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Equities rally as investors shrug off Omicron

Last Week in the City provides a round-up of the market movements and the global investing outlook for the week ending 10 December 2021.

| 10 min read

Global markets rallied this week, on hopes that the new Omicron variant of Covid-19 will not be a serious an infection as initially feared. Although it is more transmissible than previous iterations of the virus, initial reports suggest there have been no spike in hospitalisations in Southern Africa where it was first detected.

Markets believe the introduction of “Plan B” by Boris Johnson’s government will delay a UK interest rate rise – a move that was baked into market expectations before Omicron hit the headlines.

The blue-chip FTSE 100 index rallied 2.5% over the week by mid-session on Friday, with the more UK-focused FTSE 250 up 1.9%.

What lies in store for markets and economies in 2022?

Covid-19

People in England are being asked to work from home again, if possible, and face masks will be compulsory in most public places, as part of new rules to limit the spread of Omicron. Covid passes will also be needed to get into nightclubs and large venues from next week. Boris Johnson said: It's not a lockdown, it's Plan B".

Some very preliminary data from South Africa where the Omicron strain was first identified, suggested that patients need less medical intervention than with previous iterations of the infection, particularly the Delta variant. White House medical adviser Anthony Fauci said that the US was encouraged by the reports.

GlaxoSmithKline said its antibody-based Covid-19 therapy... is effective against all mutations of the new Omicron coronavirus variant.

GlaxoSmithKline said its antibody-based Covid-19 therapy, developed with US partner Vir Biotechnology, is effective against all mutations of the new Omicron coronavirus variant, citing new data from early-stage studies. The data, which is yet to be published in a peer-reviewed medical journal, shows that sotrovimab is effective against all 37 identified mutations to date in the spike protein.

Three shots of the Pfizer/BioNTech Covid-19 vaccine has demonstrated a neutralising effect against the new Omicron variant in a laboratory test, according to its manufacturers. The two companies claimed that two vaccine doses resulted in significantly lower neutralising antibodies, but that a third dose increased the neutralising antibodies by a factor of 25.

Shares in shipping broker Clarkson rallied after management raised its full-year profit guidance, driven by rising business activity as the global economy recovers from the impact of Covid-19.

Economics

An increase in interest rates from historic lows of 0.1% by the Bank of England’s policy-making committee at its 16 December meeting now appears less likely. Monetary Policy Committee (MPC) member Michael Saunders said the Omicron variant could slow the UK economy and he would need more information before he could decide on the best course of action. Mr Saunders was one of only two policymakers who voted for a rate increase in the MPC’s November meeting. A fall in the oil price may help reduce the inflationary pressures that have been building in the global economy in recent months, but the oil price rallied for the first week in seven.

  • 5% Expected inflation peak in the early part of next year.

However, the interest-rate decision remains finely balanced, with Bank of England Deputy Governor Ben Broadbent warning that Britain's tight labour market will add pressure on inflation, which he said might "comfortably exceed" 5% in April next year. Mr Broadbent also said that “transitory inflation” should be understood as referring to the next 18-24 months. Federal Reserve Chairman Jerome Powell recently said he would now “retire” the word “transitory” when discussing inflation, a significant reversal of his prior view.

UK economic growth came in lower than expected in October, which could nudge Bank of England policymakers to hold interest rates steady for a bit longer. Britain’s services sector has now returned to pre-pandemic levels of output, but the economy as a whole is still 0.5% below it was before the health crisis hit. The UK economy grew by just 0.1% over the month, despite a strong performance by the health sector and second-hand car sales. A fall in people dining out and reductions in oil extraction and gas use meant growth came in lower than expected.

UK growth expectations continued to be pared back. Business lobby group the Confederation of British Industry (CBI) has slashed its expectation of UK GDP growth this year and next. For 2021, its forecast was cut to 6.9% from its previous forecast in June of 8.2%. For 2022, its forecast was cut to 5.1% from 6.9%. It blamed weaker-than-expected output since its last forecast, with supply-chain disruption among the factors driving the slowdown in growth. Accountants KPMG is even more downbeat on Britain’s prospects. It expects growth to reach 4.2% next year at best, even if the Omicron variant turns out to be a “false alarm”. If social-distancing measures are introduced to deal with the Omicron variant, KPMG sees growth as low as 2.6%.

The loosening of financial conditions in China is at odds with actions being taken by other central banks around the world.

China’s politburo announced measures to kickstart the country’s faltering economy as its property sector continued to be hit by the fallout of the crisis from Evergrande. President Xi Jinping’s senior leadership committee rubber-stamped a plan from the central bank on Monday for more targeted lending to businesses and outlined support for the housing market. The People’s Bank of China cut the reserve requirement ratio (RRR) for banks by 0.5 percentage points, which released some 1.2 trillion yuan ($188 billion) of liquidity. The RRR is the minimum amount of capital a bank needs to set aside to cover bad loans and ensure stability of the system. The loosening of financial conditions in China is at odds with actions being taken by other central banks around the world. Leaders had also agreed to “promote the construction of affordable housing, support the commercial housing market and better meet the reasonable housing needs of buyers”.

Evergrande and smaller Chinese property group Kaisa both defaulted on payments for the first time, prompting more concern over China’s property downturn. Beijing wants the rich and foreigners to pay the property sector losses through their bond holdings – and not ordinary Chinese waiting for unbuilt homes.

There was, however, some positive data to please investors concerned about Chinese growth and its potential impact on global trade. China’s exports and imports grew faster than expected in November. China’s imports unexpectedly surged almost 32% year-on-year to about $254bn, as companies restocked depleted commodities such as coal ahead of the holidays at the turn of the year. Export growth slowed but was also stronger than forecast – up 22% to almost $326bn.

Geopolitics

President Biden reaffirmed America’s “unwavering commitment to Ukraine’s sovereignty and territorial integrity” in a call with President Volodymyr Zelensky amid concerns the US president is open to negotiating with Russia over its demands to curb NATO’s expansion. This followed a call between Mr Biden and Russian leader Vladimir Putin, that made little progress. However, Mr Biden has said that he is not considering sending US troops to defend Ukraine in response to a Russian military build-up on the country’s borders.

Commodities

Oil prices soared this week, bouncing back from an Omicron-related sell off. Both the Brent crude and WTI contracts were up about 7% over the week by mid-session Friday. Market sentiment was buoyed by easing concerns over the Omicron coronavirus variant's impact on global economic growth and fuel demand.

The EU has become overly dependent on Russian gas - and this could be a problem.

The share of total sales accounted for by battery-powered electric vehicles climbed to 19%.

Environmental, Social & Governance (ESG)

Sales of battery-powered vehicles are now rising in the UK. The number of new cars sold in the country rose in November for the first time in four months, powered by a doubling of sales of electric vehicles. Almost 22,000 pure electric vehicles were registered in November, more than double the 10,345 registered in the same month last year, as the share of total sales accounted for by battery-powered electric vehicles climbed to 19%.

US regulators are investigating Tesla following a whistle blower’s complaint that the company failed to properly notify its shareholders and the public of fire risks associated with defects in its solar-panel system over several years. The US Securities and Exchange Commission disclosed the probe into Elon Musk’s electric-vehicle group following a Freedom of Information Act request.

Flotations

British biotech group BenevolentAI snubbed London markets and was taken public by a £1.3 billion takeover by a Special Acquisition Vehicle (Spac) listed on Amsterdam’s stock exchange. It will be included in Euronext indices. The company, which uses artificial intelligence to discover and develop new treatments for complex illnesses, floated via a reverse takeover by Odyssey, a so-called blank-cheque company, or Spac.

Intel unveiled a plan to take its self-driving-car unit Mobileye public in the US in mid-2022, a deal which could value the Israeli unit at more than $50bn. Chip giant Intel expects to retain Mobileye's executive team and hold on to a majority stake in the business after the IPO.

Technology

Rohingya refugees from Myanmar are suing Meta Platforms, formerly known as Facebook, for $150bn over allegations that the social media company did not take action against anti-Rohingya hate speech that contributed to violence. A US class-action complaint argues that the company's failures to police content and its platform's design contributed to real-world violence faced by the Rohingya community.

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Equities rally as investors shrug off Omicron

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