Global stocks slid on Monday, with investors taking profits ahead of a busy week of central bank meetings that is expected to include further measures to combat high rates of inflation.
Wall Street’s benchmark S&P 500 index fell 0.9 per cent from Friday’s record high, while the technology-heavy Nasdaq index dropped 1.4 per cent.
Steven Blitz, chief US economist at TS Lombard, said looming interest rate rises in the US coupled with the spread of the Omicron coronavirus variant had added to a “bias to sell” as investors approached the end of the year.
“The time is ripe for people to consolidate positions and reduce risk,” Blitz said. However, he cautioned against reading too much into the sell-off, adding: “[The] first half of January is much more telling of market sentiment.”
The declines in the US followed similar drops in European and Asian markets. The Europe-wide Stoxx 600 index fell 0.4 per cent, while London’s FTSE 100 fell 0.8 per cent and Germany’s Dax erased its strong early gains to close flat. In Asia, Hong Kong’s Hang Seng index declined 0.2 per cent.
Investor risk-aversion was also reflected in government bond markets, with the yield on the 10-year US Treasury note dropping 0.07 percentage points to 1.42 per cent and the 10-year Bund falling 0.03 percentage points to minus 0.39 per cent. Lower yields reflect higher prices for the bonds, which are treated by many investors as safe haven assets.
The caution comes before three highly-anticipated central bank meetings this week. The US Federal Reserve, the European Central Bank and the Bank of England are all due to make policy announcements.
A report last week showed US consumer prices increased 6.8 per cent in November from a year ago — the fastest annual pace in almost 40 years. The Fed is expected to announce that it will accelerate the pace at which it withdraws its monthly bond purchases, setting the stage for it to begin raising interest rates next year.
Financial markets are pricing in a roughly one-in-three chance that the Bank of England will raise UK interest rates from 0.1 per cent to 0.25 per cent when it meets on Thursday, while the European Central Bank is also under growing pressure to reduce its monetary stimulus. Surging energy prices and supply chain bottlenecks pushed eurozone inflation to a record 4.9 per cent in November.
Investors are also grappling with almost daily updates on the effectiveness of vaccines against the Omicron coronavirus variant, the latest of which — published by the UK Health Security Agency on Friday — found that booster shots could be up to 75 per cent effective against symptomatic infection from the new strain.
That coincided with the emergence of “reassuring” data from South Africa, with Harsha Somaroo, vice-president of the country’s Public Health Association, suggesting that vaccination plus immunity built up from previous infection provide a degree of protection against severe symptoms.
Wei Li, chief investment strategist at the BlackRock Investment Institute, said “our read of the new variant is that it represents a delay, not a fundamental derailment, of the restart story”.
Despite the short-term caution in markets, BlackRock predicted in its annual outlook on Monday that global stocks would continue to climb in 2022, albeit at a slower pace than this year, while bond prices would decline.
“We are moderating our risk-taking somewhat . . . [but] we’re keeping our conviction that it’s going to be another positive year” for stock markets, Li said.
