Have markets learnt to stop worrying and love Omicron? After a nervy fortnight, traders regained confidence early this week. On Tuesday, the FTSE 100 returned to the levels it had reached before news of the variant triggered a mini-meltdown at the end of November. Other world markets have also rallied. Brent crude oil hit $76 a barrel, although it remains short of its pre-Omicron level.
Much remains unknown about the new variant, but investors have been reassured by early reports from South Africa suggesting that while Omicron is highly transmissible, it may cause less severe illness than previous variants of Covid-19.
The Fed turns hawkish
Yet below the surface all is not well. As John Authers notes on Bloomberg, the CBOE VIX Volatility index, the US stockmarket’s “fear gauge”, spiked above 30 last week before falling back. From the global financial crisis to the advent of Covid-19, VIX spikes have almost always coincided with “a significant financial event”.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
The cause this time may be as much Jerome Powell as Omicron. The boss of the US Federal Reserve said last week that he would “retire” the use of the word “transitory” to describe inflation.
The Fed’s insistence that inflation is “transitory” has been “much-maligned” as successive monthly figures show price rises sticking around, says Randall Forsyth in Barron’s. Powell has also suggested that the Fed may reduce – or “taper” – its $105bn in monthly bond purchases more quickly than planned. The Fed has bought $3trn in government bonds with printed money since March 2020, which has financed “about half” of the US government’s pandemic stimulus deficits. It is sometimes said that a central bank’s job is to remove the punch bowl from the party; in this case, the Fed “would be slowing its pour only gradually”. Faster tapering would see policy go from being “super-crazy easy to merely highly accommodative”.
In the past Powell has backed down if his hawkish comments upset markets, Matt Maley of Miller Tabak + Co. tells Bloomberg. Yet this time he has “doubled down… they’re hitting the brakes much harder”. High inflation is becoming a political issue in the US, while Powell needs a Senate confirmation vote before he can begin a second term as Fed chair next year.
No more market bailouts
Bond markets have taken Powell’s comments to heart. Yields on long-dated bonds have fallen, while those on short-term ones have risen, a sign that markets expect higher interest rates and slower growth ahead.
Traders are used to relying on the “Fed put”: when bad news comes around the Fed reliably rescues markets with easy money. The result has been that stocks sometimes rise following bad economic data (a pattern known as “bad news is good news”). The fact that Powell struck a hawkish tone even as Omicron uncertainty gripped markets has taken away that comfort blanket. For the first time in years, traders are having to get used to the idea that bad news might just be ba
-
Reeves urged to axe stamp duty from UK shares held in an ISAChancellor Rachel Reeves is reportedly considering axing stamp duty from UK shares held in stocks and shares ISAs. What could it mean for your portfolio?
-
Family investment companies explained: how the ultra wealthy shield their money from the taxmanWealthy families are increasingly turning to family investment companies to keep more of their money away from HMRC – but what are these arrangements and how do they work?
-
Yoshiaki Murakami: Japan’s original corporate raiderThe originator of Japanese activism, Yoshiaki Murakami, was disgraced by an insider-trading scandal in 2006. Now, he's back, shaking things up
-
Cash in on the vast growth potential of the companies electrifying the worldOpinion Martin Todd, portfolio manager, head of sustainable equities, Federated Hermes, highlights three electrification companies where he'd put his money
-
Galliford Try has firm foundations for strong growthBuilder Galliford Try has a finger in a wide range of pies, notably important work in the public sector
-
Card Factory is a stand-out small-cap going cheapIn a digital world, we still value the personal touch. That’s good news for Card Factory, whose unique business model is suited to weather all economic storms
-
8 of the best smallholdings for sale nowThe best smallholdings for sale – from a medieval cross-passage farmhouse in Taunton, Somerset, to a former farmhouse with an orchard in the Welsh Marches
-
How much gold does China have – and how to cash inChina's gold reserves are vastly understated, says Dominic Frisby. So hold gold, overbought or not
-
How to invest in undervalued gold minersThe surge in gold and other precious metals has transformed the economics of the companies that mine them. Investors should cash in, says Rupert Hargreaves
-
Debasing Wall Street's new debasement trade ideaThe debasement trade is a catchy and plausible idea, but there’s no sign that markets are alarmed, says Cris Sholto Heaton
