Weekly Market Update December Monday 6th 2021

The threat of Omicron collides with the threat of tightening monetary policy

It has been a volatile week for markets as investors wait for further clarity on the potential impact of the Omicron covid variant. Markets oscillated between falling on concerns that current vaccines may prove to be less effective against the new variant, whilst rallying as investors sort out bargains whilst betting that Omicron proves to be a milder strain of the virus. Amidst this noise, Jay Powell, chair of the US Federal Reserve (Fed), about turned on their patient approach to inflation, dropping the term ‘transitory’ from their rhetoric, whilst signalling a willingness to accelerate the tapering of their $120 billion a month bond purchasing programme.

As of 12 pm on Friday, London time, US equities were down 0.4%, whilst US technology stocks fell 0.7%, with the latter underperforming the wider market as, unlike last year, fears of rising inflation and interest rates surpassed fears of further covid induced lockdowns. European equities rose 0.1%, held back by governments introducing tougher social mobility restrictions in order to slow the spread of the new Omicron variant. Whilst, in contrast, UK equities rose over 1%, with both large-cap international stocks and mid-cap domestic stocks performing strongly. Japanese equities were down 1.4%, Australian stocks fell 0.5%, whilst emerging markets rose 1.1%.

Short-dated government bonds sell-off on expectations of US tapering

Government bonds, having rallied at the start of the week, sold off on the back of Jay Powell’s seemingly hawkish statement on monetary policy, before rallying towards the end of the week. 10-year US Treasuries are now trading at a yield of 1.42%, slightly down on the week (with yields moving inversely to prices), whilst 2-year Treasuries, which are much more sensitive to interest moves, s off over the week, with the gap between 2-year yields and 30-year yields narrowing by the most since March of last year.

This is an indication that bond markets are increasingly expecting interest rates to rise soon, with the global economy commensurately slowing down. 10-year German Bunds are currently trading at -0.37% and UK gilts 0.78%. Gold sold off by 0.8% over the week, as markets priced in rising real interest rates (interest rates minus the rate of inflation).

Crude oil falls further as Opec+ agrees to increase production

Crude oil fell further, with Brent crude now trading at $71.3 a barrel and US WTI (West Texas Intermediate) $68.0, as Opec+ (Organisation for Petroleum Exporting Countries plus Russia) agreed to increase their production by 400,000 barrels a day in January, despite the threat of Omicron on the global economy.

Confused picture as to the effectiveness of existing vaccines against the new Covid variant

The week began with the chief executive of US vaccine manufacturer, Moderna, saying that he expected existing vaccines to be less effective at tackling Omicron versus earlier strains of covid. However, this was somewhat contradicted later in the week when the University of Oxford and BioNTech, the two organisations behind the AstraZeneca and Pfizer vaccine respectively, said they expected existing vaccines to continue preventing severe disease, even in the case of the new variant.

It will be up to a further two weeks before it is known conclusively what the impact of Omicron on the global economy is likely to be, meaning volatility in markets is expected to remain elevated. The VIX index, a measure of volatility on the US equity market, rose above thirty this week, versus its long-term average of twenty.

US jobs data due to be released this afternoon

Markets are now waiting for the latest non-farm payrolls jobs numbers from the US, due to be released this afternoon, with an expectation of 550,000 new jobs having been created. This continues to be a key focus for investors trying to ascertain when and by how much the Fed is likely to tighten monetary policy.