New COVD-19 Variant Wreaks Havoc on Markets

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The identification of the new variant of the coronavirus in South Africa, identified as B.1.1.529, has triggered a veritable wave of panic in both financial markets and the real economy. The main fear was that the reintroduction of confinement and mobility restriction measures could end up triggering a new round of global growth slowdown.

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In this context, it is not surprising that the week ended with the Dow Jones Industrial Average down 2.0%, the S&P 500 down 2.2% and the Nasdaq down 3.5%. As expected, among the main losers were cruise operators which lost on average around 10%, as well as companies in the airline sector. The energy market also suffered a significant fall – on Friday, the price of a barrel of oil lost around -13.00%. The plunge in black gold prices was the latest dramatic turnaround before a key OPEC+ meeting this week.

The question then becomes, what will the cartel do this time? According to some estimates, OPEC+ could opt to halt its current planned production increase of 400,000 barrels per day or even cut production. The group will have to take into account internal projections, published before news of the variant broke, which showed a projected surplus by early next year 2022.

What will happen to monetary policy then? It is rumoured that the US Federal Reserve may double the pace of tapering its monthly bond purchases from January to $30 billion and end its tapering in mid-March. The Fed currently reduces its purchases at a pace of $15 billion ($10 billion in Treasuries and $5 billion in mortgage-backed assets) per month. So the Fed could start raising interest rates as early as June and do so on a total of three occasions in 2022 (June, September and December).

It is worth mentioning that the minutes of the central bank’s 2-3 November policy meeting showed that several members of the Federal Open Market Committee would be open to increasing the pace of tapering its bond-buying program if inflation remains elevated. Inflationary pressures are currently at levels not seen in more than three decades. Still, the situation may change if the new variant dents both confidence and infections in the world’s largest economy.

In Europe, meanwhile, the Italian wing of the European Central Bank has called for maintaining stimulus despite rising prices. Italian bankers recommend “not rushing” to respond to inflation to prevent the recovery from losing traction. According to Fabio Panetta, the ECB should not act prematurely in response to “an episode of bad inflation” and jeopardize the recovery of the euro area economy.

In his view, monetary policy should be patient, as premature tightening would restrict spending before demand returns to trend, leading to a demand shortfall when supply normalizes that would result in too low inflation and employment in the medium term. Howbeit, at its meeting on 16 December, the ECB is expected to announce whether it will let its large Pandemic Emergency Purchase Program (PEPP) expire as scheduled at the end of March 2022 and whether it will update its standard Asset Purchase Program (APP) at the same time. In addition, it will update its inflation forecasts for the years 2021 to 2023 and publish its first forecast for 2024.

In total, it looks like uncertainty will not disappear from the global landscape any time soon…

 

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