Markets last week |
Equities had a mixed week due to a combination of omicron variant fears and confusion about central bank activity.
The investment and economic discourse is still dominated by inflation talk. Comments by Fed Chair Jay Powell moved markets, in particular in the US. His statement was balanced, with concerns about the new omicron variant offsetting his increasingly hawkish message on persistent inflation. He gave strong hints of ending the quantitative easing programme sooner. Markets started pricing in more interest rate increases in 2022 and 2023, in addition to the ending of asset purchases early next year.
The inflation backdrop is driving the political process, too, with President Biden’s Build Back Better legislation stuck in Congress and the swing-voting Senator Joe Manchin loudly voicing his concern about spending so much money when the Fed is still buying assets. It therefore seems that Fed Chair Powell was not just speaking to markets last week about unwinding quantitative easing faster, but also to the political classes in the US.
Omicron is complicating the investment picture. (1) It is still a mystery. We don’t know whether it really is milder than delta and other variants and will supersede it, in which case, the world could go back to normal next year and a massive cyclical value rally could take place; or it is as lethal as delta, only easier to spread and bypasses existing vaccines, in which case markets could drop broadly until a timeline for new inoculations is promised and only technology and healthcare could do well. Markets are somewhere in between both scenarios and keep reacting to omicron news. (2) Almost regardless of the above, the near-term risk is that supply chains, which are starting to improve, could revert back to more bottlenecks which would add to inflation. Scientists and vaccine firms have yet to take markets out of their misery and hence the news flow will be moving risk appetite during a season that is normally characterised by a ‘Santa rally’.
The interesting conundrum is that, as investors worry about omicron and the Fed tapering and raising rates, real economic growth is surging during this quarter. The widely followed Atlanta Fed GDPNow GDP forecast has just been upgraded to a 9.7% US growth rate for the fourth quarter!
Due to Chair Powell’s statements, bond traders boosted bets on the pace of Fed tightening, pushing the US Treasury yield curve to its flattest level since January. The spread between 2- and 10-year maturity yields in Treasuries fell to a low 0.75% from 1.1% not that long ago, with government bond yields falling across the board. The US dollar and risk-off currencies had a strong week with sterling being particularly hit, as high expectations of the Bank of England raising rates are being reconsidered.
US shares fell but the UK and Europe were positive. Within equities, energy and utilities were more defensive whereas healthcare and information technology fell the most.
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Markets for the week
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Central banks/fiscal policyCentral banks keeping us on tenterhooks until next week, but Fed Chair moves markets
US Federal Reserve (Fed) Chair Jerome Powell all but announced ending the tapering of asset purchases a few months earlier than previously forecast, also commenting that inflation is proving more persistent than forecast and the word ‘transitory’ should be retired. Although he did state that the omicron variant poses risks to both sides of the central bank’s mandate to achieve stable prices and maximum employment, the markets took his overall message to be one of increasing fight against inflation through tapering and then interest rate hikes. The next Fed meeting is 14-15 December.
On 16 December, the European Central Bank (ECB) is set to announce the end of its pandemic bond-buying plan, but it may be worth watching for any surprises.
On 16 December also, the Bank of England Monetary Policy Committee (MPC) will meet and there is still an expectation in markets that they will announce the first interest rate hike in this cycle, in spite of the omicron variant uncertainty. MPC members have been uncharacteristically quiet but this may change this coming week, as Deputy Governor Ben Broadbent delivers a speech that may give clues as to whether rates are likely to rise at the meeting next week. |
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Europe
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China/India/Japan/AsiaChina surveys unchanged, Japan improving, but the real growth is in Taiwan
China: the CFLP manufacturing PMI edged up over 50 at 50.1 vs. 49.2. The non-manufacturing PMI was more stable at 52.3 vs. 52.4. Unlike the official CFLP PMI, the unofficial Caixin manufacturing PMI fell from 50.6 to 49.9. They’re both hovering round 50, though.
Japan: industrial production rose 1.1% in October and the jobless rate fell from 2.8% to 2.7%. Housing starts were strong in October, up 10.4% year-on-year vs. 4.3% earlier. Vehicle sales were down 13.4% year-on-year but that’s up from -30.2% the prior month. The consumer confidence index remained unchanged at 39.2 in November.
Other Asia: Taiwan’s manufacturing PMI has been above 60 most of 2021 and has recovered to 59.5 last month from 58.3 showing that global growth is not easing. |
Oil/Commodities/Emerging MarketsOil prices again fell, with the Brent grade below US$70/bbl, in part moved by Russia and OPEC agreeing to add to oil output in January. Most other commodities were also softer as growth is being reconsidered under the shadow of omicron. |
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