The stock markets in 2022 are still likely to be sensitive to the spread of the Omicron variant, particularly for emerging economies, with many countries still unable to access the doses required to increase immunity against various strains of the virus.
We don’t know how the latest covid contortions will change the overall global recovery picture. After an initial panic the financial markets are volatile but in wait and see mode.
Early indications seem to show it may not cause more severe illness, particularly among jabbed citizens, but it has shown to be highly infectious, and many countries are now in another race against the virus, trying to roll out extensions to vaccine programmes to limit its spread.
The weak GDP reading for October shows just how vulnerable the UK economy is to a fresh Covid shock, at a time when prices are continuing to climb.
Stock markets in Europe, particularly in the UK and the US, are likely to stay highly sensitive to inflation and the reaction of central banks in terms of the direction of monetary policy.
Given the push and pull effect of the dual worries about the virus dragging on growth and about stimulus programmes being rolled back too quickly to combat rising prices, it may keep a lid on valuations, squeezing exuberance out of the markets.
Even though corporate earnings have held up well, markets have become hooked on the drug of cheap money and a rolling back of the huge bond buying drives, will lower liquidity in the markets.
The snarled up supply chains all over the world which have also forced prices higher, don’t look set to ease significantly.
The computer chip shortage is a big driver of delays and although new factories are being built to manufacture more, these will take years to construct so there is no quick fix to solve immediate issues.
Consumers seeing incomes squeezed may be tempted to be more conservative in their spending, and not dip quite so deeply into savings built up during the pandemic, which could hold back growth.
However the accelerated shift to digital ways of working during the pandemic may have been a costly outlay but is likely to have a deflationary effect over the longer term as new technologies lower labour costs.
China’s property woes
The future of the highly indebted property company Evergrande will still be a big risk hanging over the financial markets in 2022, particularly in Asia.
The group missed payments on its debts in early December, leading Fitch ratings agency to declare it is in default. Because of the mountain of liabilities the company has, totalling more than $300 billion, there are worries that a house of cards could have built up in the housing market.
It’s feared that the collapse of Evergrande could not just set of waves of repercussions, and pull down a flotilla of smaller property companies, but also trigger more defaults spreading across the construction and potentially financial sectors.
However, it is still likely that Beijing will attempt to stop contagion in its tracks and continue to try and orchestrate a staged dismantling of the group. But even if contagion is minimal in the financial sector, the situation is still likely to cause a further marked slowdown for China’s property and construction sector, which could dampen demand for commodities like iron ore and oil.
As Russia manoeuvres more troops to the Ukraine border, concerns about the escalation of tensions are already causing fresh volatility in energy markets.
The warning from the US, that if there is an order from Putin to invade Ukraine, Russian gas exports will be targeted, has pushed up the price of wholesale gas again.
But if conflict does break out, it is likely to cause a wave of unease across financial markets, with investors scurrying away from more risky assets and taking shelter in safe haven assets like government bonds, gold and defensive stocks like consumer goods, healthcare and utilities.
The UK has also said it’s considering all options in how to respond if Moscow invades Ukraine, including economic sanctions.
If tensions are calmed we are still likely to see wholesale gas prices stay elevated, given the structural shortage in gas markets. Developing major new gas projects is an expensive and time-consuming process and there is likely to be high demand for gas as a vital transition fuel as we move toward a lower carbon energy mix.
For the UK market, the often tense negotiations with the EU regarding trade are likely to continue to weigh on investor sentiment.
Although the UK has reportedly put forward significant concessions to calm tensions, such as not immediately requiring the withdrawal of the participation of the European Court of Justice in enforcing the Northern Ireland protocol, there is still much uncertainty over how this will play out and what effect this will have on trade.
There has also been progress in terms of the dispute over post Brexit fishing rights, but the number of new licences being handed out has not satisfied many French fishermen, with a planned blockade of Calais still in their sights.
The struggle to regain ground for many companies is likely to continue, given the added red tape wound around exports.
The latest snapshot from the ONS indicates how much of a back foot UK companies are still on, with British goods exports 5.1% below their level in late 2018, with exports to the EU still 8% below the level they were three years ago.