It looks like another volatile day in store for global stock markets. Our head of markets rounds up action overnight and what's driving the UK higher on Wednesday.
Investors enter the final month of the year in reflective mood, as the Omicron variant adds to the list of concerns on the wall of worry.
In the US, hopes that the new variant could lead to a more dovish Federal Reserve were scuppered following comments from chair Jerome Powell. In the face of a strong economy and inflationary pressures, he indicated that the upcoming meeting would discuss whether it would be appropriate to accelerate the tapering process (winding down buying of bonds and mortgage-backed securities to help keep borrowing costs low and stave off another financial crisis) , which was previously due to wind down in the middle of next year.
His comments immediately switched investors’ attention to interest rate rises, the next logical step following the end of tapering, and the fact that inflation may not be transitory after all. The move away from the longstanding accommodative policy could now be in place rather more quickly than expected which, alongside the new variant concerns, was enough to send the major indices lower once more.
In addition, the oil price continued to swing significantly on the back of an uncertain demand outlook, although remaining 38% ahead in 2021.
Despite the recent weakness in markets, momentum from earlier in the year still leaves the main indices in comfortably positive territory. In the year to date, the Dow Jones has added 12.7%, the S&P500 21.6% and the Nasdaq 20.1%.
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UK markets continue to blow hot and cold in the face of Omicron uncertainty, in terms of both the medical and economic impact. Taking the lead from a more positive overnight session in Asia, shares were marked higher in opening exchanges in something of a relief rally.
Even though there is insufficient information on the latest variant to fully assess the possible impact, there is an increasing feeling that any fallout would be less severe than that seen in the initial pandemic.
In any event, and as seen in previous waves, companies are better prepared to deal with any future restrictions having experienced them before. Less positively, of course, there are already immediate impacts such as the restriction on overseas travel, which has stopped the tentative recovery of sectors such as the airlines in their tracks.
In addition, there remains the unanswered question of whether future variants and mutations will be dealt with in a similar fashion by governments and policymakers. If so, a full economic recovery will become more difficult as these interruptions interfere with the progress which companies had been making. Even so, some consider the initial market reaction to the news to have been overdone which has led to some bargain hunting as is the case in the UK today, with some rotation out of defensive shares.
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Volatility will remain nearby, however, as further details of the variant emerge and as the call for interest rate rises become louder. In the meantime, the main indices are holding on to decent gains, with the FTSE 100 up by 10.4% and the FTSE 250 by 10.8% in the year to date.
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