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Omicron and hawkish Fed concern markets

Last Week in the City provides a round-up of the market movements and the global investing outlook for the week ending 3 December 2021.

| 6 min read

Markets were volatile this week as the new Covid-19 variant Omicron variant spread and resulted in a tightening of border controls around the world. The US central bank also conceded that not all of the inflation that was currently in the system would work its way out as the global economy normalises.

The Federal Reserve has now dropped the word “transitory” from its comments on price rises.

The blue-chip FTSE 100 index fell 2.5% over the week with the more UK-focused FTSE lost 2.6%.

Why markets have fallen: Two of our bear-case scenarios have come to worry markets.

Covid-19

The World Health Organisation's (WHO) chief scientist urged people not to panic over the emergence of the Omicron coronavirus variant and said it was too early to say if Covid-19 vaccines would have to be modified to fight it. Soumya Swaminathan also said it was impossible to predict if Omicron would become the dominant strain.

It is unclear what this means for the protection given by vaccines.

The first real world data showing the variant Omicron may evade some immunity in individuals was reported by scientists in South Africa. They detected a surge in the number of people catching Covid multiple times. It is a rapid analysis and not definitive but fits with concern about the mutations the variant possesses. It is unclear what this means for the protection given by vaccines.

A UK trial of seven different jabs discovered that Pfizer and Moderna vaccines give the best booster response.

Vaccination could become mandatory in Germany from February in what has been described as “a lockdown of the unvaccinated”. “We have understood that the situation is very serious and that we want to take further measures in addition to those already taken,” Angela Merkel said. “To do this, the fourth wave must be broken, and this has not yet been achieved.” The country is planning to exclude unvaccinated individuals from most leisure and cultural activities – even going to the workplace.

Despite the negative news on Omicron hitting the travel sector hard, shares in British Airways and Iberia owner IAG rose after the chief executive Luis Gallego Martín said there were no plans for the group to follow easyJet’s £1.2bn rights issue.

Anglo American is consulting on compulsory Covid-19 jabs for all workers. It may propose sacking workers that refuse.

Economics

The emergence of Omicron raises the uncertainty around inflation, Federal Reserve chair Jerome Powell has warned. Mr Powell has called recent high rates of inflation transitory on many occasions, but he said this was a term that should now be "retired". He also said the Fed should consider tapering its bond-buying stimulus more quickly. This implies some inflation may become structural and interest rates may rise sooner than previously expected.

  • 210,000 The number of new employees in the US in November

US jobs data came in weaker than expected. Employers hired only 210,000 more workers in November, missing economists' predictions for stronger growth. Forecasters had been expecting US non-farm payrolls to increase by 550,000. The US added 531,000 in October, a sharp increase after a slowdown in hiring triggered by the spread of the Delta coronavirus variant over the summer. It remains to be seen whether the Omicron variant will have a similar dampening effect on the jobs market too. The news boosted equities as investors interpreted that the weaker jobs gains will mean the Federal Reserve won't have to speed up its plans to unwind stimulus, and that it could also delay any interest rate hikes.

Congress passed legislation on Thursday to fund the US government through mid-February, averting the risk of a partial government shutdown this week. However, the US government could start missing payments on its debts as soon as 21 December if Congress fails to raise a legal limit on public borrowing, the Bipartisan Policy Center said. The think tank's calculation, based on updated official data on tax receipts and government spending, highlights the mounting pressure on President Biden to find a way to raise the $28.9 trillion debt limit.

A number of countries had high borrowings before the Covid-19 pandemic hit. With the cost of the pandemic building debt piles higher, how will they pay it back?

Geopolitics

The European Union (EU) unveiled its €300 billion alternative to China's Belt and Road initiative — an investment program the bloc claims will create "links, not dependencies." Called Global Gateway, the EU has called the plan a "road map for investment" in the developing world. It aims to help mobilise investments in digital, clean energy and transport networks, as well as boosting health, education and research systems across the world.

94,000

Russian troops amassed on Ukraine border

Russia has amassed more than 94,000 troops near Ukraine's borders and may be gearing up for a large-scale military offensive at the end of January, Ukraine's defence minister told parliament. Oleksii Reznikov said Ukraine would not do anything to provoke the situation but was ready to fight back if Russia launched an attack.

Forming a new government in Germany has not proven that straightforward thanks to the renewed intensity of the pandemic in the country – and the new coalition has an agenda that will be difficult to deliver.

Commodities

Oil prices are expected to rise above $125 a barrel next year and $150 in 2023 due to capacity-led shortfalls in OPEC+ production, according to JP Morgan.

Codelco, the world's biggest producer, warned of lower prices and surpluses of the metal, reviving worries about weak demand from top consumer China. The Chilean group forecast a price decline of up to 9% next year, saying the market would see surpluses until 2024.

Technology

The $75bn takeover of UK-based chip designer Arm by its rival Nvidia is in jeopardy after US regulators followed the UK and Europe in moving to block the largest semiconductor chip merger in history. “The FTC is suing to block the largest semiconductor chip merger in history to prevent a chip conglomerate from stifling the innovation pipeline for next-generation technologies,” said Holly Vedova, bureau of competition director at the FTC. “This proposed deal would distort Arm’s incentives in chip markets and allow the combined firm to unfairly undermine Nvidia’s rivals.”

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Omicron and hawkish Fed concern markets

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