It’s been a shaky start to the year for global equity markets, with volatility being driven by rising inflation, interest rates and the ongoing tensions between Russia and Ukraine.

Tech stocks drive market decline

Last week the VIX index, which tracks the implied volatility of the US equity market, reached its highest level in twelve months, while the MSCI World local currency index, which measures the overall performance of global developed market equities, declined 4.9% – its biggest monthly drop since March 2020.

The decline in the equity market over the month has been strongly driven by tech stocks. With US inflation measured by the Consumer Prices Index currently at a 40 year high of 7%, and speculation rife that the Federal Reserve may bump up interest rates in the coming months, the US tech stocks with the biggest valuations have been subject to the largest corrections. In US dollar terms, Microsoft and Amazon declined 7.5% and 10.3% respectively during January, while Tesla shares were driven down 11.4% and the tech-heavy NASDAQ index ended the month 9.0% lower.

Weathering the storm

Other industries have weathered the recent volatility a lot better. In particular oil prices have risen sharply along with inflation, with crude oil futures reaching their highest level since 2014, and the prospect of higher rates has been positive for banks, with the FTSE All-Share Banks Index rising 12.3% during the month. Because of this, the FTSE 100 index, which has just 1.2% exposure to IT stocks and much larger weights in the energy and financial sectors, was one of the few major global equity indices to post a positive return in January.

Full round-up

Here is the full round-up of January market performance. In the UK, the FTSE 100 index gained 1.12%, while medium and smaller companies, measured by the FTSE 250 ex IT index and the FTSE Small Cap ex IT index respectively, slipped 6.39% and 3.35% respectively. In the US, the S&P 500 USD index declined 5.17% while in Europe the Eurostoxx 50 EUR index fell 2.75%. Japanese stocks measured by the Topix JPY index were off 4.83%.

Emerging markets returns were mostly negative, with the MSCI Emerging Markets index losing 1.78% in local currencies. Indian stocks measured by the Nifty 50 INR index dropped 0.08% while Chinese equities measured by the MSCI China local index declined 2.89%. However Latin American equities, measured by the MSCI Latin America local currency index, climbed 4.08%.

In the fixed income market, UK government bonds, measured by the FTSE Gilts All Stocks index, sank 3.85%, while long dated (over 15 years to maturity) gilts slumped 6.62%. Sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, lost 3.13%. In the high yield market, the Bank of America Merrill Lynch Sterling High Yield index relinquished 1.36%.

There were mixed returns in the commodities market. The S&P GSCI USD index, which consists of a basket of commodities including oil, metals and agricultural items, picked up 11.63%. This was led by the surge in oil prices, as crude oil futures soared 17.21% during the month. In the agricultural markets, corn and wheat futures returned 5.52% and -1.23% in USD respectively, while in the precious metals markets, the S&P GSCI Gold and Silver indices fell 1.88% and 4.10% in USD respectively.

In the currency markets, it was a mixed month for the pound as it appreciated 0.66% against the euro and depreciated 0.63% versus the US dollar and 0.61% against the yen.