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Omicron triggers higher volatility and equity profit taking: November 2021 Monthly Market Commentary

15 December 2021

MARKET CONTEXT: : Omicron triggers higher volatility and equity profit taking  

Global Macro:  Global markets have reacted swiftly to the new Omicron variant, with an equity market sell-off in end-November. Nonetheless, economic growth remains strong around the globe amid central banks’ accommodating monetary policies, which we believe will support equity markets as countries and businesses adapt to a post-Covid world. We note corporate earnings are on the rise in the US, Europe, and China, with Chinese industrial firms’ profits surging 42.2% YoY to RMB 7.2tn in January-October 2021. Meanwhile, inflation remains high in Western economies (6.8% in the US; 4.9% in the Eurozone), in contrast to major Asian economies (2.3% in China; 0.1% in Japan). This may lead to a de-synchronization of central banks’ policies next year, which we think would favor Asian markets that will be less exposed to domestic rate hikes. We note the US Federal Reserve has already started its tapering by reducing its monthly bond purchases by USD 15bn, while the ECB and BoJ confirmed their easy monetary policy would remain unchanged for the time being.  

Financial Markets:  We anticipate some market volatility going forward, which will provide opportunities. After falling 4% on average in November due to concerns over the Omicron variant, we believe equity markets will benefit from the global economic growth and rising earnings amid a favorable interest rate environment. On the fixed income side, although the Fed started to tighten liquidity, we think the US is unlikely to let its cost of funding increase much. Based on our econometric model, over the next 12 months, we expect to see the effective Fed funds rate (currently 0.07%) within the [0.10%; 0.50%] range, the 10-year US Treasury yield (currently 1.53%) within [1.3%; 2.0%], the 10-year German Bund yield (currently -0.40%) within [-0.4%; +0.2%], and the 10-year Chinese government bond yield (currently 2.90%) within [2.8%; 3.2%]. Meanwhile, we expect RMB to remain strong versus USD and other major currencies, on the back of China’s solid economic fundamentals and its relative resilience to the Omicron variant thanks to the country’s zero-Covid tolerance policy. We believe USD will continue to benefit from its safe-haven nature versus EUR, GBP and commodity currencies, like AUD and CAD, until we have more clarity about the toxicity of the Omicron variant. We also expect EUR and GBP to remain under pressure in the short term as Europe fights the new Covid wave.


Equity: Month to date the S&P 500, Euro Stoxx 50, and Hang Seng Index lost 0.7%, 4.5%, and 7.5%, respectively, amid increased market uncertainty and equity profit taking. Fixed Income: The 10-year US yield contracted 3bps in November to 1.53% as investors favored Treasuries over equities; meanwhile, the negative Covid backdrop resulted in a decline in Emerging Market government bonds (-2.6% in USD; -3.1% in local currencies) and High-yield corporate bonds (-3.1% in USD; -0.6% in EUR). Currencies: With respect to USD: EUR -1.7%, AUD -5.0%; CNY +0.4%; safe-haven JPY +1.0%, CHF -0.3%. Commodities: Gold edged up 0.5% in November while oil prices dropped 18.3%, amid concerns over the new Omicron variant.