Commentary on financial market developments – December 2021
Highlights:
- A less dangerous omicron
- US: annual inflation +6.8%
Commentary:
The close of 2021 brought positive news to the markets and stocks firmed significantly after the previous November declines. In addition, some stock indices have once again surpassed their all-time highs. The exception was Russian equities, which lost value even though the price of oil rose by +10.2%. This is due to uncertainty about a possible armed conflict between Russia and Ukraine. The gold price rose and ended the year at USD 1829.2/oz.
Investors reacted very positively to new expectations about a new mutation of the coronavirus called Omicron. After the initial panic, it is becoming apparent that Omicron, while more contagious than the more widespread Delta, is usually much milder. The combination of high infectiousness and mildness could lead to a rapid population boom, experts say, which could paradoxically have positive consequences for humanity in terms of increased collective resilience. In addition, contrary to initial assumptions, studies show that the covid-19 vaccines from Pfizer and BioNTech show effective protection against the newly spreading Omicron variant after the third dose of vaccination.
U.S. inflation released in December rose +6.8% year-over-year in consumer prices. The US Federal Reserve responded by announcing that it would accelerate monetary tightening. But you don’t want to do so immediately so that companies and investors can prepare and adjust their inflation expectations themselves. That’s why the Fed has announced ahead of time that it will likely end its asset purchases by the end of 1Q this year. Subsequently, the Fed foresees three interest rate hikes in the course of 2022. Very importantly, however, the US central bank no longer considers inflation to be transitory and is ready to fight it. Indeed, a sharp rise in the price level is a serious problem for the economy.
The Chinese central bank has gone in the opposite direction and is easing its own monetary policy. This may be due to the pressure it has come under because of the virtual default of the huge Chinese property developer Evergrade. Its collapse could shake the Chinese financial system and the central bank wants to counteract this by intervening.
Just before the Christmas holidays, the CBR raised interest rates, unexpectedly deciding at its meeting to raise the two-week repo rate by 1 percentage point to 3.75%! This will lead to a rise in interest costs that will make credit financing more expensive for companies and increase mortgage repayments for households in the future. Companies with low margins and high debt, as well as households with low free cash flow and high credit, will come under pressure and 2022 could be a very challenging year for many companies and people.