“Baby won’t you dance with me I’m feeling kind of hurt” Rolling Stones

Another rough week for equity markets as they adjust to the yet unknown threat of Omicron. Central Bankers are already turning more dovish as they now wait to see how the governments react to the new variant. Michael Saunders was quoted this week as saying he sees the merits in waiting to move on interest rates. The debate I had on GB News is now settled, rates will stay where they are into the New Year.  ECB chair Christine Lagarde ruled out rate rises for the entire next year. The OECD,  this week also conceded that the variant impact could just as easily have a deflationary impact as an inflationary one, something we also pointed out last week. We remain of the view that central bankers would be reluctant to spend 100’s of billions of dollars in the past year supporting the global economy for it to shrink now.

The public’s reaction to wearing a face mask indoors and some modest heightened travel restrictions gives governments a pretty good hint of how the public is feeling towards another winter of being tied to our homes. It would now seem that coronavirus is causing lethargy whether you have it or not.

US equities held the 50-day moving average despite a poor Friday, which may underpin our view that a base for equity markets is being found. A whistle-stop tour of the performance of other assets in the past week, bonds remain in demand as the ten year US treasury yield fell to 1.35%. With US inflation running above 5%, that continues to illustrate a reassuring level of fear for other assets. The price of oil continues to jockey around 70 dollars a barrel, gold just under 1800 dollars. The US dollar, another safe haven has unusually weakened during this period of uncertainty.

Looking to the week ahead the ebbs and flows of Covid news are likely to continue to dominate financial markets thinking. At this point in time, despite new vaccines and forecasts of economic growth for this year and the next, the fear gauge is above where it started the year. This week we have a reasonably busy diary, particularly for the US. Consumer sentiment and price inflation will dominate the headlines. Forecasts are for consumer price inflation to rise to 6.7% in November. In the UK investors will turn their attention to monthly GDP figures, alongside industrial production, construction output, trade balance, Halifax House Price index, and Markit Construction PMI. In Europe, the Eurozone will be releasing the final estimate of third-quarter GDP, while Germany is set to publish the ZEW Economic Sentiment Index.

Fingers crossed equities may have a better week, as the Russell 2000 has hit a 52 week low. There are news reports of a new tablet to aid the recovery from Covid. The FTSE 100 has held 7000, and we are coming into Christmas. Keep the faith.