Prior to the discovery of the Omicron variant it seemed reasonable to expect that perhaps the global economy may continue to recover and reach pre-pandemic levels in the not-too-distant future. However, the discovery of the Omicron variant on the African continent and another surge in cases across Europe in late November threw a spanner in the works with markets digesting the news negatively as a flight to safety ensued.

In the days and weeks since the discovery of Omicron, scientists and politicians grappled to understand the effects of the variant and the efficacy of existing vaccines against the newly discovered strain. Since then, it has become apparent that Omicron is more infectious than the Delta variant and will likely become the dominant strain in the coming months.

In fact, during the past couple of weeks, the rise in COVID-19 cases has risen substantially in mainland Europe but more so in the UK with governments introducing a number of restrictions to curb the spread of the virus with others even mulling the possibility of making vaccines mandatory.

The global financial markets have somewhat recovered from the sell-off that occurred following the discovery of the new strain as it has become apparent that booster shots should provide adequate protection against Omicron. However, despite the discovery of the latest strain, there are other matters that are concerning investors with the persistently high levels of inflation and the hawkish tone adopted by the major central banks being top of mind for many investors.

On the inflation front, the US reported that during November inflation rose by 6.8% on a year-on-year basis, above market expectations of 6.2%, which is the highest level of inflation since June 1982 and marks the ninth consecutive month that inflation was above the Federal Reserve’s inflation target. Rising inflation is also a concern for the euro area and the UK with each reporting inflation prints of 4.9% and 5.1% respectively for November on a year-on-year basis.

This week investors will pay particular attention to the announcements of the major central banks and their views on the economic effects of the new strain and possible changes in their respective monetary policy. As at the time of writing of this article (Thursday), the US Federal Open Market Committee (FOMC) concluded its December monetary policy meeting on Wednesday where the outcome was more hawkish than expected.

Global markets will remain susceptible to any negative headlines surrounding the pandemic- Simon Gauci Borda

Conversely, expectations for the European Central Bank and the Bank of England monetary policy decisions later on Thursday are expected to be comparatively milder as central bankers are weighing the threat of the surge in virus cases against the persisting inflationary pressures.

The Federal Reserve’s FOMC announced this week that, while it has left its federal funds rate unchanged, in view of the inflationary pressures and improving labour market conditions, it will be doubling the pace of tapering to $30 billion per month in January bringing down their monetary injection programme to $60 billion in asset purchases in January.

Moreover, FOMC members revised higher their policy rate projections which now show three rate hikes of 0.25% in 2022 up from two hikes shown in the September projections. Furthermore, the FOMC also dropped the usage of the word ‘transitory’ when referring to the rise in inflation but rather acknowledged that inflation has “exceeded 2% for some time”.

The Bank of England’s Monetary Policy Committee is expected to delay raising rates at its December meeting, unlike the Federal Reserve, with market expectations being that the BoE will push forward hiking rates and take a wait-and-see approach given the spike in COVID-19 cases in the UK. as a result of the Omicron variant. The revised expectations come despite the string of strong data releases showing progress in the economic recovery while inflation remains high.

The European Central Bank is expected to announce its first step in the process of slowly withdrawing its stimulus by outlining plans to end net bond purchases under the Pandemic Emergency Purchase Programme by March 2022 in view of the improved economic conditions and rise in inflation. Having said that, the ECB is expected to maintain it open-ended Asset Purchase Programme for the time being while increases in policy rates are only likely to start in 2023.

While the discovery of the new variant initially spooked markets, it seems as though the dust has started to settle and that central banks will remain hawkish in light of higher levels of inflation and improving economies. This is based on the assumption that the economic impact from another surge in cases will be manageable primarily as the booster shots should be able to provide sufficient protection and limit the rise in hospitalisation and death rates.

However, in the near-term, given that the rise in cases is expected to continue and social restrictions are being re­-introduced, global markets will remain susceptible to any negative headlines surrounding the pandemic.

Simon Gauci Borda is a research analyst at Curmi and Partners Ltd.

The information presented in this commentary is solely provided for informational purposes and is not to be interpreted as investment advice, or to be used or considered as an offer or a solicitation to sell/buy or subscribe for any financial instruments, nor to constitute any advice or recommendation with respect to such financial instruments. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.