Global Stock Markets May Experience “Tightening” Shocks In 2022

22

In 2021, with the gradual recovery of the world economy from the impact of the COVID-19, the global stock market has shown an overall upward performance supported by loose monetary policies and fiscal stimulus measures.

Looking ahead to 2022, the central bank’s monetary policy changes in major economies such as the Federal Reserve, and the uncertainty caused by the repeated epidemics, have become the two prominent risks facing the market. Analysts believe that the recovery of the world economy is not yet stable. Once the monetary environment is tightened excessively, global stock markets may experience shocks caused by policy “tightening”.

Global stock markets are generally up

Thanks to factors such as the recovery of the world economy, the improvement of corporate profits, and ample liquidity, most of the world’s major stock markets will rise in 2021.

The U.S. stock market showed a volatile upward trend in 2021. The S&P 500, Dow Jones Industrial Average and Nasdaq Composite Index rose 26.89%, 18.73%, and 21.39%, respectively.

In Europe, the Frankfurt DAX index rose 15.7% last year, and hit a record high in mid-November; the London Stock Market “Financial Times” average price index of 100 stocks performed solidly, rising 14.3% throughout the year.

Compared with European and American stock markets, the Japanese stock market rose more moderately, and the Tokyo stock market’s Nikkei stock index rose 4.9% last year.

In anticipation of the Fed’s tightening of monetary policy, some emerging economies are facing capital outflow pressure, and stock market performance has been dragged down. Brazil’s Sao Paulo Bovespa Index fell 11.93% throughout the year, ending the six consecutive years of upward momentum since 2015.

The central bank’s water collection raises concerns

Since the outbreak of the epidemic, various economies have generally implemented loose monetary policies and fiscal stimulus measures to cope with shocks and boost the economy, which has significantly pushed the stock market higher. However, with the rise of global inflation, the central banks of major economies such as the Federal Reserve are brewing or have begun to tighten monetary policy, putting pressure on the market.

Affected by factors such as high international energy prices and obstruction of the global supply chain, global inflation has risen significantly, and inflationary pressures in the United States have been particularly pronounced. In November 2021, the US consumer price index rose 6.8% year-on-year, the largest year-on-year increase in nearly 40 years. To curb inflation, the Fed announced in December of the same year that it will accelerate its “reduction of the balance sheet” and may raise interest rates several times in 2022.

Historically, the Fed’s monetary policy tightening cycle has often triggered changes in the prices of major global assets, and the stock market may fluctuate sharply in the short term. In particular, emerging markets and developing countries will face capital outflows, currency devaluations, and domestic risk asset prices. Shock.

Takeshi Ueno, a researcher at the Nissei Institute of Basic Research, believes that the negative impact of the US’s withdrawal from loose monetary policy and turning to tighten on global stock markets may exceed expectations.

At the same time, the spread of the mutant COVID-19 Omicron has once again faced challenges in the prevention and control of the global epidemic. After the South African report discovered the Omicron, global stock markets fell sharply, highlighting market vulnerabilities.

Ulrich Cartel, the chief economist of Deka Bank in Germany, predicts that if Germany’s control measures against the spread of Omicron continue until the spring of 2022, the economy may face a greater impact and the stock market may undergo drastic corrections.

In addition, geopolitical factors such as the mid-term elections of the US Congress to be held in 2022 and Brazil’s presidential election will also have an impact on the stock market.

Market volatility may increase

How will the global stock market evolve in 2022? Analysts believe that due to the divergence of recovery paths and different policy spaces in various countries, the trend of stock markets is also different. Considering the two major risk factors, the tightening currency environment and the continuous disturbance of the epidemic, high volatility may become a common feature of major stock markets.

Deutsche Bank believes that the outlook for global stock markets in 2022 is “still positive.” The continued growth of corporate profits is expected to continue to push up the stock market, but the upward momentum may slow down and market trends may diverge.

In the United States, as the Federal Reserve tightens monetary policy and gradually withdraws fiscal stimulus measures, U.S. stocks may face tests. Larry Benedicte, the founder of the market research organization “Speculators”, believes that the U.S. stock market is expected to experience a relatively difficult year in 2022, and major stock indexes will fall to varying degrees.

In Europe, the German “Business Daily” believes that the profit growth of German listed companies in 2021 exceeds the increase in stock prices, which means that the stock price is undervalued to some extent. It is expected that the DAX index will rise by about 12% in 2022.

Takeshi Ueno believes that with the gradual recovery of the Japanese economy and the improvement of corporate performance, the Tokyo stock market is likely to continue to rise in 2022, and the Nikkei stock index is expected to rise to more than 30,000 points by the end of the year.

Brazil’s Vargas Foundation economist Joelson Sampaio said that the Fed’s interest rate hike will cause funds to withdraw from emerging market countries. Coupled with factors such as Brazil’s presidential election, the Brazilian stock market may fluctuate sharply in 2022.