JUST BECAUSE WE CAN’T CALL IT TRANSITORY DOESN’T MEAN INFLATION IS HERE TO STAY

This week US Fed chair Jerome Powell added to market volatility by saying the term ‘transitory’ should be retired from the discussion about interest rates. Powell’s testimony to Congress also heard him support a faster taper of Fed bond buying. Markets duly reacted, sending equities down and US government bonds up. Powell said there is confusion as transitory can mean both very short term, and not permanent. Powell maintains he has always been referring to the later definition and still believes this is the case. Markets have been looking to the short-term and reacting when each month inflation refuses to fall. With expectation now growing that the Fed will act soon there is scope for further misunderstanding.

Meanwhile, the FTSE’s reputation for being stuffed full of old-fashioned businesses has been shaken as tech companies Darktrace, Wise and Deliveroo have all chosen to list in London this year. However, the transformation to a UK version of Nasdaq may have to wait as the initial performance of many of the new additions is proving underwhelming.

GLOBAL: RAPID SPREAD OF OMICRON VARIANT UNSETTLED MARKETS

Risk markets fell in November as concerns about the rapid spread of the new variant of Covid-19 caused a sell-off in global equities. The Omicron variant has been detected in most global regions despite the swift imposition of travel restrictions to limit its spread. There is still little information about whether the new variant is vaccine-resistant or whether symptoms are more or less severe than other variants.

Equity markets have experienced a broad sell-off, with most major markets down substantially since 25th November. Oil has also dropped sharply, with Brent Crude falling from $81 to $71 a barrel over the last week. The uncertainty about the threat of the virus meant that markets have stabilised and many regions have staged a slight recovery in the first days of December. In the UK, travel and leisure stocks bore the brunt of the selling but healthcare, consumer discretionary and banks all fared poorly. The general risk-off mood saw gilts and corporate bonds rally sharply to post positive returns for November.

EUROPE: INFLATION HITS RECORD HIGH OF 4.9%

Inflation in the eurozone rose to 4.9% in November, reaching its highest level in over 20 years. Rising energy prices remain the main driver but services and non- energy industrial goods are also contributing. The increase raised concerns that price pressures will persist for longer than previously anticipated, which puts more pressure on the European Central Bank to reduce its monetary stimulus. This was further heightened by German inflation hitting 6%, as high inflation is a very sensitive issue in German politics.

Meanwhile, the OECD released its biannual economic outlook. It left its global growth forecasts more or less unchanged, however, it raised concerns that the Omicron variant threatens to intensify supply shortages and put more upward pressure on inflation. Against this background oil prices, which have made a substantial contribution to inflation this year, have fallen more than 15% from their recent peak as increasing supply and the potential for more Covid disruption ease demand pressure.

EQUITIES: DARKTRACE RELEGATED FROM FTSE 100 AS 2021 IPOs STRUGGLE

Darktrace was one of the year’s better performing IPO’s when it listed in May. The IT security company achieved a valuation of £1.7bn and its shares had risen almost 200% by late September. It was added to the FTSE 100 in October, however, questions over its valuation and growth prospects have caused its shares to tumble. Many early stage investors took the first opportunity to sell when their lock in period ended and this has contributed to the slide which will see Darktrace exit the FTSE 100 later this month.

A number of high-profile listings have struggled to live up to expectations. Money transfer company Wise, tech company Alphawave and food delivery firm Deliveroo have all listed in the UK with billion pound valuations but Darktrace is the only one of the four to remain above its listing price. Other listings, including Oxford Nanopore and Trustpilot, are above their IPO value but the mixed performance of UK IPOs is consistent with the global picture as almost 50% of the 43 IPOs over $1bn in 2021 are now below their listing value.