World stocks have marched back towards record highs as traders waited to see if Europe’s top central banks, the ECB and Bank of England, would match the US Federal Reserve’s upbeat message and cut stimulus.
There was more drama in Turkey as the record low lira plunged another 3 per cent ahead of its own central bank meeting, and Omicron numbers were rocketing globally, but for once it wasn’t infecting the major markets.
The pan-European STOXX 600 index jumped 1.4 per cent early on led by the tech and energy sectors. Wall Street futures were also pointing up again, while the bond and currency markets seemed happy with the Fed’s turbo taper plan to end its pandemic-era bond purchases by March.
“If the Fed moves (hikes interest rates next year), it will be okay as long as there is growth,” said Barrow Hanley’s Head of International Equities Rand Wrighton, referring to bets US rates could go up three times before the end of 2022.
He also added that while the rapid spread of the Omicron COVID-19 variant might delay the timing of economic recoveries, it shouldn’t ultimately alter the broader trajectory.
The Fed had laid out a scenario in which the pandemic, despite the Omicron variant, gives way to a benign set of economic conditions, with inflation easing largely on its own, interest rates increasing slowly, and unemployment staying low.
“The economy no longer needs increasing amounts of policy support,” Fed Chair Jerome Powell said.
Attention now turns to the ECB and BOE, which are also trying to balance the need to support economies threatened by the virus with the need to cut money printing to cool surging inflation.
The ECB’s 1245 GMT policy statement is expected to see it dial back its stimulus one more notch. But it is also expected to pledge ongoing support, sticking to its long-held view that inflation will abate on its own.
However, markets have ramped up bets that the BoE, which announces its decision at 1200 GMT, could finally raise rates after data on Wednesday showed British consumer price inflation at a more than 10-year high following another strong surge.
“There is clearly more pressure on the BoE to get along with it and start to normalise policy after having bottled it at the last meeting … though the consensus is the BoE will hold fire and wait until the fallout from the Omicron variant becomes clear,” Tapas Strickland, a director of economics at National Australia Bank, wrote in a note to clients.
Sterling was up 0.2 per cent to just under $1.33 having peaked for the year back in May at $1.4250. The euro climbed a similar amount to just over $1.13 even though forward-looking euro zone purchasing manager data came in weaker than expected.
Europe is facing a fourth wave of infections and many governments have been encouraging citizens to stay home and avoid unnecessary social contact.
IHS Markit’s Flash Composite Purchasing Managers’ Index, a good indicator of overall economic health, dropped to 53.4 in December from 55.4 in November, its lowest since March and below the 54.0 predicted in a Reuters poll.
That headline number was dragged down by the services PMI, which sank to an eight-month low of 53.3 from 55.9. While above the 50-mark separating growth from contraction it missed the Reuters poll estimate for 54.1.
“The euro zone economy is being dealt yet another blow from COVID-19, with rising infection levels dampening growth in the service sector in particular to result in a disappointing end to 2021,” said Chris Williamson, chief business economist at IHS Markit.
It wasn’t looking like a good Christmas for Turkey either.
The lira dropped to an all-time low beyond 15 against the dollar ahead of another expected interest rate cut by the central bank, which has fallen in line with President Tayyip Erdogan’s risky new economic program.
“We exited local markets in September – we went to zero,” said Aegon Asset Management’s head of emerging market debt Jeffery Grills, blaming the direction the country’s economic and monetary policies were now taking.
The lira has halved in value this year.
Things were far smoother in the commodity markets however. Oil rose towards $75 supported by record US implied demand and falling crude stockpiles, while cooper which is highly sensitive to the health of the global economy rebounded 2.2 per cent after falls on Wednesday has taken its losses since October past 11 per cent.