Global share markets posted strong returns in December as news the Omicron coronavirus variant was less severe, and a more optimistic economic outlook helped drive risk sentiment and share market gains in the final two weeks of the year.
Global interest rates also increased as markets priced in expectations for central banks to react to persistent inflation and an improving economic outlook.
As expected, the Federal Reserve continued to taper their QE (asset purchase) programme. The market now expects the Fed to end QE this quarter and begin hiking the Fed Funds Rate in March.
The Bank of England surprised markets in joining the tightening club by hiking its Bank Rate from 0.1% to 0.25%. The market had priced only a 40% chance of this on the view the BoE would wait for more data on the effect of the omicron outbreak. However, the BoE Governor noted the UK had a very tight labour market and more persistent inflation pressures.
The European Central Bank also confirmed they would begin to taper their QE bond buying from early 2022 as inflation and the region’s economic recovery make progress towards the ECB’s targets. The ECB remains one of the more cautious central banks and does not expect to raise interest rates this year.
Local interest rates were broadly unchanged,despite a slightly lower drop in Q3 GDP than expected and global interest rate moves. This is not surprising given the RBNZ had already begun hiking and the NZ interest rate market has priced in further OCR hikes.
The markets will now look toward the delicate balancing act that central banks face to remove monetary stimulus. If they move too quickly, they may quash growth and with it investor confidence – if they move too slowly they risk blowing more hot air into asset price bubbles and letting inflation get out of hand.