Global Markets Update – Monday 13 December 2021

Omicron variant

Volatility rose as global stocks and bonds whipsawed over the fortnight. Initially stocks dropped steeply when the CEO of Moderna said that existing vaccines would be much less effective at tackling Omicron and on news that the Fed may accelerate its QE tapering. This was followed by a sharp rally as early indications showed that Omicron led to mild infections and Pfizer said three doses of its vaccine neutralised the virus. In contrast, bonds initially rallied and then sold off.

On balance, investors now appear more concerned about rising interest rates than they do about Omicron. Fast-growing tech shares have lagged given their sensitivity to changes in interest rates, given valuations in the industry are dependent on profits far off in the future.

UK

The FTSE 100 rallied 3.5% over the two weeks, helped by its large exposure to oil companies and miners.

The UK government implemented Plan B of COVID-19 restrictions, including expanding the mandatory wearing of face masks, recommending people once again work from home and the introduction of vaccine passports in some settings.

UK GDP rose just 0.1% in October as supply chain disruption hit activity and the rebound in many services stuttered, strengthening the likelihood of a delay to an interest rate rise.

Retail sales grew at an annual rate of 5.0% in November, up from 1.3% in October, driven by a surge in Black Friday deals.

US

The S&P 500 gained 2.1% over the two-week period to close at an all-time high, while the tech-heavy Nasdaq rose 0.5%.

Non-farm payrolls were far weaker than expected in November, rising just 210,000, although the unemployment rate dropped to 4.2%.

Fed chair Jay Powell signalled he would support a quicker reduction of the US central bank’s $120bn of monthly bond purchases, citing a “very strong” economy and “very high” inflation, although he did acknowledge the potential risk of Omicron to the economy.

US inflation rose to an annual rate of 6.8% in November. This was the fastest annual pace since 1982 although the data was better than many had feared. The core inflation rate increased to an annual pace of 4.9%, compared to 4.6% in October.

The Conference Board’s consumer confidence index slipped to 109.5 in November, from 111.6 in October, marking the lowest level since February.

Europe

The FTSEurofirst 300 rose 2.7% over the fortnight.

Germany tightened its virus control measures, with similar moves also seen in Denmark, Italy and Poland.

ECB president Christine Lagarde said it was unlikely eurozone interest rates would increase next year, calling the current rise in inflation as a “hump” that “eventually declines”, but added that the ECB would act swiftly if needed to staunch the increase in prices.

Olaf Scholz became German Chancellor. The country’s incoming German finance minister stressed the need for “stability” in the eurozone but said it should be combined with “growth and investment” in a possible sign of openness towards reforming Europe’s fiscal rules.

The flash estimate of eurozone inflation hit 4.9% in November, up from 4.1% in October.

German inflation rose 6% on a harmonised basis in November, its highest level since 1992. The data increases the pressure on the European Central Bank which continues with an ultra-loose monetary policy.

Japan

The Nikkei 225 slid 1.1% over the two weeks.

Japan’s GDP contracted by an annualised 3.6% between July and September, a steeper contraction than the initial estimate of a 3.0% drop, as a surge in COVID-19 cases led to a steep decline in consumption.

Pacific Basin ex Japan

China’s central bank moved to free up liquidity for the banking system by cutting the share of deposits that financial institutions must hold in reserve. The Chinese authorities also acted to manage the decline of ailing property developer Evergrande and support the housing market.

China’s official manufacturing purchasing managers’ index came in at 50.1 for November, better than expected and ending two months of shrinking activity. However, the Caixin manufacturing PMI fell to 49.9 in November from 50.6 in the prior month, plunging back into contractionary territory for the second time since April 2020.

China’s producer prices inflation slowed to 12.9% in November from 13.5% in October.

Shares in distressed Chinese real estate developer Evergrande hit a new low after it missed a crucial interest payment. The company, which has entered a restructuring process with assistance from local government officials, has now been rated ‘restricted default’ by credit rating agency Fitch.

Inflation in South Korea rose 3.7% year on year in November, its fastest pace in almost 10 years. Meanwhile, industrial output fell 3.0% over the month of October, its steepest drop in nearly a year and a half, as

car production was hit by the protracted global semiconductor shortage.

Emerging markets

India’s economy grew at an annual rate of 8.4% between July and September.

Brazil entered a recession in the third quarter as the economy shrank 0.1%, after a 0.4% contraction in the second quarter. The contraction was driven primarily by a sharp drop in agriculture, which has been affected by an unprecedented drought, and a steep decline in the export of goods and services.

Mexico’s populist president alarmed markets by abandoning his nomination of a respected former finance minister, Arturo Herrera, as the next central bank head in favour of a little-known public sector economist who is loyal to him.

Turkey’s finance minister resigned and was replaced by a loyalist to President Recep Tayyip Erdogan amid a sharp plunge in the lira. Turkey’s economy grew at an annual rate of 7.4% in the third quarter, but analysts warned that the pace of expansion was unsustainable given rapidly rising inflation and a depreciating lira.

Poland’s central bank raised interest rates by 50 basis points to 1.75%. Inflation hit 7.7% in November, causing the government to announce an ‘Anti-inflation shield’ of tax cuts and cash handouts to soften the blow for consumers.

Bonds

The yield on the 10-year US Treasury note fell as low as 1.36%, before closing the two-week period just under 1.5%. However, Jay Powell’s comments pushed up yields on shorter-dated Treasury securities, causing the difference between five and 30-year Treasury yields to narrow by the most since March last year.

The yield on the 10-year German Bund closed at -0.35%.

US junk bonds suffered their largest monthly decline in more than a year, on fears the spread of the Omicron coronavirus variant will hinder the ability of low-rated companies to repay their debts as well as news that the Fed may accelerate the tapering of its bond-purchase programme. Credit spreads widened around 65bps over the month. The sell-off was even worse for the lowest-rated corner of the market, where triple C and lower-rated bonds lost 1.4%.

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Image by Gerd Altmann from Pixabay