Global Markets View - Dec 14, 2021
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* US indices declined on Monday (S&P500 down 0.9%, Nasdaq down 1.4%) as markets await further clarity from the Fed and other central banks. VIX ended up at 20.3.
* About 20 central banks are due to hold meetings this week, with the Federal Reserve seen winding down bond purchases and signalling an interest-rate liftoff in 2022 -- heralding a historic pivot to counter the fastest inflation since the 1980s. The European Central Bank, the Bank of England, and the Bank of Japan are also set to announce their monetary policy decisions.
* While the US 10-yr yield declined to 1.42%, the Dollar Index strengthened marginally to 96.4. Gold was flat at $1,785 while Brent was down 1% to $74.3.
* Over past 4 cycles (’94, ’99, ’04, ’15), the S&P 500 gained 9.5% in the twelve months prior to the first hike, and 26.0% over the subsequent 3 years. The real damage from higher rates tends to occur later in the cycle when tighter policy flattens/inverts the yield curve. We are far from that point.
* Communication out of China’s annual Central Economic Work Conference prioritizes macroeconomic stability in 2022. This is in line with Chinese Communist Party’s desire to ensure robust economic conditions ahead of politically important 20th Party Congress in end-2022. Thus, authorities are easing on the fiscal front: they plan to implement new tax breaks, reduce fees for businesses, and adopt a “moderately proactive approach” to increasing infrastructure investment.
* Nevertheless, authorities also mentioned ongoing reforms in the areas of antitrust regulations, de-carbonization, and financial stability in the property and financial sectors. This indicates that policymakers are not abandoning China’s structural reform agenda. Rather, they also want to secure progress towards long-term goals ahead of the National Party Congress.
* Overall, Chinese authorities are attempting to strike a balance between short-term growth and structural reform targets. Thus, they will maintain a measured approach to stimulating the economy.
* In case of Emerging Markets, fundamentals among many economies are still weak. Inflation is high, which is prompting EM central banks to hike aggressively which will dampen demand. Notably, EM policymakers are tightening monetary conditions even though the economic recovery is incomplete. Meanwhile, fiscal conditions will also tighten in 2022. Meanwhile, China is likely to maintain a gradual approach to stimulating its economy which will impact demand for EMs. Also, hawkish rhetoric from the Fed will strengthen the dollar which doesn’t bode well for EM currencies.
* In India, CPI inflation rose in-line with consensus to 4.9% in November on rising vegetable prices, from 4.5% in October. Core inflation rose by 6.5%. Inflation is expected to inch higher in the coming months, but it is not a concern in India at the current juncture. It is expected to average about 5.5% in FY22-23, around the RBI’s growth maximizing threshold inflation estimate. India currently has a demand problem rather than an inflation problem.
* Volatility is high in the Indian markets too. On Monday, Nifty closed down 0.8% while mid-and-smallcaps were almost unchanged. With the year-end holiday season around the corner and local cues drying up, market participants are likely to turn to global cues. The Fed policy meet slated for later this week will hold the key to the markets’ direction in the coming weeks. The Fed’s decision on rates is also likely to give cues on how the RBI is likely to act in CY22.
Source: ABSLAMC Research