At the close of business last Friday, global equities were lower on the week as the emergence of a new COVID-19 variant in South Africa upset markets. The yield on the US 10-year Treasury note traded in a wide range this week, rising to 1.65% on fears of faster tapering by the US Federal Reserve before sliding to 1.51% on Friday on the coronavirus concerns. The price of a barrel of West Texas Intermediate crude oil fell to $71.25 from $75.50 while volatility, as measured by the Cboe Volatility Index (VIX), rose to 26.7 from 17.6.
New COVID-19 variant emerges
A new, quickly spreading strain of the coronavirus was identified in South Africa this week, spooking markets on fears of travel restrictions and the potential for renewed lockdowns and other nonpharmaceutical interventions.
Equities and other risk assets sold off on Friday while the yield on safe-haven Treasuries tumbled fourteen basis points from Wednesday’s close. Stocks linked to the reopening of the economy, such as those in the travel and leisure sector, were hit hard. According to the Wall Street Journal, the South African strain has a high number of mutations that scientists think may make it more transmissible and allow it to evade some of the immune responses triggered by previous infection or vaccination.
CANADIAN ECONOMIC NEWS
Last Friday, Canada’s main stock index had its worst day in more than a year as worries about the new covid variant out of Africa resulted in a broad-based selloff. The TSX composite index was down 487.28 points at 21,125.90, but it is important to note that the TSX is still up 21.18% year to date. I think it is prudent to wait and see how fears over the Omicron covid strain will play out. The markets hate uncertainty and until we see if current vaccines will provide protection against this strain expect to see continued volatility.
US ECONOMIC NEWS
While labour shortages persist, there are signs that supply chain disruptions may have peaked. Trans-Pacific freight rates fell by a quarter while several US retail giants said they are well-stocked for holiday shoppers. Falling COVID-19 case counts, particularly in Malaysia and Vietnam, have boosted goods production.
Powell reappointed Fed chair; faster taper feared.
On Monday, US President Joe Biden reappointed Jerome Powell to a second term as Fed chair and nominated the other candidate for the job, Fed Governor Lael Brainard, as vice chair. The US 10-year Treasury note yields backed up to 1.65% in the announcement’s wake, partially on the belief that Powell is less dovish on monetary policy than Brainard.
Also contributing to the rise in rates were comments from several Fed policymakers — echoing those at the November meeting of the Federal Open Market Committee, minutes showed — backing a faster tapering of asset purchases amid more-persistent-than-expected inflation. During the Thanksgiving holiday, Goldman Sachs forecast the Fed will conclude tapering its bond buying by March instead of June and hike rates as early as June, with additional hikes projected for September and December.
US coordinates release of oil reserves
To combat rising energy prices, the United States has organized the release of reserves from the strategic stockpiles of several large petroleum consuming nations. The United States will sell up to fifty million barrels of crude oil from its Strategic Petroleum Reserve over the coming months, while China, India, Japan, South Korea and the United Kingdom will release smaller quantities. The sales are expected to have only a modest market impact given their relatively small size and concerns that OPEC+ will offset the sales by curbing planned output hikes. For perspective, the US release equates to about three days of national consumption.
US weekly jobless claims tumble
This week, the number of workers filing for unemployment benefits for the first time fell to a 52-year low of just 199,000, from 270,000 the week before. However, analysts suspect that seasonal adjustments may have distorted the data. They counsel waiting for next week’s data for confirmation. Other US data releases this week included a slight downgrade to Q3 GDP to 2.1% from 2.2% and a 0.5% decline in October durable goods orders, though core orders, which exclude defence and aircraft, rose 0.6%. Existing home sales rose by the most since January, increasing 0.8% last month, while the price for a median home in the US rose 13.1% year over year, to $353,900. Personal income rose 0.5% in October while spending rose a robust 1.3%.
EUROPEAN ECONOMIC NEWS
Germany rejects return to lockdown
Amid a record number of daily cases, the German government considered but rejected a two-week lockdown, with incoming Chancellor Olaf Scholz pushing back against the recommendation of the outgoing Angela Merkel. Scholz wants to see if more moderate measures reduce the spread before instituting a full lockdown. He is considering mandatory vaccinations for certain groups. Neighbouring Austria has instituted a full lockdown because of the spread of the Delta variant and will make vaccination compulsory as of 1 February.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
PBOC signals easier policy ahead
Analysts think China is readying markets for an easing of monetary policy after the People’s Bank of China removed language from its most recent monetary policy report that suggested restrained policy. In the quarterly report, the central bank said the economic recovery faces headwinds from temporary, structural and cyclical factors, making it more difficult to maintain a stable economy. Adjustments to the reserve requirement ratio are seen as more likely than policy rate cuts in the near-term, analysts said.