| January has so far seen a fairly volatile start to the year in Equity and Bond markets. A combination of the changed interest rate backdrop and the potential tightening of monetary accommodation by Central Banks is one factor contributing to the uncertain start to 2022. The assumed impact of the Omicron variant and Political uncertainty are also feeding into the news cycle and fanning the flames of the uptick in volatility.
At times like these there is a case for taking a deep breath and having a look at the different elements contributing to the volatility to see what is actually happening.
Central Banks are tightening Interest Rates in the US and the UK as a counter to the inflation spike we are seeing at present. Central Banks need to be seen to be taking action to deal with this to ensure a soft landing for the global economy. The inflation increases we are witnessing have been primarily caused by the disruption in supply chains due to the re-opening of the world economy. This has been exacerbated by lost production due to Covid and this in turn has led to a reduction in company inventories in the face of significant demand which in turn is pushing up prices. This cycle is temporary as industrial production will return to more normalised levels, inventory will be rebuilt and inflation should dissipate naturally through 2022 as supply and demand rebalance. The business cycle is not over it is just moving into a different phase and these moves often cause markets to pause and consider.
The recent relaxation in Covid precautions, due to the impact of Omicron being less acute than feared, is a sign of the process of returning to a more normal way of life. Travel restrictions being lifted increases the potential mobility we can all enjoy and that should lead to expenditure increasing.
The recent dip in retail sales in December was caused by a combination of Omicron concerns and by the fact that many people were buying early this Christmas on the fear of shortages. Many UK consumers still have the benefit of excess savings built up through Furlough to rely on, 80% of mortgages in the UK are on fixed rate deals (Bank of England, 30.06.2021), so interest rate increases should have less of an impact on overall fixed expenditure.
Politics is also having an impact on sentiment at the present time. The outcome of the Sue Gray, “partygate” investigation, is expected later this week. Whilst the implications for the Prime Minister are significant the outcome is hardly a market moving event and will not register significantly outside the UK. The concerns about Ukraine and the Russian military build-up on their border is more of a concern.
The US have promised unprecedented sanctions against Russia in the event of any incursion and international unity on the matter seems to be solid. Ongoing talks are taking place between the parties involved and the hope would be that common sense will prevail. If a resolution to this issue can be found then sentiment would turn more positive and this headwind would be removed.
Overall then we are positive about the outlook for Equity markets. Volatility will be heightened at times but the progress made in the global economy in 2021 will be built upon and the outlook for Global GDP in 2022 is above trend.
As has been said before, if you have specific questions about your circumstances Scott and I are here to assist, so please get in touch. |
