Market Overview – 19/01/2022

Global equity markets continued to gyrate last week as investors tried to balance the development of Covid-19 and the changing expectations of central bank policy. Although transmission rates of the Omicron variant are much higher than previous iterations, there is a growing feeling that it is potentially less deadly. We have seen restrictions reimposed in some countries, especially continental Europe and parts of Asia, but there is optimism that the social and economic damage of previous lockdowns will not be repeated. As a result, money has flowed back into the reopening names such as airlines, hospitality and leisure.

At the same time, central banks, especially the US Fed, have signalled that they will start to tighten monetary policy this year to temper rising inflation expectations. This will take the form of an ending to bond purchases and an increase in interest rates plus, in the case of the US, a reduction in the size of the central bank balance sheet (allowing existing bond positions to run off). Markets are now pricing in potentially four rate rises in the US. Policy tightening is not expected to be as hawkish in the UK and Eurozone, but bond yields have been rising globally. The more aggressive pivot by the US saw 10-year Treasury yields rise from 1.5% to 1.8% in the first week of 2022. They have since stabilised around the higher level. Rising yields have led to some profit, taking in the growthier end of the market, particularly technology. The corporate results season is now upon us and arguably the most important input to inform decision making will be shared, notably how companies themselves are performing in this environment and what they are anticipating in the months to come.