Investors dump equities

Investors have dumped equities at a record pace in the days since major central banks signaled they won’t be deterred in their fight against inflation—a fitting end to the worst year for world stocks since the global financial crisis.

Equity funds were hit by outflows of almost US$42 billion, the highest ever, in a week when the Federal Reserve, the European Central Bank and the Bank of Japan all sounded staunchly hawkish notes in their policy outlook for next year, squashing bets of an imminent return to the era of cheap money.

In the US on Friday, new numbers showing inflation cooling there seemed to mollify some investors, as markets rose slightly to end the week.

US stocks ended Friday’s session with gains as investors digested data showing inflation is continuing to ease and the Federal Reserve’s rate hikes are serving their purpose. 

Both the S&P 500 and the tech-heavy Nasdaq 100 still suffered their third week of losses, the longest losing streak for both indexes since late September, as investors this month grappled with a hawkish Fed and data pointing to a resilient economy that can handle more rate-hike pain. 

Treasuries ended a holiday-shortened session lower. The benchmark 10-year yield climbed the most this week since early April 2022, ending Friday around 3.75%. The dollar suffered a weekly drop. This week’s gains took the yen to its highest level since June as the Bank of Japan’s sudden increase in its yield trading band is expected to encourage Japanese investors to bring money home.

Data on Friday showed the Fed’s closely watched measure of inflation cooling and consumer spending stagnating. Consumers’ year-ahead inflation expectations also dropped this month to the lowest since June 2021, a survey by the University of Michigan showed. Both sets of data calmed sentiment on Friday. 

“I think there is very little depth of liquidity, and a lot of daily and weekly options. But it has seemed like really exaggerated moves relative to any news,” said Peter Tchir, head of macro strategy at Academy Securities. “It seems like we rally hard on ‘Santa’ and weaker inflation data and selloff hard on good data and eco fears.”

While central bank officials this year have repeatedly said that they’ll keep raising rates, markets have often shrugged off these warnings. But economic data has continued to keep investors on the edge. They’ve especially been attuned to information pertaining to jobs, since softening in the labor market is something the Fed is keeping an eye on. 

“Historically, usually the market has been right, but in 2022 it’s been the Fed,” Jim Bianco, founder of Bianco Research, said on Bloomberg Television and Radio. “Are we going to get the pivot in 2023 or are we going to get the pivot in 2024? If the market doesn’t get the pivot, which it is expecting, I think there’s going to be some room for disappointment.”

Investors have cheered a moderation in inflation in recent months. But data underscoring a strong economy has often led to choppy sessions for markets, with some traders reassured that a US recession is still at bay while others fear this means the Fed will stay aggressive.

In commodity markets, everything from oil to gold and copper rose on Friday. Oil posted substantial weekly gain as Russia said it may cut crude production in response to the price cap imposed by the Group of Seven on its exports, highlighting risks to global supplies in the New Year.