At the close of business last Friday, global equities declined following the rapid spread of the Omicron variant of the coronavirus to much of the world. The yield on the US 10-year Treasury note fell to 1.38% from 1.48%, while the price of a barrel of West Texas Intermediate crude oil declined to $67.63 from $68.17.
As I said in last week’s newsletter, we can expect increased volatility until clarity on how governments globally and the vaccine suppliers provide more details on handling the Omicron virus. Volatility, as measured by the VIX, jumped to 30.67 from 29.6 on the week after a 10-point spike on Friday.
We looked at the last 19 times since 1990 that the VIX surged over 40% in a single day and found markets were higher 18 out of the 19 times a year later, with an average gain of 20%. November and December have been the S&P 500 Index’s second- and third-best months of the year since 1950, with the index rising an average of 1.7% and 1.5%.
Omicron variant spreading fast
The World Health Organization said that the Omicron variant is likely to spread further and poses a very high global risk because of the potential for severe consequences resulting from surges of infections in some areas. The new variant has been detected in more than thirty-eight countries around the world, up from twenty-three just forty-eight hours earlier. Early data suggests it is spreading more rapidly than previous variants.
CANADIAN ECONOMIC NEWS
The TSX pushed lower Friday to end a third-consecutive losing week amid concerns about impending action by the US Federal Reserve. The TSX is up 18.36% year to date.
US ECONOMIC NEWS
Powell warns on US economy
All major US indices are up over 15% year to date despite the recent selloff. US Federal Reserve Chair Jerome Powell believes that the Omicron variant and a recent uptick in coronavirus cases pose a threat to the US economy and muddle an already-uncertain inflation outlook. He also said that worries over the variant could reduce people’s willingness to work in person, which would slow progress in the labour market and intensify supply chain disruptions. He added that the central bank could consider reducing the pace of its monthly bond buying, a topic that he expects to discuss at the bank’s December meeting. The International Monetary Fund said the Fed should tighten monetary policy at a faster pace considering rising inflation risks.
EUROPEAN ECONOMIC NEWS
Eurozone inflation sets record
The euro zone’s inflation rate rose to a record high in November, prompting further questions about the European Central Bank’s monetary policy plans. Headline inflation came in at 4.9% for the month, which was above a consensus forecast of 4.5% and higher than October’s 4.1%. The figure was the highest on record in the twenty-five years that the data has been compiled.
Higher energy prices contributed the most to the latest inflation reading. The Organization for Economic Cooperation and Development said the major risk to an otherwise upbeat global economic outlook is that the current inflation spike proves longer and rises further than expected.
JAPAN, CHINA and EMERGING MARKETS ECONOMIC NEWS
China’s factory activity unexpectedly picked up in November, as the manufacturing purchasing managers’ index rose to 50.1 in November from 49.2 in October. The 50-point mark separates growth from contraction. Analysts had expected it to come in at 49.6.