After a strong end to 2021, share markets were rattled in January on concerns about inflation, larger rapid monetary tightening by the US Federal Reserve and fears of a Russian invasion of Ukraine.
International shares finished the month down -5.1% (hedged) and -2.2% (unhedged) on a weaker AUD. Similarly, after some wildly volatile negative days towards the end of the month, Australian shares finished down -6.5%.
For international shares, the selloff was primarily focussed on growth stocks, particularly in sectors that had benefitted during the pandemic, such as technology, as investors considered that revenue growth may taper in the future. Fear of rising financing costs on the back of future interest rate rises also harmed sentiment.
Emerging markets outperformed developed markets returning 1.2% supported by signs that China was gradually easing policy.
The US economic rebound since the pandemic recession has continued, although Omicron dented activity in January.
Consumer inflation in the US shot up in December, its highest level since 1982, likely ending arguments against the case for higher interest rates.
January's US Federal Open Market Committee (FOMC) meeting confirmed expectations that the US Federal Reserve would start to raise rates in March and commence quantitative tightening by reducing bond holdings.
Similarly, Australia's inflation surprised on the upside again for the December quarter. The RBA's recent meeting announced an end to bond buying, but despite Governor Phillip Lowe emphasising the 'historic opportunity' to delay tightening the cash rate to get as close to full employment as possible, the market started to price in rate rises for this year.
AUD falls and oil price rises
The Australian dollar fell over the latter part of the month as expectations of Fed tightening increased.
Oil prices surged over the month as concerns built that Russia may invade Ukraine, impacting key supply chains. The oil price rise also added to fears that rates would rise sooner.