Global Markets View - Dec 20
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* US S&P500 ended down 1.5%, Nasdaq was flat, and VIX rose to 21.5 on Friday while safe havens such as the dollar and Treasury bonds rose as markets wrestled with rising numbers of Omicron cases and a hawkish turn from major central banks in the fight against inflation. Brent crude was down 2% to $73.5 while Gold rose to $1,807.
* President Joe Biden warned that hospitals could be overwhelmed as the omicron variant spreads rapidly across the U.S., declaring the potential for a “winter of severe illness and death.” Fears of an economic slowdown were emanating out of the bond market on Friday, with the 10-year Treasury note yield falling below a closely watched level of 1.40%, before trading back to that point by the end of the day.
* Omicron is spreading at a rapid rate across Europe, with countries implementing containment measures in a bid to avoid a spread of cases. The U.K. reported over 90,000 cases in a single day on Friday, but daily deaths remain relatively stable for now. A monthly survey from Germany’s IFO Institute showed sentiment in Europe’s largest economy sliding in December, with the business climate index falling to 94.7 from 96.6 in November, below a consensus forecast of 95.3.
* Omicron’s greater transmissibility suggests China will keep it’s Covid-zero policy in place for longer and could force China to impose more selective, surgical shutdowns than during the Delta wave. The effectiveness of containment and tracing capabilities has improved over time such that each successive wave of Covid outbreaks has had a smaller impact on mobility and hence growth.
* At the same time, the character of regulatory tightening in China is also changing so as not to de-stabilize growth. Policy-makers will be taking a more structured and institutionalised approach, and changes from here on will likely be more incremental. Policy-makers are prioritising infrastructure investment in areas like pollution alleviation, carbon emission reduction, new energy sources, new technologies and new industrial clusters.
* In India, economic activity is holding up despite the looming Omicron threat. In the first fortnight of Dec’21, mobility continued to improve. Electricity generation and power consumption showed improvement and exports also showed strong growth. E-way bill generation, a measure of commercial activity, moderated from the previous fortnight, but remained above Nov’21 levels.
* However, urban unemployment has been on the rise over the past two fortnights, mainly due to reverse migration during the festive season, while rural unemployment also rose modestly. Additional disbursal of grants of ~Rs220bn under MGNREGA is supporting rural employment in the short term.
* With central banks across the world hinting at higher rates in CY22, Indian markets saw some pressure on Friday along with global markets. Nifty declined 1.5% while mid-and-smallcap indices lost 2-2.5%. IT index was the only sectoral index to close the day in the green with gains of over 1.3% driven by Accenture’s strong quarterly number and upgrade in its FY22 outlook. INR’s continued weakness also helped tech exporters.
* FII flows have been extremely weak in the last few months and are likely to get even worse in the short term given the tapering and rate hike fears but they are likely to improve again next year.