Global Markets View - Dec 13, 2021
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* We are almost halfway through the final month of 2021 and equity markets seem to be back in the mood to end the year on a strong note, overcoming concerns of high inflation and Fed tapering/rate hike plans as well as worries regarding the spread of the Omicron variant. Last week, S&P 500 climbed 3.8% and the Nasdaq advanced 3.6%. VIX fell to 18.7, below the threshold level of 20. But market breadth has narrowed substantially in recent months. Just five stocks (AAPL, MSFT, NVDA, TSLA, GOOGL) have contributed 51% of S&P 500 returns since April.
* The US CPI print, which markets were awaiting with bated breath, came in at a 39-year high of 6.8% yoy. It was certainly eye-catching but was also in-line with expectations leading to markets breathing a sigh of relief.
* In 2013, the 10-year yield troughed at 1.63% but ended the year over 3% after the taper tantrum. However, this time, the Fed has worked hard to avoid a taper tantrum by proactively communicating their tapering plan. Markets have started to price in Fed hikes, but yields have moved nothing like they did in 2013 with the US 10-yr yield currently at 1.5% and projected to rise to 2% by Dec 2022. Global inflation has already put many EM central banks on a hiking path; instead of being caught off guard, most have stayed ahead of the curve. And even with the market pricing rate hikes, real US rates look likely to pick up only gradually. This time really does seem to be different from 2013 although we will know more after monetary policy meetings for the key global central banks- i.e. FED, ECB, Bank of Japan and Bank of England happen this week.
* News of Omicron cases doubling every 2.5 days over the past two weeks in the UK is undoubtedly concerning, as health officials fear Omicron cases could soar past 1 million by the end of the month (less than 600 cases have been confirmed thus far). Seeing the virus spread so rapidly in a country with a high vaccination rate forces one to consider the potentially devastating ramifications for less-vaccinated countries. At the same time, early data shows that Omicron has only caused mild symptoms for those fully vaccinated. So, it’s still difficult right now to ascertain the trajectory of covid’s mutations as well as its impact on the global economy and direction of the Fed.
* The Dollar index ended flat at 96 and Gold was also unchanged at $1,785. Brent crude ended up 1% at $75.3.
* In China, government policy is at its inflection point as the Politburo prioritizes stabilizing growth for 2022 and a policy shift is being seen toward countercyclical easing. However, their carefully calibrated approach - balancing between staying the course with structural reforms and stabilizing the economy - means that Beijing will only initiate piecemeal policy easing in the near term.
* In India, Nifty rose 1.8% last week as markets found relief amid trickling viewpoints that Omicron may not be more deadly than previous strains. FIIs who were sellers during early part of the week bought equity towards the end. Global capital is likely to exercise more discretion in the year ahead due to monetary policy tightening amid uncertain growth outlook. This is where India with its large consuming class can provide comfort to global capital. India has some steady drivers supporting demand. They are: (1) Pent-up demand and recovery in consumption of services, (2) Internalization of demand for both goods and services due to make-in-India, shop-in-India and travel-within-India, and (3) Growing external demand for India’s goods and services due to improving competitiveness.
Source: ABSLAMC Research