A Christmas rally helped global stock markets deliver double-digit gains for the third year in a row, as fears that the Omicron variant would derail the economic recovery eased. In contrast, bond yields moved higher on lower demand for safe havens.
Covid infection levels increased sharply across much of the world (with the UK and France reporting record daily new cases), but preliminary studies have indicated the highly transmissible Omicron variant may result in a lower share of hospitalisations among infected patients than earlier strains.
The FTSE 100 rose 1.8% over the two weeks. While UK shares lagged many other developed markets in 2021, the index rose more than 4%in December, its best monthly performance since November 2020.
UK third-quarter GDP growth was revised down to 1.1%, from an earlier estimate of 1.3%.
As UK infection levels reached the highest level on record, the government said England would have no new Covid restrictions introduced before the new year. In contrast, the UK’s three devolved administrations of Scotland, Wales and Northern Ireland have each tightened restrictions.
The S&P 500 rallied 3.2% over the fortnight, reaching fresh peaks. The index has surged 27% in 2021, led by a near 50% rebound in energy stocks followed by a more than 40% increase in the real estate sector. Nevertheless, five technology stocks contributed over 50% of the S&P 500’s performance: Apple, Microsoft, Nvidia, Tesla and Alphabet.
US fourth-quarter earnings growth is forecast to reach 45% year on year. This would be the highest on record according to data from FactSet going back to 2008.
US growth prospects were dealt a blow after Democratic senator Joe Manchin said he would not vote for President Joe Biden’s flagship Build Back Better bill, meaning the legislation was unlikely to pass in its current form. Manchin cited the country’s existing debt levels, the re-emergence of Covid-19 and rising prices for consumer goods for rejecting the bill.
US third-quarter GDP growth was revised up to an annualised 2.3%, slightly higher than the previous estimate of 2.1%.
The University of Michigan’s consumer sentiment index rose to 70.6 in December. While this was an improvement on November’s reading of 67.4, it was still the lowest reading since November 2011.
Durable goods orders were better than forecast, rising 2.5% in November of 2021, compared to a revised 0.1% increase in October.
Core PCE, the Fed’s preferred measure of inflation, hit 4.7% in November, up from 4.2% in October.
Personal spending growth eased to 0.6% month on month in November, from an upwardly revised 1.4% rise in October.
The FTSEurofirst 300 increased 2.8% over the two weeks. The larger FTSEurofirst 600 rose 22% over the year, the second-best performance for the index since 2009.
European countries tightened restrictions to combat surging COVID-19 infections. The Netherlands became the first EU country to re-enter a nationwide lockdown, shutting bars, restaurants and most non-essential shops until at least mid-January.
Eurozone consumer confidence slumped to -8.3 in December, from -6.8 in November, as the Omicron variant caused cases to surge.
Italy’s parliament approved a €32bn budget aimed at boosting growth, focusing on tax cuts for companies and individuals. It also confirms tax credits and subsidies introduced by the previous government and allocated more than €3.5bn to mitigate the impact of rising energy prices.
The Nikkei 225 gained 0.9% over the two-week period. The broad-based Topix rose 10% over the year.
Japanese industrial output jumped 7.2% in November, the largest monthly increase since 2013. The improvement was driven by a 43.1% month-on-month resurgence in car production while other manufacturers appeared to be rebuilding exhausted inventories more rapidly than expected.
Pacific Basin ex Japan
Hong Kong’s Hang Seng dropped more than 14% in 2021, weighed down by a regulatory crackdown by Beijing, which particularly targeted the education and tech sectors. The mainland China CSI 300 fell more than 5%.
China eased monetary policy by cutting its one-year prime lending rate, in an attempt to stop the country’s economic growth slowdown “gaining momentum”.
China’s official manufacturing purchasing managers’ index rose to 50.3, up from 50.1 in November.
Thailand and Singapore joined Japan in closing their borders to most foreign travellers, while New Zealand pushed back its planned re-opening until the end of February.
The MSCI Emerging Markets Index declined 5% through 2021 in US dollar terms. Excluding China, the EM Index rose more than 9%.
The Bank of Mexico’s outgoing governor has spoken out about the importance of protecting the bank’s constitutional mandate as the institution faces mounting political pressure from President Andrés Manuel López Obrador and his party.
The yield on the 10-year US Treasury bond closed the year at 1.51%, a rise of 12 basis points over the two weeks.
The yield on the 10-year German Bund closed the year at -0.18%, a rise of 20 basis points over the two weeks. The 10-year UK Gilt yield rose 29 basis points to 0.97% over the same period.
The yield on the Italian 10-year BTP approached 1.2% amid growing uncertainty of Italy’s political future. Prime Minister Mario Draghi signalled that he would be willing to become Italy’s president when the seat becomes available in January, a move that could trigger early parliamentary elections after his 10-month administration.
The Turkish lira jumped sharply after President Recep Tayyip Erdogan unveiled a new savings scheme aimed at luring Turkish savers away from the US dollar and gold by compensating them for exchange rate losses if they hold their money in lira.
European gas prices slumped as unseasonably mild weather curbed demand and fresh supplies of the fuel headed to the region. In the run up to Christmas, prices rose above €180 per megawatt hour due to waning confidence in extra Russian supply but closed the year under €85 per megawatt hour as tankers carrying liquefied natural gas (originally destined for Asia) arrived in Europe.
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