Over the long Christmas weekend, some investors will hopefully make a more sober assessment of the risks facing the economy and markets. Chief among those risks are high levels of inflation and potentially weaker economic growth, owing to the rapid spread of omicron triggering waves of restrictions around the world.
Light trading on Christmas Eve
Christmas Eve means markets are closed in most places, and where they are open trading is limited to half of the day. Understandably, volumes are wafer thin. Overnight saw Asian markets trade mixed, failing to find further strength from another record close on Wall Street, while the FTSE hit a fresh weekly high. Brent crude oil prices weakened slightly, suggesting the optimism surrounding positive news on omicron faded somewhat. Meanwhile, FX was little-changed, although emerging market currencies, except the Turkish lira, outperformed.
Positive Omicron news likely priced in
Judging by the stock market rally this week, it appears as though investors are still confident that the ongoing recovery from the pandemic recession can survive the omicron wave. Sentiment has been lifted by several scientific studies showing that omicron is less severe than previous mutations. The new variant has also introduced a new element of uncertainty as to whether central banks will be able to follow up with more rate rises if the economic recovery falters.
However, with the markets already staging a relief rally back to record or multi-year highs, and thus undoing the omicron-driven sell-off from November and early parts of December, the renewed optimism is likely to be priced in by now. Any further good news regarding omicron is therefore likely to have progressively less impact on the markets.
Central bank tightening
Investors are therefore likely to focus on other factors when making trading and investment decisions. These include monetary tightening by the Fed and other major central banks, as inflation has soared across the world. The Federal Reserve is planning to wrap up bond purchases by March and start lifting rates thereafter, with the FOMC’s median projections made in December pointing to three rate increases. The Bank of England is seen raising rates at least a couple of times in 2022, while the European Central Bank is set to taper its QE purchases significantly. Although the markets have remained on the front foot, the pace of the global stock market rally has slowed and occasionally reversed in recent months. This is partly a reflection of reduced support from central banks and a more challenging fiscal environment facing investors in the year or years ahead as governments start paying for the cost of rescuing their economies from the pandemic.
OPEC+ could stick with plans of gradual hike on Jan 4th
For crude oil investors, the next meeting of the OPEC+ on January 4 will be in sharp focus. The group is expected to stick with its decision to raise oil output by a further 400k barrels per day, although some have argued they will be more cautious because of the virus situation. If they do stick with status quo, I think this will put some pressure on oil prices.
It is also worth keeping in mind that US rig counts have now risen to their highest levels since April 2020. So, expect to see more supplies hitting the market later in the year, both from the OPEC+ and non-OPEC producers. This should put downward pressure on oil prices.
Looking ahead to the rest of Q1
Please see ThinkMarkets’ quarterly outlook guide produced by our team of in-house analysts
HERE.