International Communique No. 317 – 7th December 2021
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TORN BETWEEN HOPES AND FEARS
Leading equity indices wobbled last week, unnerved by rising inflation and fears linked to the new variant. The Fed chair admitted for the first time that the term ‘transitory’ was no longer appropriate when describing inflation. The current antithetical situation is stoking volatility as we head out of 2021 and into 2022.
On the one hand, the omicron variant has the potential to slow growth and delay the Fed’s monetary tightening; on the other, inflation – at a 30-year high – could exacerbate pressure on supply chains, thereby pushing up inflation even more.
US employment figures clocked in below expectations. A total of 210,000 jobs were created in November, falling short of the 550,000 expected. In contrast, the unemployment rate fell to 4.2%, down from 4.6% in October.
Disappointing job creation data may lead some to believe that the Fed will be forced to maintain a loose policy. They are therefore not anticipating a rate hike, despite soaring inflation. But this prospect is refuted by Fed members, who are increasingly leaning towards less accommodation.
The prospect of higher rates is piling pressure on tech stocks. Indices are experiencing jolts due to this uncertainty, especially as the year draws to a close. This is prompting some investors to pocket profits on sectors trading on rich valuations.
Stocks are not the only market hit by the current vagaries: the yield on the US 10-year Treasury last week sank from 1.49% to 1.35%.
Chinese stocks have been under pressure for some time from both US and Chinese governments, which operate different listing rules. Didi has been the first victim, announcing that it would delist from the New York Stock Exchange only 6 months after its IPO. Other Chinese stocks plunged shortly afterwards, amid rumours that it would soon be their turn.
The Evergrande saga continues to loom large, with the threat of default ever more imminent. The Chinese minister in charge has stated that banks’ reserve requirements will be lowered in due course to bolster the real economy.
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