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Take Five: Where's Santa?

Published 12/06/2021, 02:13 AM
Updated 12/06/2021, 02:16 AM
© Reuters. FILE PHOTO: A Wall Street sign outside the New York Stock Exchange in New York City, New York, U.S., October 2, 2020. REUTERS/Carlo Allegri/File Photo

(Reuters) -How disruptive will the Omicron COVID variant prove to be for the world economy. That's a question markets are grappling with.

The Federal Reserve's Jerome Powell no longer reckons "transitory" is the right word to describe surging price pressures -- upcoming inflation numbers may prove him right.

China weighs in with data of its own, and Germany gets ready to move on from the Merkel era.

Here's your week ahead in markets from Ira Iosebashvili in New York, Vidya Ranganathan in Singapore; Marc Jones, Sujata Rao and Dhara Ranasinghe in London. Compiled by Dhara Ranasinghe.

1/ ADIOS TRANSITORY

A hawkish shift from the Federal Reserve and concern over Omicron heightens the focus on Friday's U.S. inflation data.

Fed chief Jerome Powell reckons "transitory" is no longer accurate to describe high inflation and that the Fed could in December debate speeding up its bond buying taper https://www.reuters.com/world/us/feds-powell-wages-are-not-moving-up-troubling-rate-that-would-spark-inflation-2021-12-01.

Another strong inflation print could bolster expectations of a more aggressive Fed, weighing on markets already spooked by Omicron https://www.reuters.com/business/change-suite/ready-pounce-investors-prepare-swings-opportunities-omicron-variant-spreads-2021-11-30.

U.S. consumer prices accelerated 6.2% in October - their biggest annual gain in 31 years - and could stay uncomfortably high into 2022 due to snarled supply chains.

The Fed's latest "Beige Book" survey shows firms grappling https://www.reuters.com/markets/us/us-companies-battle-rising-prices-labor-shortages-fed-survey-shows-2021-12-01 with rising inflation and scrambling to fill jobs amid labour shortages. No surprise then that the Fed's tone is shifting.

2/WHERE'S SANTA?

Stock market traders often enjoy a 'Santa rally' in December as investors load up on treats for the new year, but this one doesn't look so promising.

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The emergence of Omicron and a Fed now clearly inching https://www.reuters.com/markets/us/powell-yellen-head-congress-inflation-variant-risks-rise-2021-11-30 to raise U.S. rates are dampening https://www.reuters.com/markets/europe/global-markets-graphic-2021-11-30 festive spirits.

Wall Street's S&P 500 has notched a positive return in December 74% of the time since 1928 https://www.reuters.com/markets/europe/history-says-expect-strong-december-us-stocks-despite-omicron-fed-worries-2021-12-01 data shows, more than in any other month. But for now it and MSCI's 50-country world index are both frozen flat.

That just leaves the VIX volatility index - the so-called 'fear gauge' of world markets - doing any rallying.

3/ ROLLING THE DICE

A conservative economic growth target that pushes President Xi Jinping's 'common prosperity' agenda is what most China watchers expect in 2022 and the coming data dump may not surprise them.

Inflation is benign, affording Beijing space to pursue targeted monetary easing, even as other major economies look to tighten. Exports continue to show strength and could be even stronger if Omicron disrupts supply chains and increases global demand for electronics.

Focus is also turning to key Communist Party meetings in mid-December that set growth and policy targets that won't be released until next year. Policy advisers expect the growth target to be a modest https://www.reuters.com/markets/asia/china-advisers-recommend-lower-2022-gdp-target-headwinds-grow-sources-2021-12-02 5%-5.5% - versus the near-8% pace in 2021.

Rolling the dice on the economy is proving easier than on regulation, where more property developer defaults https://www.reuters.com/markets/rates-bonds/chinas-kaisa-struggles-relief-bond-holders-default-risk-looms-2021-12-02 loom, Macau's casinos are under siege https://www.reuters.com/world/asia-pacific/macau-gambling-group-suncitys-shares-hit-record-low-after-chairman-arrested-2021-11-30 and there's little sense of who's next in the firing line.

4/ THE DOLLAR PROBLEM

To paraphrase a former Treasury secretary, the dollar is the U.S. currency but can become the world's problem.

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The dollar's 7% year-to-date gain turned 2021 into another 'annus horribilis' for emerging markets -- tightening financial conditions and raising costs for commodity importers.

As U.S. rate-rise bets pull ahead https://www.reuters.com/markets/europe/trillion-dollar-wager-that-interest-rates-wont-rise-far-2021-12-01 of most developed peers, the dollar's flexed its muscles again. A comparison between U.S. and German "real" - or inflation-adjusted - 10-year yields shows the former's premium at the highest since last March.

Foreign entities with dollar liabilities have started their December greenback rush, boosting the currency's premium in swaps markets. That may continue until year-end.

If the Fed raises rates https://www.reuters.com/world/us/feds-powell-wages-are-not-moving-up-troubling-rate-that-would-spark-inflation-2021-12-01 next year, the dollar may weaken as it often does as a tightening cycle begins. But given the dollar's potential to surprise, bearish forecasts are remarkably few.

5/ BAPTISM OF FIRE

Olaf Scholz officially takes over as German chancellor in days to come, ending Angela Merkel's 16 years in charge of Europe's biggest economy. He steps straight into fire fighting mode.

Germany is battling soaring COVID infections https://www.reuters.com/business/healthcare-pharmaceuticals/german-state-reports-four-fully-vaccinated-people-infected-with-omicron-2021-12-01 in a fourth wave, inflation is running at record high levels https://www.reuters.com/markets/stocks/german-inflation-hits-highest-decades-increasing-pressure-ecb-2021-11-29, Europe faces an energy crunch and a Russian troop build-up near the Ukraine border has triggered alarm in the West.

Scholz, who heads a three-party coalition, will oversee the introduction of tougher COVID-19 fighting measures as the Omicron discovery escalates concerns.

Meanwhile who Scholz nominates as the next Bundesbank President https://www.reuters.com/markets/europe/who-will-be-bundesbanks-next-chief-2021-11-23 will also be watched closely as the ECB's hawks and doves battle it out. According to one press report, Joachim Nagel, a top BIS official has moved into pole position.

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