A number of major themes continue to play out in global financial markets, and today's bigger than expected increase puts UK inflation at a 10-year high.
Investor apprehension is growing as rising prices, a fast-spreading Omicron variant and a likely hardening of the Federal Reserve’s attitude to monetary tightening all conspire to undermine sentiment.
Another spike in producer and consumer prices will put extra pressure on the Fed to accelerate its tapering programme in order to facilitate interest rate rises next year. The current market expectation is that the programme will now finish in March, followed by interest rate rises in the following couple of months, with a level of 0.75% possible by the end of 2022.
At the same time, the variant has placed new doubts on economic growth, with a further slew of economic numbers likely to give more colour to the current sentiment on the ground, such as the retail sales figure which is due later. It is unclear whether the increasing speed of the Omicron spread will be enough for the Fed to lessen its hawkish stance and, equally, whether its main concern for the economy relates to the variant or inflation.
This level of uncertainty has unsettled investors, and the significant gains made so far have been trimmed as the year end approaches. Even so, the Dow Jones remains ahead by 16% in the year to date, the S&P500 by 23.4% and the Nasdaq by 18%.
- Why I’m buying ‘value’ stocks and other top tips
- Ian Heslop's outlook for the US stock market in 2022
- Bill Ackman: hot sectors and the economy in 2022
- Want to buy and sell international shares? It’s easy to do. Here’s how
A similar pattern is playing out in the UK, where a significantly higher than expected inflation reading puts the Bank of England on the horns of a dilemma. The figure of 5.1% compares to a previous figure of 4.2% and was expected to come in at 4.7%, which would usually prompt an interest rate spike.
However, the recent Omicron variant has thrown the UK’s growth trajectory into doubt, notwithstanding a decent employment number yesterday. On balance, the market is still pricing in no change until the following meeting in February, although this inflation number could make the decision a closer call than had been expected.
Generally higher prices, supply chain bottlenecks and a tight labour market are themes which will clearly spill over to the New Year, all of which will put further pressure on companies in considering whether to pass on these higher costs to consumers. With the current variant also impacting the hospitality and tourism industries, pressure is likely to remain on share prices for the time being.
At the same time, the cyclical nature of the UK’s premier index, with its preponderance of oil, mining and banking stocks will also come under renewed pressure until the demand picture becomes clearer. Of some solace is the general return to previous dividend levels, with the FTSE100 currently yielding 3.5% on average and therefore at least meaning that to some extent investors are being paid to wait as the current difficulties work through.
The main indices have also seen some of this year’s earlier gains eroded, although the FTSE100 remains ahead by 11.6% and the FTSE250 by 10% in 2021.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.