The Lowdown │Global markets to 10 December 2021

The Lowdown │Global markets to 10 December 2021

Published December 9, 2021

It’s not just seasonal

Much of what is currently happening on the financial markets can be classed as seasonal. And in addition to those routine seasonal trends, optimism is mounting about future global GDP growth, while being countered by pessimism over the spread of the new Omicron variant. This is against a backdrop of rising inflation and uncertainty over what the implications might end up being for global equity and bond markets as the central banks begin to tighten their monetary policy and withdraw the accommodative measures that have been in place over the past decade.
Although inflationary pressures, concerns over slower growth rates and tighter monetary policy have all worried global investors over the last few months, it is Omicron that has dictated stock-market sentiment over the past few trading days, taking investors on something of a rollercoaster ride.

Still too many unknowns

The information vacuum is likely to continue until scientists understand the speed of transmission and how serious this new variant is. Global economists will also need some time to gauge the longer-term economic consequences of it.
These are challenging and uncertain times for investors. And if there is one thing that stock markets and risk assets do not like… it is uncertainty. Wall Street’s VIX Index – or the “fear gauge” as it is known – initially spiked higher, before subsequently dropping as global investors scrambled in and out of financial assets on the basis of daily noise.
Elsewhere, recent comments from some of the world’s leading vaccine providers prompted a sell-off in the stock markets; Moderna CEO Stephane Bancel was among a number of vaccine specialists who have suggested that there might be a material decrease in the effectiveness of current vaccines against the new variant. There has, however, been a rebound in the equity markets – which have been buoyed by reassuring news from Pfizer that a third shot of its BioNTech / Pfizer Covid-19 vaccine offers added protection against Omicron.

Embedded inflation and the end of bond-buying?

There have been other pandemic-related stresses and strains: US Federal Reserve Bank Chairman Jerome Powell has announced that he will be ditching the word “transitory” from any further central bank statements on inflation. Furthermore, an increase in the Fed’s tapering of the bond-buying programme has been tabled for discussion at its next meeting this month. The immediate reaction was for bond yields to increase while prices fell on worries of a central bank error.

Might strategic oil reserves come into play?

A similar reaction was seen in the commodity markets: crude oil prices experienced elevated volatility as concerns mounted over the effects of the new variant of economic growth. After falling 15% on Omicron worries, crude oil prices recovered some of their losses when it was agreed at a meeting of OPEC+ (the cartel of oil producing countries) to press ahead with efforts to increase production by around 400,000 barrels a day each month.
Prior to this OPEC+ meeting, several countries – including the US, China and the UK – had indicated that they would release supplies from their strategic oil reserves to help stabilise oil prices should it prove necessary to do so.
The recent rise in inflation has been largely linked to Covid-19 and the 2020 lockdowns, which in turn, have disrupted supply chains around the world. The pandemic and inflation continue to pose a significant risk to many industries around the world – particularly those with higher input costs: price increases could put pressure on margins. However, we should see some of that supply chain disruption diminish as we get further into 2022 and beyond. Needless to say, much will depend on how dangerous Omicron proves to be and how we fare in tackling it.

Pricing power and healthy gross margins – always

In the meantime, while inflation remains high and central banks continue to ponder whether interest rates need to be hiked sooner rather than later, careful portfolio construction becomes even more important. Those businesses with pricing power and healthy gross margins are likely to be the outright winners in this investment environment.
Disruption and sustainability are two other themes that will continue to play a huge role in reshaping our world. This will hold true for decades to come. While riskier asset classes (equities) may be trading at close to their all-time highs, consumer and industrial demand – together with healthy corporate earnings and margins – are likely to drive global equity markets even further over the foreseeable future.