Global market mood soured last week, extending a slump since November. On Wall Street, Dow Jones, S&P 500 and Nasdaq futures slipped 0.89%, 1.42% and 2.25% respectively. The VIX market ‘fear gauge’ closed at its highest since February. In the Asia-Pacific region, the Nikkei 225, Hang Seng and ASX 200 dropped 1.98%, 1.27% and 2.20% respectively. Conditions were relatively tame in Europe, with the FTSE 100 gaining 0.39% as the DAX 40 fell 0.67%.
Risk aversion meant that forex traders flocked into the safety of the highly liquid US Dollar, which soared against the Australian and New Zealand Dollars. The similarly-behaving Japanese Yen and Swiss Franc also outperformed. Taking a look at commodities, growth-linked crude oil prices softened, extending a bear market. Gold prices managed to hold some ground, capitalizing on a further decline in longer-term Treasury yields.
Driving the worrying mood in sentiment appears to be a combination of the emerging Omicron Covid-19 variant and the Federal Reserve’s hawkish pivot. This past week, Chair Jerome Powell retired the word ‘transitory’ from describing inflation estimates. Policymakers at the central bank have also expressed the possibility for tapering quantitative easing faster than anticipated. This follows persistently elevated inflation readings in the world’s largest economy.
Speaking of inflation, the US will release the next CPI report on December 10th. Headline inflation is expected at a whopping 6.8% y/y in November, up from 6.2% in October. That would be the highest rate in almost 40 years. The core reading, which excludes energy and food items, is estimated at 4.9% y/y from 4.6% prior. Further upside surprise could