As we are now only 9 days away from Christmas itself, I’m sure many thoughts are turning to family arrangements and celebrations over the Christmas holiday period and in many ways, although this year will be far from normal, it will certainly be a far cry from last year’s restrictions.
You can’t go anywhere without bumping into the latest statistics about Omicron and I certainly don’t intend to add to that subject here in any direct detail, because there’s already too much conflicting information out there as to how serious the spread of this latest variant will in fact be in terms of degree of illness and hospitalisations etc.
Rather, I would like to turn my attention firstly to the impact that we are seeing on markets, both directly from the concerns over Omicron, but also the potential implications that this could have for the supply chains and indeed, inflation, which we are seeing spiking around the world.
It’s interesting to see that with UK inflation figures up at 5.2%, the Bank of England has today decided to increase interest rates from their historically low level of 0.1% to 0.25% Bank base rate.
By comparison, with inflation around 6.8% in the US, the Federal Reserve decided to leave rates where they were.
Traditionally, interest rate manipulation by central Banks has been seen as an effective way to control inflation and clearly, with an inflation target of 2.5%, an actual inflation at more than double that is something the Banks need to take very seriously.
However, when we flip back to the implications of Omicron and the wider investment markets, we’re really not seeing major concerns being interpreted into the markets themselves.
In fact, over the last 2 weeks, we’ve pretty much seen that the losses that were in evidence at the end of November when Omicron first surfaced, have been reversed and despite daily volatility, markets are trading relatively strongly.
As we know, markets are always trying to anticipate the next moves and last month it was widely expected that the Bank of England would increase interest rates and of course, they didn’t. This time around, markets were anticipating rates would remain unchanged, but we now know they have been increased.
I think however, the following graph helps to put it in perspective when you look at interest rates over the last 16 years and from this, I think you can see that it is rather more a symbolic upwards movement rather than a major rattling of the financial sabre!
There are schools of thought that say with the increased rates of taxation that are coming through in the UK, Europe and the US, that these will all have an impact on people’s spending ability and thus, will be a negative influence on inflation rates and therefore, it begs the questions whether interest rate hikes now are appropriate or not.
In fact, comments from Suren Thiru, Head of Economics at the British Chamber of Commerce, suggests that today’s rate increase will have little effect on most firms, although many may view this as the first step in a longer term policy movement – however, he added as the current inflationary spike is mostly being driven by global factors, higher interest rates now will do little to curb further increases in inflation.
Talking this week to one of the Fund Managers that we work closely with, he was of the view that certainly in the EU and UK, inflation may well peak in the middle of 2022, because as he said, inflation cannot continue to rise or remain at its higher levels whilst we have a backdrop of the continued slowdown in China. As always, people have differing opinions.
We also know that some inflationary pressures have been caused by supply chain issues and yet last week, General Motors in the US announced that their supply of chips for their car components were now back on track and that they were no longer suffering a shortage. This in itself helps to endorse the view that industry is progressively finding ways to adjust its productivity by learning to live with the constraints of Covid.
Bringing all of this together, it does rather suggest that whilst we might see short term lumps and bumps in market movements, this is likely to largely be sideways until we get a clearer picture as to what the medium and longer term impact of Omicron might be, in particular in regard to supply chains and whether the inflationary pressures this could bring could extend the inflationary period.
Getting in the Christmas Spirit
Returning now to thoughts about Christmas, I thought I would look for some Christmas comments from others and I hope the following might be of interest:
‘My idea of Christmas, whether old fashioned or modern, is very simply; loving others. Come to think of it, why do we have to wait for Christmas to do that?‘ – Bob Hope.
Another one I saw that is anonymous reads ‘May you never be too grown up to search the skies on Christmas Eve’ – I quite like that thought!
And finally, ‘The thing about Christmas is it almost doesn’t matter what mood you’re in, or what kind of year you’ve had – it’s a fresh start.’ – Kelly Clarkson (American Idol winner in 2002 – no, I didn’t remember who she was either!)
Thinking about a fresh start in the New Year is perhaps a positive note to end the last newsletter of 2021 and so I would like to thank everyone for your comments and messages of support over the last year and in a couple of weeks’ time, we can start to do it all over again.
Christmas Office Hours
As a reminder, we are planning to close the office at noon on 23rd December and reopen on 4th January 2022. We will, however, be monitoring e-mails over the Christmas period, so will be able to respond to any urgent situations that may arise.
Let me close by wishing you and your families a very Merry Christmas and let’s hope that we can look froward to a better 2022.
Please see attached our Christmas greeting.
With best wishes from all at RAFP