- Weekly market update
- 5 minute read
A good week for
- Equities recovered last week on better sentiment
- Oil rebounded +7.5% in US dollar terms, recouping last week’s losses
A bad week for
- US government bonds weakened c. -1% in local terms
- The US dollar weakened on a trade weighted basis
Omicron cases continued spreading in the UK last week, causing the Government to introduce “Plan B” measures in England. Masks are once again compulsory in many indoor settings and working from home is once again encouraged where possible. Given the diminished efficacy of existing vaccines against the Omicron variant, the booster programme is being ramped up, with a third dose offering greater protection. Despite encouraging people to work from home, Number 10 did not change guidance around work Christmas parties or hospitality, which would have had a negative impact on the sector. However, initial data suggests that weaker health confidence has nonetheless damaged consumer appetite for social consumption. The risk to growth may influence the decision of the Bank of England’s Monetary Policy Committee this week, with Omicron adding downside risks to growth.
Chinese financial system
China’s central bank eased financial conditions last week. The People's Bank of China (PBoC) announced that it will lower the reserve requirement ratio (RRR) for almost all banks by 50bps, effective from Dec 15th. The RRR is the fraction of deposits that regulators require a bank to hold in reserves and not loan out. The cut allows banks to make more loans, releasing c. RMB1.2tn of liquidity. The PBoC said the aims of the policy were to support liquidity and growth for SMEs by lowering funding costs. China’s economy has been hindered by curbs on the heavily-indebted real estate sector, with sharp declines in home sales and tight restrictions on pre-sale revenues causing a liquidity squeeze. More targeted support for the sector is likely required, with the government hinting at further easing of financial conditions to support growth.
US Inflation surged higher in November, reaching the fastest pace in 39 years. The headline index rose 0.8% month-on-month, and the core measure 0.5%, translating to annual increases of 6.8% and 4.9% respectively. Food prices were a key contributor, rising over 6%, along with energy, up 3.5%. Shelter, a large share of the CPI basket, continues to advance at a steady pace, with auto prices continuing a secondary surge. At these levels, inflation is well ahead of wage growth, weighing on consumer spending power. This week the Fed must decide whether to accelerate the asset taper, in order to be in a position to raise rates when required, or delay, in order to provide maximum support to the economy as Omicron hits the US.
Germany’s influential leader, Angela Merkel, stepped down last week. After 16 years as Chancellor, Merkel was replaced by Olaf Scholz of the Social Democrats. Scholz will govern in coalition with the Greens and the Free Democrats and is expected to bring continuity, having acted as Merkel’s vice-chancellor. Scholz’ immediate agenda includes tackling Germany’s fourth wave of Covid-19 cases and the threat of a Russian invasion of Ukraine. The end of Merkel’s leadership may have an impact further afield, given Germany’s prominence within the European Union. Merkel’s pro-trade stance was thought to have influenced relations with China and the US, with a tougher stance on China now possible.
Chinese real estate
China’s most indebted real estate company missed a debt deadline last week, triggering a default. Evergrande was due to pay $1.2bn in interest on international loans on Monday, but had not paid by Wednesday, causing ratings firm Fitch to declare a default. This may make it more difficult for the firm to restructure its debts. While China’s government has stepped in to ease liquidity conditions and limit contagion within the financial sector, it is clear that domestic investors are a higher priority than overseas bond holders.
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