Weekly Market Insight

Weekly Market Insight – 29th November

29th November 2021

Omicron coronavirus variant prompts sharp selloff in equity markets and risk assets, President Biden taps the strategic petroleum reserve to try to take the heat out of oil prices and Irish hoteliers beginning to feel some pressure from COVID cancellations. All these stories and more are covered in this week’s insights update from BlackBee. 

Economy

Disappointingly news broke last week of a new highly transmissible COVID Omicron variant which has emerged initially from Africa. Although it is too early to say how science can tackle this latest mutation, it presents another hurdle to near term growth around the world economy coming as it does on top of already rising COVID case numbers globally. Markets reacted in a fairly predictable way late last week with risk assets falling sharply and safe havens like government bonds and gold rallying.

In the US President Biden granted Jay Powell a second term as Chair of the US Federal Reserve which at least provides investors with some consistency in this role at a vital juncture for US monetary policy as the Fed now looks to chart its path through rising inflation and a slowing economy. On the inflation front, President Biden did what he could to arrest the rise in US petrol prices in the past year (average unleaded prices have risen from $2.12 to $3.40 a gallon) by releasing 50 million barrels from the US strategic petroleum reserve. However, this only accounts for roughly half a day’s global demand so the move is likely to be nothing more than symbolic. The key problem in energy markets this year has been that supply has been very slow to get back to pre COVID levels as producers balance the dual objectives of keeping the market supplied but yet keeping prices attractive from their point of view. Our chart of the week this week provides a good example of this, illustrating that shale oil production in the US still remains well off pre-COVID levels.

Moving onto the Euro area, the minutes of the ECB’s October monetary policy meeting that were released last week acknowledged that inflation trends had been underestimated and that this required “sufficient optionality in the calibration of its monetary policy measures”. This reads like a coded suggestion that the ECB could turn hawkish in 2022 but we doubt this. Although inflation is uncomfortably high, the Euro zone economic recovery is slowing and with another highly transmissible COVID variant looming the balance of risks has shifted to the downside.

Equities

The overall tone for equity markets was generally softer last week ahead of the Thanksgiving holiday in the US but they succumbed badly to a bout of selling late in the week on concerns around the spread of the Omicron COVID variant. Most equity markets shedded 2-4% during Friday’s trading session as investors adopted a ‘sell first, analyse later’ approach to the latest COVID development. Elsewhere conditions in emerging markets remained volatile as the debacle surrounding the Turkish lira kept emerging market investors on edge.

Bonds

It was a week of two halves for sovereign bonds last week with yields initially pushing higher early in the week as Jay Powell’s reappointment as Fed chair coupled with recent comments from soon to be former vice chair Richard Clarida seemed to cement the notion that the bond taper (and perhaps a slightly quicker one) was on the way. However, everything changed late in the week as the breaking story of the Omicron variant caused a massive flight to safety and a sharp fall in government bond yields. Credit markets were generally weaker over the past week, very much taking their cue from the selloff in other risk assets.

Commodities

On the whole commodity markets were generally weaker last week as Omicron variant concerns caused oil prices to plunge, pulling the sector down along with many of the industrial metals where demand could be hurt by further pandemically led stoppages in economic activity. Meanwhile gold turned around dramatically late in the week, with its safe haven status pulling prices higher and recovering some of its earlier losses amid concerns around tighter US monetary policy and a stronger US dollar.

Sector News:

Hospitality – Tourism Ireland continues its 2022 campaigning as hotel sector battles event cancellations

Tourism Ireland last week announced another new partnership, this time with The Weather Network in Canada. The partnership involves the release of four short videos and a podcast episode on the network’s channel, aimed at promoting Ireland as a tourist destination to an estimated audience of 10 million Canadians over the next month. However, while much good work is ongoing to generate tourism interest for 2022, hotels are beginning to feel some pressure from event cancellations as a result of rising COVID case numbers here in Ireland. In response, the Irish Hotel Federation has requested additional government support to deal with over €90m in lost revenues as a direct result of these cancellations. Hoteliers are now forecasting that occupancy will be down to 34% for December and 14% for January and February, with the effects compounded by the loss of EWSS support and the local authority rates waiver being discontinued in January all of which suggests government supports may be needed yet again in early 2022. 

Commercial Real Estate – Plenty of visible competition for Dublin commercial real estate

Despite losing out on the purchase of Pennys’ distribution centre to Union Investments as well as on a stake in Facebook’s new European headquarters in Dublin to Blackstone, German real estate investor Deka Immobilien still managed to close in on the purchase of Airbnb’s European headquarters in Hanover Quay in Dublin for €41.5m last week. Deka appears keen to ramp up its portfolio of Irish real estate with the German group having already purchased premises on Grafton street for €22m as well as the Matheson headquarters for €164m this year. The move highlights how demand for Dublin CRE is strong even in the wake of increases in recent COVID case numbers.