Futures in the United States and Europe are up today as investors react positively to the Fed’s decision to speed up its tapering process to tackle surging consumer prices before they get out of control. Despite liquidity being sucked out of the economy, stock traders are optimistic that the United States will be able to stay on track and achieve sustainable growth in 2022. This is good news for stock markets because economic growth ultimately translates into higher profits for companies, which will mean higher returns for investors in the form of more dividends and rising share prices.
In yesterday’s session, the Dow Jones Industrial Average rose 1.08%, while the S&P 500 index jumped 1.63%. The Nasdaq, the tech-savvy index, surged 2.15% while the Russell 2000 climbed 1.65%.
Today is another important day for investors as we are scheduled to receive purchasing managers’ indexes (PMI) from an array of countries such as Germany, the United Kingdom, and the United States. It is imperative to decipher PMI readings as they provide clues to investors on how companies see demand acting out in the coming months. This is because purchasing managers react quickly to changing demand dynamics and have the most up-to-date information. Moreover, the European Central Bank (ECB) and the Bank of England (BOE) are also set to release their monetary policy statements, which can stir volatility in stock markets.
Investors should understand that consumer prices have been rising despite the Fed’s initial view that it would likely be short-term and alleviated with time as companies tackle supply chain constraints. However, a recent inflation reading has proved this notion to be incorrect and has persuaded the Fed to act by becoming more hawkish and expediting winding down of its quantitative easing measures to avoid the U.S. economy heating up. This is why the central bank has decided to taper its bond purchases by $30 billion per month, twice its initial plan, and indicated that it will likely go ahead with three quarter-point policy rate hikes next year. Similarly, in 2023, it will likely move ahead with another three hikes, followed by two more in 2024.
Yesterday’s price action in stock markets makes it clear that the Federal Reserve has been successful in effectively shaping expectations of investors while avoiding a tantrum that could have triggered massive selloffs of equities in the United States. However, it is important to note that companies that performed better in yesterday’s session were dominated by defensive sectors such as healthcare and utilities, which indicates that stock market participants are somewhat wary regarding the future outlook of economic growth.
Furthermore, stock traders should also keep in mind that the Omicron variant is continuing to pump infections in countries around the world, which is forcing governments to increase restrictions and controls on sectors like travel and entertainment to curb cases from spreading. This can potentially have an adverse impact on the global economic recovery and hence be potentially detrimental to stock market sentiment.
Looking closely at the crypto sector over the last 12 months, there is no doubt that hedge funds, comprised of a more varied portfolio of digital coins, have performed remarkably better than Bitcoin. In November’s crypto slump, Bitcoin lost 6.5% of its value, while hedge funds dominated by cryptocurrencies fell nearly 2% over the same period. This phenomenon proves that a portfolio of alternative coins will very likely provide investors with superior returns compared to if they solely invested in Bitcoin. This view can also be proved by looking at just the price action of Ethereum, which surged 526% last month while Bitcoin merely jumped 100% in value.
Going forward, rising cases of the Omicron variant are likely to be the main factor causing volatility in crude oil prices. Yesterday, WHO, through its preliminary findings, indicated that vaccines in distribution may likely be less effective against the new strain of cases, which also means a higher risk to Americans of contracting the virus again. This is why many countries, like Norway, are moving to tighten control to curb the spread of the infections. As a result, oil demand may potentially take a hit if restrictions on sectors such as travel are imposed again, as indicated by the International Energy Agency (IEA) as well. At the same time, oil supply is likely to rise, particularly in the U.S., potentially pushing supply above demand and dragging oil prices down. On the other hand, investors should note that OPEC+ raised its forecast for global oil demand for the first 3 months of 2022.
In a surprising turn of events, despite a hawkish Fed, the dollar index dipped, and gold prices edged higher. This is odd because when a central bank acts aggressively, the dollar index usually climbs as higher interest rates push the demand for that currency higher. However, this was not the case after yesterday’s FOMC meeting. This could possibly be because of rising cases due to the Omicron variant, which persuaded investors to take some exposure to the precious metal until the coronavirus situation cools down.
Despite a hawkish Fed, the dollar index declined in value because investors are likely playing it safe until they get more information on what the new strain of cases means for financial markets around the world. Moreover, today is an important day for the Euro and the pound as the ECB and BOE are expected to announce their monetary policies today. Today’s meeting will be particularly interesting as Omicron cases are spreading in Europe and the United Kingdom, and so investors will be looking at whether they use a wait and see approach or act now, like the Fed, to wind down their massive stimuli. If they turn hawkish, both the euro and the pound are expected to rise in value.
Asian Pacific Markets
Factory data from China showed that output grew faster than expected because of a modest decline in raw material prices and higher energy production. In November, factory output was expected to rise 3.6%, but in reality, it surged 3.8% compared to the 3.5% climb in October. However, in the same period, retail sales numbers came in below forecasts, rising just 3.9% compared to the forecasted 4.6% rise. Having said that, investors should keep in mind that new restrictions being implemented by Beijing are likely to dent demand for retailers, potentially having a negative toll on economic growth for the second-largest economy in the world.
As of 12.06 a.m. EST, the Nikkei climbed 1.78% and the Shanghai index jumped 0.28%. The Hang Seng index, in Hong Kong, dropped 0.81%. The ASX 200 index fell 0.53%, and the Seoul Kospi rose 0.19%.