Investors Run for Cover

(Cover Image Source: Lucas Favre)

Global stocks suffered their worst week in more than a year as investors fled risk amid growing concerns over faster interest rate hikes and conflict in Ukraine. The blue-chip S&P 500 and technology focussed Nasdaq declined 5.4% and 7.0% respectively over the week, and the FTSE 100 fell 4.1%.

“Stay at home” technology stocks, such as Netflix and Peloton, which surged during the pandemic, have led the declines in the new year, victims of high valuations and the easing of Covid rules. Netflix dived 24% immediately after it warned subscriber growth will slow markedly this year, despite the recent huge success of the Korean drama Squid Game. Peloton suffered a similar fate when it was reported it will temporarily halt the production of exercise bikes and treadmills due to lower demand. Bad news doesn’t go down well when markets are already on edge.

Cheaper valuations provide opportunities for M&A activity and last week Microsoft announced it had agreed to buy Activision Blizzard for $75 billion, or $95-a-share, in an all-cash deal. Microsoft will pay a $30 premium above Activision’s share price but a similar level to where it was trading in July before a harassment lawsuit was filed against the video game maker. Activision currently trades at $80, suggesting there is a risk that competition regulators will push back against the proposed deal.

Investors were also jolted by another hot inflation report. Consumer prices in the UK rose 5.4% in December from a year earlier, the fastest pace in 30 years. The rhetoric from Bank of England officials has become more hawkish in recent weeks, warning multiple interest rate hikes are needed this year to curb inflationary pressures and expectations. Markets also have a nervous eye on the Federal Reserve’s meeting this week.

Government bonds sold off in the wake of the inflation report but snapped back sharply, attracting demand from investors seeking shelter from the storm. 10-year German Bund yields briefly moved above zero for the first time since May 2019 but are now firmly back in negative territory. Precious metals, such as gold and silver, also pulled in safe-haven flows and Palladium gained more than 12%, pricing in the risk that Russia, the world’s largest producer, will be hit with sanctions if it invades Ukraine.

Oil prices ended the week modestly lower with Brent crude trading at $86 a barrel. The enflamed tensions between Russia and the West provides support for energy prices but the outlook is clouded by the prospect of higher interest rates which could slow the global economy and demand.

The pain in cryptocurrencies continued and Bitcoin fell to a 6-month low, a near 50% retracement from its November all-time high. The turbulence in broader financial markets has shaken out investors from speculative assets and sentiment was further undermined when Russia’s central bank proposed to ban the use and mining of all cryptocurrencies in the country.