Despite the reimposition of social restrictions here in the UK and elsewhere, investors – along with everybody else – have breathed a sigh relief as early evidence suggests the omicron variant may not pose as severe a threat as had been feared. Meanwhile, evidence from Europe, Japan and Asia suggests supply chain bottlenecks may be easing. Together, these developments have allowed investors to look forward to next year with a degree of optimism.
Last week’s performance – major stock markets
| S&P 500 | +3.82% |
| Nikkei 225 | +1.46% |
| CSI 300 | +3.14% |
| Euro Stoxx 50 | +2.92% |
| FTSE 100 | +2.38% |
Commentary
US:Growth trumps inflation
Stock market investors reacted positively to early indications that, in the words of Anthony Fauci, chief medical advisor to the president, there did not appear to be “a great deal of severity” in the omicron variant of the coronavirus. If this is indeed the case, the US economic recovery should be able to continue apace, despite further signs of tightness in the labour market and multi-decade high inflation that are putting pressure on the Federal Reserve to raise interest rates.
Japan:Questions remain over government spending plans
Prime Minister Fumio Kishida addressed parliament this week, setting out some details of his $490bn stimulus plan. A key part of the proposals involves digitalising the economy and promoting a culture of innovation. While the scope of the plan is proposal, investors are wary having seen a number of large-scale government stimuli amount to little under previous administrations.
China:Policymakers move to stem property sector fall out
The crisis that has enveloped China’s property sector continues, with large developers struggling to make interest payments on their debts. Given the importance of the property sector to Chinese economic growth, the State has been watching developments closely and, last week, moved to ease financial conditions and provide liquidity to the banking system. This should help limit the fall-out from the property sector’s travails, but it is not yet clear whether policymakers are seeking to go beyond this and actively stimulate economic growth.
Europe: Omicron arrives at a delicate time for the European economy
Several European counties reimposed tighter social restrictions in an effort to contain the spread of the omicron variant. The measures will dampen economic activity at a time when the economic outlook is in the balance. As demonstrated by German industrial production data, supply chain bottlenecks appear to be easing. However, a decline in new orders for manufactured goods suggests demand may be falling just as the supply side gets itself in order.
UK:Plan B
The UK government unleashed ‘plan B’ last week, encouraging people to work from home where possible and imposing restrictions on large gatherings. The measures, which will weigh on economic growth, coincided with the release of data showing the UK economy grew by only 0.1% in October. Despite this, Chancellor Rishi Sunak held a firm line on fiscal policy, rebuffing pleas from the private sector for help to offset the impact of the restrictions. Sunak’s ability to maintain this stance will depend on how long ‘plan B’ remains in effect.