Weekly Market Insight

Weekly Market Insight – 6th December

06th December 2021

Omicron and Fed taper shakes up the equity market again, bonds rally despite Fed Chair turning more hawkish and calls for further support for the hospitality sector grow louder. All these stories and more are covered in this week’s insights update from BlackBee.

Econonomy

As yet the severity of the economic impact of the omicron Covid-19 variant still remains uncertain. As a result, public health and central bank key decision makers generally kept their powder dry last week and awaited more scientific research before commenting on the new strain of the virus.

The Organization for Economic Cooperation and Development (OECD) released its economic outlook report which was prepared pre-Omicron discovery. They found that economic recovery, while uneven across countries since the pandemic began, had been stronger anticipated. This momentum, however, is projected to ease. In the Eurozone and US, GDP growth of 5.2% and 5.6% in 2021 is forecast to ease to 4.3% and 3.7% next year respectively. The OECD also warned that inflation could be higher and last longer than originally anticipated.

In the US Fed Chair Jerome Powell echoed inflation concerns in testimony to Congress, signalling a more hawkish stance on inflation and hinting at a quicker withdrawal of the FED’s large-scale asset purchase program in the face of an economy experiencing high inflationary pressures. Omicron news stories have added further to the inflation concerns, stoking fears that pressures on the global supply chain will increase. US jobs data released last Friday indicated that the economy was close to full employment amid a tighter labor market as the jobless rate fell from 4.6% to 4.2%, and despite non-farm payrolls only adding 210,00 jobs last month 82,000 more jobs were created than initially reported in September and October giving Powell even more encouragement to quicken the rate of the taper and increase interest rates earlier than expected.

In the Euro zone however, ECB President Christine Lagarde appeared to double down on her view that inflation was temporary, describing the recent rise in prices as a “hump” driven by energy price increases and reiterating that we are unlikely to see Eurozone rate hikes in 2022.

Equities

Markets were more reactive than public health and central bank officials in the wake of Omicron news leading to a turbulent week for equities. Initially investors ‘bought the dip’ but suffered another shakeout with the sell-off deepening in the wake of Jerome Powell’s comments around the tapering of the Fed’s asset purchase program as well as the announcement of the first omicron cases in many of the large developed economies. Meanwhile, emerging market equities remained choppy, not helped by the Turkish Lira losing 20% of its value last week against the Dollar. Having already lost 45% so far this year, President Recep Tayyip Erdogan continued to stubbornly resist raising interest rates. Last week’s equity market volatility is clear in our Chart of the Week this week which shows the recent moves in the VIX Index, also known as Wall Street’s ‘Fear Gauge’ – on Wednesday it traded at 31.1, well above its historic average of 20 and its 6-month average of 18.3. 

Bonds

Long-term Sovereign bond yields declined last week as fears over the Omicron variant and the subsequent sell-off in equities eclipsed the taper comments from Fed President Jay Powell noted earlier. 10-year yields were temporarily up on Thursday as investors worries around oil-demand were slightly eased following the OPEC+ announcement. However, US 10-year yields on Friday were at their lowest since late September, and 30-year yields fell to their lowest rate since January. 2-year yields also fell but the spread between 2-year and 10-year yields narrowed to 77 basis points, down from 130 in October, a sign investors’ have downgraded their economic expectations about the coming year.

Commodities

Oil prices and futures plunged early last week over concerns around the potential impact of the omicron variant. However, later in the week worries about near-term demand were eased slightly following the OPEC+ announcement to raise monthly output by 400,000 barrels per day by January. Combined with their decision to keep the meeting ‘in session’, which delivered a positive message about the demand prospects for oil, this saw Brent prices rise to $72 per barrel, with WTI crude for January rising to $68.32 and ICE futures for Brent Crude increasing to $71.55 per barrel on Thursday. The news came as a positive surprise to markets who expected the group to prop up prices, but the risk-off sentiment took hold on Friday which saw WTI crude-prices slide back to $66 dollars per barrel. Elsewhere gold prices fell on the back of a strengthening US dollar and the potential tightening of US monetary policy being faster than expected but clawed back some of its losses on Friday as the fall in US 10-year yields boosted the attractiveness of the safe-haven metal.

Sector News

Hospitality – Irish Hotel Federation urgently calls on government to reverse its plans to cut EWSS supports. 

Last week the Irish Hotel Federation made an urgent appeal to government to reverse its decision to cut the EWSS employment support from the 1st of December as bookings for events and social gatherings have collapsed amidst the discovery of the Omicron variant. Elaine Fitzgerald Kane, president of the IHF said that against the backdrop in cancellations and new public health guidance that the basis for the 2022 budget no longer applies. The sector now faces significant short-term pressures as December trading generally sustains seasonally slacker trading trends in January and February.

Commercial Real Estate – Demand for Dublin Office space continues to grow

Last week Linsey released its 3rd quarter report on the Irish office market which indicates that pipeline demand is strong. A total of 125,000 sqm of office accommodation was reserved by the end of September of which 75,000 sqm was reserved in the third quarter up from the 50,000 sqm reserved last quarter. 80% of this office accommodation was located in Dublin city centre indicating the continued strength of demand for the location.  The vacancy rate also fell for the first time since the onset of the pandemic to 11.3% down from 11.6% the previous quarter, with the city centre having the lowest vacancy rate of 9.7% (net of stub-standard stock).