Global equities started the week on the back foot as investors took profits ahead of a busy week of central bank meetings. These were expected to include further measures to combat high rates of inflation as a report indicated US wholesale prices rose at a record pace last month, increasing pressure on the Federal Reserve (Fed) to bring its bond purchase programme to an end. Investors were also grappling with almost daily updates on the effectiveness of vaccines against the Omicron coronavirus variant.
Wednesday’s hawkish update from the Fed indicated that US interest rates were now expected to rise three times in 2022. The Fed also said that it would begin cutting its bond purchases by $30bn a month in January, double its previous pace. Investors, however, were not put off by the prospect of reduced direct market stimulus from the Fed, and instead focused on the message that the central bank would not let inflation spiral out of hand and equity markets rallied as a consequence.
This meeting of the Fed was extremely important as it took place just after Jerome Powell removed the term “transitory” from his definition of inflation. Expectations were heightened by the fact that producer prices for November rose nearly 10%. The last time US inflation was at such a level, US interest rates were in double digits.
The rally was short-lived as US technology stocks slid after central bank policy shifts. The declines in US stocks on Thursday, however, stood in sharp contrast to rallies in European and Asian stocks earlier in the day. The Bank of England’s Monetary Policy Committee voted 8-1 to increase rates by 0.15 percentage points to 0.25 per cent, surprising some economists who had expected the bank to hold fire given the rapid spread of the Omicron coronavirus variant. The Committee also voted unanimously to maintain the stock of UK government bond purchases. Over in Europe, policymakers at the European Central Bank (ECB) also confirmed on Thursday plans to end net purchases under the central bank’s pandemic-era bond-buying programme next March. Policymakers in the UK and the Eurozone are extremely concerned with the soaring inflation in the regions and these measures are deemed necessary to combat this rising inflation.
As of 12pm on Friday, London time, US equities fell 0.9%, however, US technology stocks had a much tougher week, falling by 2.9%. European stocks fared better falling by 0.4% and UK equities fell by 0.4%. Japanese equities increased by 0.5%, and Emerging markets fell 1.2%.
After the Fed’s hawkish tone, US Treasuries started to rise again after falling earlier in the week, with the 10-year Treasury yield, which moves inversely to price, ending the period down 0.07% at 1.41%. In the UK, the 10- year Gilt yield was up 0.02% at 0.758% and there was a very small move in the German 10-Year Bund yield which declined 0.02% to end the period at -0.367%.
Crude oil prices fell over the week on Covid concerns but rallied on Thursday in the face of a weaker dollar and a larger-than-expected drop in US crude reserves. According to the latest report from the Energy Information Administration, US commercial crude reserves fell by 4.6 million barrels in the week ending December 10, almost triple what analysts had expected. Brent Crude ended the period at $73.74 USD down 1.88% with WTI Crude falling 0.77% at $71.12 USD.
Gold ended the period up 1.42% at £1,810.10 as US dollar weakness backed by the downbeat Treasury yields boosted the metal’s price.
South Africa’s health minister said on Friday that the government believes that vaccines and high levels of prior Covid-19 infection are helping to keep disease milder in a wave driven by the Omicron variant.
Anecdotal reports suggest that the Omicron variant driving the fourth wave, which saw the country report a record number of daily infections earlier this week, is causing less severe illness than previous variants in South Africa. Over in the UK, prominent scientist Professor Tim Spector said Omicron appears to produce a “fairly mild” illness with most people recovering “after about five days”. It is too early to draw firm conclusions but early signs indicate that Omicron could be a much milder albeit, more transmissible variant. Early data also suggest that three vaccine doses are extremely effective in slowing transmission and avoiding serious disease with booster programmes accelerating globally. Governments are keen to avoid lockdowns but restrictions are inevitable until we have more clarity.
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