- Positive signs of Covid variant boost risk appetite
- Restrictions and lockdowns could soon ease
- South African stocks lead global recovery
- Fed’s bond tapering could hold back US techs
- ECB’s ongoing support could see EU outperform US stocks
Source: ThinkMarkets and TradingView.com
It looks like investors have made up their minds about Omicron. After careful consideration, they think it is probably no more dangerous than the Delta variant of coronavirus and that preventative lockdowns and restrictions that we have seen will soon ease. Another major economic shock will thus be avoided. That’s what the stock market bulls are expecting to happen. The South Africa 40 would not have it a fresh high today had that not been the case. European indices have more than made up their losses from the week before and could soon hit fresh records or multi-year highs, or at the very least outperform their US counterparts.
Investors have been relieved to find out that Omicron hasn’t yet prompted a big rise in hospitalisations and deaths, while some pharmaceuticals (e.g., GSK) have revealed they have come up with treatment against the new strain. So, there’s hope – hope that at worst, Omicron may be just as transmissible as the common cold, but no more dangerous than some of the other variants of Covid and that current vaccinations are effective against it.
The focus is going to turn back to tapering of bond purchases in the US, which is likely to accelerate as per the Fed’s recent commentary and given the sharp increases in the rate of inflation over the past several months. Although we won’t have any Fed officials speaking until the FOMC’s meeting on December 15, we will have one last look at consumer inflation data on Friday. Economists think that prices have increased another 0.7% on the month to take the year-over-year reading to 6.8% from 6.2% in the previous month.
If this is the case, or worse we see even hotter inflation numbers, then the dollar could accelerate to the upside. Rising inflationary pressures should lead to higher bond yields, as investors price in a speeding up of tapering and sooner-than-later rate hikes.
As far as equities are concerned, and everything else being equal, this should see value stocks outperform growth, such as the technology sector. Techs have led the US rally since everything bottomed out last year, but now that the Fed is expected to be wrapping up bond purchases in the next few months and given the sector’s sky-high valuations, the upside should be limited going forward. So, US investors might not be in too much rush to chase this rally. There is a good possibility, I think, that the European markets will potentially outperform their US counterparts.
Indeed, the European Central Bank is likely to maintain its bond buying programme in some form even after PEPP ends, likely in March. Here, growth concerns remain significantly higher than in the US, with the likes of Spain struggling to recover from the pandemic. Though inflation has sky-rocketed in recent months, we have seen energy prices come down sharply while other factors such as supply bottlenecks are likely to fade further in the months ahead. Hopefully inflation will ease back, allowing the ECB to keep the printer going ‘brrrr’. The euro should weaken as result, boosting European exports – all else being equal.
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