Market week: Stocks retreat on central bank hawkishness

Bank of England raises rates, U.S. Fed to end QE in March

Stock indexes posted losses on the week, driven down by a combination of the so-called quadruple witching hour (the simultaneous expiration of single stock and index options and futures), the rise of the Covid omicron variant, and the more hawkish tone by central banks around the world.

The U.S. Federal Reserve Board announced on Wednesday plans to end its program of monthly bond purchases (quantitative easing) in March rather than June as previously planned. In its statement, the Fed said, “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” Fed Chair Jerome Powell had earlier forecast the risk of inflation to persisting for sometime. The Fed also telegraphed three 25-basis-point rate increases next year, most likely to follow the end of the Fed’s quantitative easing program. The yield on the bellwether 10-year U.S. Treasury 10-year note fell to below 1.40% last week as a result, before ending the week at 1.407%.

The Bank of England on Thursday raised its key interest rate to 0.25% from 0.1% this past week, noting that inflation had risen to an annual 5.1% in November, up sharply from 3.1% in September. The BoE said it expects inflation to remain around 5% going into 2022, and rising has high as 6% by the middle of the year. The rate hike was the first major central bank to raise rates, and is seen as a harbinger rate hikes by other G-7 central banks in coming months.

The S&P 500 Composite Index dropped 1.9% on the week, led by energy, consumer discretionary, and information technology stocks. The technology-weighted Nasdaq Composite Index posted even larger losses, retreating 3.0% on the week. And Toronto’s benchmark S&P/TSX Composite Index edged back 0.7% on the week, as crude oil slipped 2.3%. Gold gained 0.9% on the week, up only 1.5% for the year to date despite all the inflation-induced ferment in equity and bond markets.

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The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.