January 2022 could be the worst month for global markets since the pandemic began.
In less than three weeks, the capitalization of global stock exchanges collapsed by $5 trillion as a result of frontal sell-offs from Asia to the United States.
On expectations of Fed policy tightening - with the "printing press" halted and dollar rates raised - U.S. stocks lost 10% on the S&P500 index and more than 15% on the high-tech Nasdaq, its worst performance since the global financial crisis in October 2008.
The Rusell 2000 Index of small-cap companies plummeted 20% and was on the verge of a bear market, and the VIX Fear Index jumped to its highest since October 2020.
"The double whammy of risk events was too much for Wall Street to digest," said Fiona Cincotta, senior analyst at City Index.
First, U.S. inflation has accelerated to a 40-year high (7% in December), and as early as March, the Fed will stop buying assets and may start raising interest rates. Secondly, there is a threat of war hanging over Europe, and it has not yet been possible to eliminate it through negotiations with Russia.
"Investors are fleeing risky assets," Cincotta stated.
European stocks on Monday suffered their worst collapse since June 2020, down 3.81% on the EuroStoxx600 index. Bourses in France and Germany ended the day down nearly 4%, while gas quotations soared 16% and once again surpassed $1,000 per thousand cubic meters.
"The threat of conflict at the very borders is weighing on European indices as hopes melt away that diplomats will be able to come up with something substantial," said Suzanne Streeter, senior analyst at Hargreaves Lansdown.
On Monday, the U.S., Britain and Australia began evacuating embassies from Kiev, while NATO brought troops and combat readiness and sent additional forces to the eastern flank. The U.S., meanwhile, is considering moving a contingent of 5,000 soldiers to Europe, which, according to The New York Times sources, could be increased tenfold if necessary.
The moment of truth for the markets will come on Wednesday, when the next meeting of the Federal Reserve will take place, warns OANDA analyst Craig Erlam. Federal Reserve rate futures quotes last week laid down four hikes this year, and the U.S. central bank will have to find a "delicate balance," Erlam points out: on the one hand to convince investors of its ability to rein in inflation, and on the other, not to collapse markets.
Investors are worried that tighter monetary policy in the U.S. could turn into an economic downturn, says Stven DeSanctis, a strategist at Jefferies. The first alarm bells have already rung: the U.S. Services Business Activity Index slipped from 57.6 to 50.9 points in January and is on the verge of a recession zone that starts below the 50 mark.
"Investors see that an aggressive Fed could push the economy into recession," DeSactis said.