Market Commentary – January 2022

January 2022 Global Market Commentary

2022 started rough for global equity markets. Both the MSCI World Islamic Index and the MSCI EM Islamic Index tumbled by 4.5% and 1.5%, respectively, in January. Sukuk also returned negatively, with the Dow Jones Sukuk Index declining by 1.6% in the same period due to rising interest rates.

Volatility in January was induced by concerns about the Central Banks tightening monetary policy due to accelerating inflation, as well as geopolitical tensions in eastern Europe. Commodities were the best performing asset class as oil and gas prices soared. Brent oil reached $90 per barrel, driven by falling oil stockpiles in the US and rising geopolitical tensions between Ukraine and Russia.

In the US, the benchmark S&P 500 ended down 5.3% in January, its biggest monthly drop since March of 2020 when the pandemic took hold. Growth stocks came under increased selling pressure, while value stocks benefited largely as they were supported by the financial sector. In macroeconomic news, December consumer inflation surged to 7% year-on-year, the highest level since 1982. The rise in prices was broad-based across goods and services.

After its January Federal Open Market Committee meeting, the Federal Reserve reiterated that the After its January Federal Open Market Committee meeting, the Federal Reserve reiterated that the federal funds rate will remain on hold at zero to 0.25% for now, while bond purchases should end in March and that it will subsequently hike interest rates. The more aggressive stance  (referred to as “hawkish”) on interest rates is what is creating uncertainty and increased volatility, as markets evaluate whether the Fed will make a policy error.

In Europe, movement restrictions were lifted in countries like the UK and Spain as hospitalization rates trended lower, though infection rates remained high. December inflation rose to 5% year-on-year, propelled by rising food and goods prices. The European Central Bank signalled that rates are likely to be unchanged in 2022, but it remains flexible in its future policy path.

In emerging markets, Latin American markets such as Brazil outperformed in January supported by higher commodity prices. Meanwhile, China underperformed in the same period, mired by concerns over the nation’s economic and regulatory challenges. China’s Q4 2021 economy slowed down further, prompting the central bank to cut key policy rates for the first time since April 2020 to fend off uncertainties created by new coronavirus outbreaks.

In Malaysia, the benchmark KLCI declined by 3.5% in January, following similar trends seen in the region where monthly gains in the financial sector helped to offset losses in the broader equity markets. Commodity and energy are favored driven by expectations of firmer Q4 2021 earnings.

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