The war in Ukraine has tended to increase uncertainty regarding inflation and growth prospects. When and with what consequences this war will end is pure speculation, but capital markets are expected to build a certain immunity to the headline risks in the coming weeks. The medium- to long-term consequences, on the other hand, could be significant. It is possible that we are at the beginning of a new bloc formation or a new Cold War. This would put a significant damper on globalization and further fuel higher structural inflation. 

US equities closed lower for a fourth straight session Monday as concerns over a recession in the US mounted after the Fed took a more hawkish tone than expected. The Dow Jones fell 0.5% to 32,758, the S&P 500 lost 0.9% to 3,818, and the Nasdaq Composite shed 1.5% to 10,546. In contrast, European equity markets closed the first session of the week higher, with the benchmark Euro Stoxx 50 up 0.2% to 3,811 helped by gains in energy, miners, chemicals and retailers. 

Summary

  • Asian equity markets plunged on Tuesday, with Japanese shares leading the decline after the Bank of Japan (BOJ) unexpectedly raised the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25%, while keeping its ultra-low benchmark interest rates unchanged. Shares in Australia, South Korea, Hong Kong and mainland China also tumbled as investors continued to grapple with the prospect of further monetary tightening by major central banks that could tip the global economy into recession next year. 
  • European equity futures are falling this morning, similar to their US counterparts, which reversed direction after the announcement by the BOJ. 
  • Oil prices rose on Tuesday, extending gains from the previous session, as demand optimism stemming from top crude importer China’s economic reopening outweighed concerns over an expected global economic slowdown next year. Despite surging Covid cases, China appeared intent on ending its strict zero-Covid policy and delivering more pro-growth measures centred on reviving consumption. 
  • Australia’s central banks considered leaving interest rates unchanged at its December policy meeting, citing the lagged effects of the aggressive tightening delivered so far and the benefits of moving cautiously in an uncertain environment. The minutes showed the board weighed three options—hiking by 50 basis points, 25 bps, or pausing—but the arguments for a 25-basis-point hike prevailed. This was the first time the Board considered pausing since it started raising interest rates in May. 
  • A House committee recommended that Donald Trump be prosecuted for his role in the January 6th assault on the US Capitol, the first-ever such referral of a former president. In the final of a 17-month investigation, the committee voted unanimously Monday to refer Trump for prosecution by the Justice Department on four criminal offences, including insurrection, which would disqualify him from holding office if convicted. 
  • European nations reached a deal to cap natural gas prices at €180, ending months of political wrangling over whether to intervene in an energy crisis that has risked pushing the region into a recession. The so-called gas market correction mechanism, a temporary measure designed to prevent extreme price swings, will apply for one year from the 15th February. The cap is significantly lower than an earlier proposal by the European Commission.  
  • A poll by Elon Musk on whether he should quit as Twitter CEO showed the majority of users of the social media platform who took part voted in favour of the move, after the poll ended on Monday. About 57.5% votes were for “Yes”, while 42.5% were against the idea of Musk stepping down as head of Twitter.  
  • Meta Platforms shares dropped over 4% yesterday after the European Commission said it could impose a fine of up to 10% of its annual global turnover if evidence showed an infringement of the EU’s antitrust laws.