Global equity markets have started the New Year on a weak footing as fears over the economic impact of the Omicron covid variant have receded, leading to a sharp increase in bond yields as expectations of monetary tightening rise to combat inflationary pressures. In what feels like a repeat of January last year, the 10-year US Treasury yield has jumped up from 1.51% to 1.73% in a matter of days, sending richly priced growth stocks downwards, whilst the energy and banking sectors have enjoyed a strong rally, building on their recovery from last year. Later today the latest US non-farm payrolls are released, with expectations that 400,000 new jobs were created in December. If this proves to be close to the mark, this will reinforce expectations for sooner monetary tightening from the US Federal Reserve.
As of 12pm London time on Friday, US equities had fallen 1.5% over the week, whilst US technology stocks were down 3.6%. European equities were down 0.2%, whilst UK stocks, which have a greater weighting towards financials and energy, were up 0.5%. The Japanese market rose 0.2%, whilst Australian equities gained 0.1%. Emerging markets fell 1.2% with a large divergence of returns at a country level, with Indian stocks rising 2.6%, whilst domestic Chinese stocks fell 1.7%.
Following on the heels of US Treasuries, the yield on 10-year German bund, which moves inversely to price, rose to -0.06%, reaching the highest level since May 2019. The latest European inflation numbers were released today, with the latest consumer prices index for December coming in higher than forecasted at 5.0% for the year. A number of commentators have begun to forecast this number to rollover in the coming months, therefore it is definitely one to watch out for. The 10-year UK gilt yield also rose to 1.15%, with the Bank of England having already raised interest rates from 0.1% to 0.25% in December.
Crude oil has risen by over 6% in the first week of the year, as traders price in higher demand as fears of Omicron wane. Brent crude is currently trading at $82.8 a barrel, whilst US WTI (West Texas Intermediate) is trading at $80.1. Meanwhile gold fell by 2.0% as expectations of US monetary tightening grow, with the precious metal now trading at $1,792 an ounce.
Whilst it is too early to be totally confident as to the economic impact of the omicron variant, the early signs are encouraging that whilst it is more contagious, it is indeed less virulent than previous variants, as the early indications from South Africa suggested. Therefore, the focus on investors’ minds has returned to inflation.
There are solid reasons to think that inflation may peak in the coming months, not least the fact that inflation is a year-on-year comparison and very soon we will no longer be making comparisons to a period of lockdown.
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