Market Commentary 21st December 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 21st December 2021
Equity Indices
The FTSE 100 declined by 0.30% last week, whilst the FTSE 250 suffered a fall of 0.64%. The indices held up better than most of their global counterparts during a volatile week for risk assets.

The Bank of England (BoE) raised interest rates from 0.10% to 0.25% following their Monetary Policy Committee meeting last week. Whilst concerns around the economic impact of the Omicron variant had previously cast doubts on a rate rise, policymakers appeared to be focussed on inflationary pressures. Data released on Wednesday ahead of the BoE meeting showed that the UK Consumer Price Index (CPI) rose by 5.1% year-on-year in November.

Travel and leisure stocks were volatile, with investors weighing up the possible impact of further coronavirus related restrictions. Budget airline easyJet PLC suffered a sharp decline during the first half of the week, before recovering some ground on Thursday and Friday to finish the week down by 3.27%. The Restaurant Group PLC saw their share price move in a similar fashion, posting a decline of 3.02% for the week.

With the exception of the Swiss Market Index, all major European equity indices moved lower across the week. Germany’s DAX declined by 0.59%, whilst the broad FTSE All World Index – Europe ex UK lost 0.96%.

The current wave of coronavirus cases prompted Germany’s central bank to lower their growth forecasts, with the expected Gross Domestic Product (GDP) increase for 2021 cut from 3.7% to 2.5%. The Bundesbank now expects growth of 4.2% in 2022, down from their previous estimate of 5.2%.

Data published last week showed that Eurozone inflation has reached the highest level recorded since the Euro was created. The Consumer Price Index rose by 4.9% in November, with soaring energy prices (+27.5% year-on-year) being the main driver.

All of the major US equity indices posted declines last week, with the S&P 500 falling by 1.94%, the Dow Jones Industrial Average losing 1.68% and the NASDAQ 100 moving 3.25% lower.

Investors paid close attention to the Federal Reserve’s policy meeting. The Fed announced they would accelerate the tapering of their quantitative easing programme, with asset purchases now expected to stop in March 2022. The central bank indicated they will not hike rates until the asset purchase programme is wound up, with members of the bank’s policy committee expecting to implement three 0.25% hikes during 2022.

The Fed Chair, Jerome Powell, stated during a post meeting press conference that the Omicron variant does not currently justify continuing their asset purchase programme for longer than planned. Powell suggested that the US economy is in good health, with consumer demand “very strong”.

Asian equity markets were mixed last week, with China’s Shanghai Composite Index declining by 0.93% and Japan’s Nikkei 225 gaining 0.38%. The broad FTSE All World Index – Asia Pacific moved 1.27% lower.

The Chinese central bank introduced measures to weaken the Yaun, with the currency strengthening against the US Dollar during recent months. Policymakers emphasised the need for economic stability at the government’s annual Central Economic Work Conference, acknowledging that the pandemic remains disruptive to Chinese economic growth. The Ministry of Finance announced they would grant loans to local governments ahead of schedule to support fiscal spending. Policymakers also suggested they were considering policies to boost consumer demand, particularly for automobiles and home appliances.

The Bank of Japan (BoJ) maintained their dovish stance, leaving interest rates on hold at -0.10%.  The BoJ appeared keen to support small and medium sized businesses well into next year, extending a key lending facility until September 2022. The central bank stated that supply side constraints remain an issue for Japanese economic growth.

The 10-Year Gilt yield rose from 0.74% to 0.76% across the week. Most developed market government bond yields declined across the week as investors increased their exposure, but the Bank of England’s interest rate hike appeared to outweigh any increase in demand for Gilts.
The 10-Year German Bund yield declined from -0.35% to -0.38% last week, with investors appearing to rotate away from equities and into government bonds.

The Eurozone Central Bank (ECB) kept interest rates unchanged following their policy meeting last week and appeared to rule out the possibility of an interest rate rise during 2022. The central bank appeared keen to emphasise that the withdrawal of monetary stimulus will be very gradual, with economic growth still under threat due to the pandemic.

The 10-Year US Treasury yield fell from 1.48% to 1.40% last week. Risk-off sentiment amongst investors appeared to be the biggest driver for the downward pressure on yields, with Federal Reserve committee members appearing more hawkish than previously expected.
GBP / USD – Current 1.3245 Previous 1.3273

GBP / EUR – Current 1.1780 Previous 1.1727

Uncertainty around Covid-19 restrictions and the outlook for UK economic growth appeared to override the impact of an interest rate rise last week, with the Pound weakening by 0.21% against the US Dollar. The Pound rose by 0.45% against the Euro, with the ECB’s relatively dovish stance weakening the Euro last week.

The Gold spot price gained 0.86% across the week to reach $1,798.11. The precious metal appeared to find some support amidst the risk off sentiment.
Oil was relatively stable last week, with the Brent Crude spot price declining by 2.17% to $73.52 per barrel. Whilst the outlook for short term demand remained uncertain given the spread of the Omicron variant, data indicating declining US crude inventories appeared to support prices.