Inflationary headaches intensify

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Global Market Review

Omicron variant hits sentiment

Global equity markets generally fell over November as investors digested new of the discovery of the new “Omicron” variant of the Covid-19 virus in South Africa, which triggered concerns that the economic recovery might be derailed. Federal Reserve (Fed) Chair Jerome Powell warned that the emergence of the Omicron variant posed “downside risks to employment and economic activity and increased uncertainty for inflation”. The Cboe VIX Index, which tracks expected stock market volatility, rose to its highest level since May.

“Chair Powell maintained that policymakers “can be patient” about tightening rates”

Fed remains “patient”

Higher prices for energy and food drove up the rate of US consumer price inflation to 6.2% in October, its most rapid rate since November 1990. Although the Fed expects inflationary pressures to continue “well into next year”, they are predicted to subside by the second or third quarter of 2022. The Fed is set to scale back its asset purchase programme, but Chair Powell – who was nominated by President Biden for a second term – maintained that policymakers “can be patient” about tightening rates. The Dow Jones Industrial Average Index fell by 3.7% during November.

Eurozone CPI reaches record levels

The eurozone’s rate of inflation rose to a record high of 4.9% year on year during November, propelled upward by rising energy prices. Nevertheless, European Central Bank President Christine Lagarde believes that “An undue tightening of financing conditions … would represent an unwarranted headwind for the recovery” and reiterated that a rate increase in 2022 was “unlikely”. Elsewhere, Olaf Scholz is set to take over from Angela Merkel as Germany’s Chancellor following a coalition agreement between the SPD, the Greens, and the FDP. During November, the Dax Index fell by 3.8%.

Weakness in Japan

Japan’s economy shrank at an annualised rate of 3% during the third quarter as supply chain bottlenecks undermined export activity, consumption and capital spending. Although exports rose by 9.4% year on year in October, this was the weakest performance since February. The Nikkei 225 Index fell by 3.7% over the month.

A new deal for climate change

COP26 ended with the agreement of the Glasgow Climate Pact, which included undertakings to reduce Co2 emissions and cut the use of coal. However, the latter pledge was modified to placate India and China, and the pact received some criticism for failing to go far enough.