 3 percent for the week and closing below the critical 4,300 support level for the first time since June 2021, while the tech heavy Nasdaq fell 3.9 percent, its biggest weekly fall since mid-January at the height of the new year selloff. Year-to-date, the Nasdaq is now down 19 percent and flirting with bear market territory.

The selling has been unrelenting for several former US tech high flyers as their share prices continue to be pummelled, including Facebook (Meta) which has fallen almost 50 percent year-to-date, Zoom, one of the big winners of the stay-at-home trade, is now almost back at its pre-Covid low having slumped almost 75 percent since August, and streaming giant Netflix, which hit a two-year low of US$340 on Friday, having shaved 50 percent off its market cap in just four months.

Contrast that with oil producer ExxonMobil which has seen a 54 percent lift in its share price since September, with gold producer Newmont, whose shares have gained 35 percent in the past six months as both companies benefit from a strong lift in commodity prices.

After a strong debut on the Nasdaq exchange last November, shares in Kiwi-originated shoe manufacturer Allbirds have slumped 75 percent in value to US$5.37, while shares in fellow kiwi space technology company Rocket Lab continue to hover just above their January low of US$7.55 having declined more than 50 percent since December.

Chinese technology stocks under pressure

Chinese technology stocks also experienced their worst week in a year as concerns over forced delistings from Wall Street and new difficulties for groups planning to sell shares in Hong Kong spurred heavy selling by global investors. The Hang Seng Tech index fell 5.6 per cent on Friday. Regulators and legislators in Washington are pushing for greater scrutiny of foreign listings in the US while Beijing has carried out an extended crackdown on offshore-listed tech companies it views as a potential threat to national security.

The tumble for tech groups such as online retail giant Alibaba, which has seen its share price slump almost 50 percent since October, is primarily due to the US Securities and Exchange Commission announcing five New York-listed Chinese companies faced delisting in early 2024 if they fail to hand over audit documents backing their financial statements.

Bond Yields Lift

The cautious mood among investors was also prevalent in the $22tn US Treasury market, as investors dumped US government debt. Yields rise when a bond’s price falls. The benchmark 10-year Treasury yield gained 15 percent for the week to 2 percent, while here the NZ 10-year government bond yield hit 3 percent for the first time since June 2018 and, at the short end, the two-year rate climbed to 2.605 for the first time since December 2015.

Commodity prices pressures starting to bite

Surging commodity prices, which preceded data this week showing US inflation had hit its highest level in 40 years, have unnerved traders and cast many earlier economic forecasts into doubt. Economists at Goldman Sachs lowered their US growth forecast for 2022 to 1.75 percent from 2 percent previously.

Brent crude oil futures fell 4.8 percent last week to US$112 a barrel, having traded as high as US$138, as investors assessed the possibility of producer group Opec raising output to compensate for US sanctions against Russia after EU leaders said at a summit they were debating further moves against Moscow. Gold couldn’t hold on to its early gains after trading at $US2070 earlier in the week. The precious metal succumbed to profit-taking after a strong run up in recent weeks, finishing up 0.9 percent for the week at US$1988 an ounce.

Both Bitcoin and Ether finished the week higher gaining 1.7 percent and 1.2 percent respectively. The NZ dollar fell 0.8 percent against the US dollar for the week to 68.07 US cents.



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Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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