Uncertainty over the short-term economic outlook remained a key theme this week, with a rise in daily Covid-19 cases and inflationary pressures across the globe resulting in a risk off tone within financial markets. A downward trend emerged over the week, as investors contemplated future monetary policy amid a rapidly changing public health situation, before strongly rebounding as policy news flows provided some much-needed clarity on the outlook for 2022 and beyond. Although today’s positive price movements are not included in the performance dataset below, we have observed investors reacting positively to the Federal Reserve and Bank of England decision making this week. With policy clarity improving and investors regaining confidence that central banks will respond appropriately to inflation data flows, we anticipate that risk asset prices could push higher over the coming weeks as investors reset financial market expectations moving into the final weeks of 2021. Given the brightening short term outlook as key risks continue to abate, we will be looking to redeploy the remaining excess cash levels accordingly over the coming days back to normal levels.
Market Moving Events
With US and UK annual inflation rates reaching 6.80% and 5.10% in November respectively, speculation over central bank movements weighed heavily on markets over the week. The Federal Reserve was the first central bank out of the developed economies to hold their December monetary policy decision meeting this week, announcing changes to monetary policy which remained in line with our expectations. The majority of Federal Reserve policymakers see three interest rate hikes in 2022, and a further three rate hikes in 2023, meeting market expectations in response to the elevated 6.80% inflation rate published earlier this month. The Federal Reserve also met expectations by doubling the rate of tapering asset purchases to $30 billion a month, bringing the end to their asset purchase programme around about March 2022. This has reassured financial markets that policymakers are well aware and considerate of current and projected inflationary pressures within the US economy, and the positive market reaction has helped to end this week’s trend of declining asset prices.
UK policymakers, on the other hand, surprised markets at the monetary policy committee meeting earlier today. Following the emergence of the Omicron variant at the beginning of the month, investors had significantly reduced expectations of a policy rate hike at the December meeting, highlighting the uncertainty as a result of the Covid-19 variant in the short term. Despite this, the Bank of England surprised many financial market participants by raising interest rates 15 basis points, lifting borrowing costs to 0.25% after citing inflationary pressures as a key concern of theirs. While some institutions are concerned that the central bank has decided to raise rates at a time when Covid-19 cases are on the rise, MPC members have cited that the growing persistency of some price pressures warranted a December rate hike, albeit only 15 basis points. Given the latest BoE outcome, economists will revise and adjust their policy and economic outlook for 2022 over the coming weeks. While the BoE decision surprised markets, with inflation at a decade high and considering the strength of the UK labour market, we view this as a positive step forward, while the decision also helps to send a signal to financial markets that policy makers will attempt to tame elevated inflation at a gradual pace over the coming years.
In a busy week of central bank meetings, the European Central Bank (ECB) also announced their interest rate decision on Thursday, where it was established that the central bank would temporarily boost regular monthly bond-buying for half a year to smooth the exit from pandemic stimulus when their emergency pandemic bond-buying programme comes to an end in March. In line with expectations, the ECB is not expected to hike interest rates until 2023.
While elevated levels of uncertainty weighed on risk assets over much of the week, both the Fed and BoE monetary policy decisions have provided additional clarity to financial markets, noting that only the Fed decision has been factored into the performance of assets in the table below at this stage. In reaction to the announcements, US equities jumped on the back of the Fed’s meeting, helping to eradicate some of the weekly losses. Although not due to flow through into performance until market close today, European and Asian equity markets pushed higher following the Fed’s announcement, while UK equities have remained flat as of writing in response to the BoE policy announcement.
Within non-equity markets, government bond yields were trending lower throughout the week as investors sought safe-haven assets, however, bond yields have jumped across the board on Thursday in response to the BoE’s surprise policy hike. The biggest mover over the week from the table below has been the index-linked gilt sector, which has fallen 5.76% over the period as financial market expectations for long-term inflation have eased in recent weeks, albeit short term expectations remain elevated.
The portfolios have followed financial markets lower in the weekly time frame, with inflation, Omicron, and policy uncertainty acting as short-term headwinds for risk asset prices. While inflation and Omicron concerns are expected to remain over the coming weeks, our optimism on the outlook for financial markets throughout 2022 and beyond remains unchanged given economic forecasts and our current positioning in the economic cycle. Considering this, with greater clarity on monetary policy, and given attractive valuation levels across the market, we are expecting to redeploy our remaining elevated cash levels by the end of this week, taking our cash levels down to 2%-3% from 15%-20% across our main OBI portfolios. As a result, we are looking to increase our exposure to attractively positioned assets within the portfolios, and also add a new global investment opportunity that provides the OBI portfolios with exposure to the sustainable energy transition in our next rebalance, repositioning the portfolios in line with our 2022 outlook.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited.
Key Events We Are Watching This Week:
- Friday 17th: EU Inflation Rate, November.
- Tuesday 22nd: UK and US GDP QoQ Q3 Growth Rate.
This Day in History
On this day, in 2009, James Cameron’s Avatar was released, making more than $2.7 billion worldwide.
Thank you for reading, have a great week!
Jason, Gina & Ben