Most major stock markets ended last week in the red as central banks moved to raise interest rates and rein in their support for the economy.
In the US, the Nasdaq slumped nearly 3.0% after the Federal Reserve’s survey of policymakers found a majority now expect three interest rate hikes in 2022 instead of two. The S&P 500 and the Dow also fell 1.9% and 1.7%, respectively.
The UK’s FTSE 100 slipped 0.3% after the Bank of England surprised the market with an increase in the base interest rate to 0.25%. The pan-European STOXX 600 also dropped 0.4% as Covid-19 restrictions tightened in several European countries.
Over in Asia, China’s Shanghai Composite slid 0.9%, with technology stocks particularly hit hard by the Federal Reserve’s more hawkish interest rate outlook.
Last week’s market performance*
- FTSE 100: -0.30%
- S&P 500: -1.94%
- Dow: -1.68%
- Nasdaq: -2.95%
- Dax: -0.59%
- Hang Seng: -3.35%
- Shanghai Composite:-0.93%
- Nikkei: +0.38%
*Data from close on Friday 10 December to close of business on Friday 17 December.
Surge in cases gives investors the jitters
Stocks started this week in the red as a surge in Covid-19 cases gave investors the jitters. The FTSE 100 fell nearly one percentage point on Monday (20 December) with travel and leisure stocks under pressure after an emergency cabinet meeting was convened to discuss possible pandemic restrictions.
Wall Street stocks also closed sharply lower, following news the Omicron variant has now been found in 43 US states and around 90 countries. Also in focus was Democratic senator Joe Manchin’s statement that he would not back President Joe Biden’s ‘Build Back Better’ bill, thereby putting the legislation in jeopardy.
At the start of trading on Tuesday, UK and European stocks had managed to claw back some of the previous day’s losses, with the FTSE 100 and STOXX 600 opening 0.9% higher after the UK cabinet said it would wait for more data before imposing restrictions.
BoE first major central bank to lift rates
Last week, the Bank of England (BoE) became the first major central bank to increase interest rates since the pandemic hit. The monetary policy committee voted 8-1 to raise the base rate from 0.1% to 0.25%, surprising investors for the second time in six weeks. Investors and economists had expected the Bank to leave interest rates unchanged because of the uncertainty created by the Omicron variant.
Governor Andrew Bailey said the Bank needed to tackle the strong inflationary pressures building up in the economy. The annual rate of inflation hit 5.1% in November, the highest level in a decade. Bailey told the BBC it could reach around 6% in the next two to three months. He said the Bank had thought “long and hard” about the impact of Omicron on economic activity before making its decision. “But it is not at all clear if the impact [on the economy] could cause inflation to come down, or even go up,” he added.
Fed and ECB reduce asset purchases
The US Federal Reserve announced last Wednesday that it would taper its support for the economy more quickly than planned. Stimulus will be reduced by $30bn a month from January and is expected to end by March.
Fed chair Jerome Powell said economic activity is on track to expand at a robust pace this year, and the US is making “rapid progress” towards maximum employment. Officials forecast that benchmark interest rates would need to rise from current near-zero levels to 0.9% by the end of 2022 amid higher inflation and declining unemployment.
The European Central Bank (ECB) also announced it would reduce bond buying under its pandemic emergency purchase programme, which is due to end in March. However, bond buying under the asset purchase programme will be increased and will continue for “as long as necessary to reinforce the accommodative impact of its policy rates”, the ECB said.
Black Friday boosts UK retail sales
Last week also saw the latest retail sales figures from both the UK and the US. In the UK, retail sales volumes rose by 1.4% in November from the previous month, faster than analysts had expected and 7.2% above their February 2020 level.
UK retail sales (MoM%)
Source: Refinitiv Datastream
Growth was driven by non-food sales, including clothes, toys, computers and jewellery, with retailers reporting strong trading around Black Friday and in the lead-up to Christmas, the Office for National Statistics said. Clothing stores sales volumes were above their pre-pandemic levels for the first time.
In the US, retail sales were below expectations, rising by 0.3% in November following a revised 1.8% gain the previous month. The suggestion is Americans started their holiday shopping earlier than usual to avoid empty shelves amid the ongoing supply chain disruption. After adjusting for inflation, retail sales fell by 0.5% in November from the previous month.
The value of investments, and any income from them, can fall and you may get back less than you invested.
Neither simulated nor actual past performance are reliable indicators of future performance.
Performance is quoted before charges which will reduce illustrated performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy.
We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document.
For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk.
Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.
Opinions expressed in this publication are not necessarily the views held throughout Brewin Dolphin Ltd.