Market Overview

Summary of world equity markets in December

A positive finish to 2021: Despite the spread of the Omicron variant of Covid-19, major equity markets around the world ended 2021 in positive territory, boosted by mounting hopes that the variant would prove less serious than initially feared. In the US, the Dow Jones Industrial Average Index rose by 5.4% during December and by 18.7% over 2021, reaching a new all-time high towards the end of the month.

Question-marks over Omicron: UK equity markets wobbled early in December as investors tried to assess the potential impact of the new Omicron variant of Coronavirus. Concerns over its rapid spread spurred the governments of the UK’s home nations to impose varying levels of restriction on living, working and socialising, triggering fresh worries over the outlook for the struggling hospitality and leisure sectors. The Organisation for Economic Co-operation & Development (OECD) warned that Omicron could cause additional disruptions to the supply chain and exacerbate inflationary pressures.

Best year since 2016: The FTSE 100 Index rose by 4.6% over the month, reaching its highest level since February 2020 during December amid rising investor optimism that Omicron might prove less severe than initially feared. Over 2021 as a whole, the index rose by 14.3%, achieving its best calendar year performance since 2016. In comparison, the FTSE 250 Index climbed by 4.6% over December and 14.6% over the year. During the month, Dechra Pharmaceuticals and Electrocomponents joined the FTSE 100 Index, displacing Johnson Matthey and Darktrace, which were added to the FTSE 250 Index.

Inflation remains a focus: Higher costs for transport and energy drove up the UK’s annualised rate of consumer price inflation from 4.2% in November to 5.1% in December, representing its highest rate since September 2011, when it stood at 5.2%. The International Monetary Fund predicted that inflation will rise as high as 5.5% during 2022 and urged the Bank of England (BoE) to “avoid inaction bias” in dampening inflationary pressures.

Rate increase: During December, BoE policymakers tightened rates for the first time since August 2018, raising the key base rate by 15 basis points to 0.25%. The BoE warned that Omicron could curb economic growth in December and in the first three months of 2022, exacerbating existing disruption to supply chains and staffing levels. The Monetary Policy Committee is widely expected to implement further tightening measures over 2022.

Disappointing economic data: Investors were disappointed by lacklustre GDP figures released during December. The UK economy expanded by only 0.1% in October; moreover, it expanded more slowly than initially estimated during the third quarter of 2021, according to the Office for National Statistics (ONS), which revised down its growth calculation from 1.3% to 1.1%. The ONS reported that the UK economy remains 1.5% smaller than its pre-pandemic level.

Hawks circle in the US: As food and energy prices continued to rise, US inflation continued to surge – the rate of consumer price inflation soared to 6.8% year on year in November, representing its steepest annual increase since June 1982. Meanwhile, the  Federal Reserve announced that it intends to accelerate the winding-down of its asset purchase programme, indicating that the programme will end in mid-March. The news fuelled expectations of higher interest rates this year with ten policymakers predicting three increases in 2022, and two forecasting four increases.

Inflation continues to bite: Higher energy prices continued to stoke inflationary pressures in the eurozone, where annualised consumer price inflation rose from 4.1% in October to 4.9% in November. In comparison, the rate was -0.3% a year earlier, according to Eurostat. Nevertheless, President of the European Central Bank Christine Lagarde maintained that current inflation is temporary and is caused by “passing phenomena”. Elsewhere, economic sentiment in Germany deteriorated during December, according to the ZEW Indicator of Economic Sentiment, which fell into negative territory for the first time since June 2021 as bottlenecks in supply continued to weigh on production and retail trade. The DAX Index climbed by 5.2% in December and rose by 15.8% over 2021 as a whole.

Better times ahead for Japan? The economic outlook for Japan has improved, according to the country’s government, which reported stronger activity as the impact of Covid-19 continues to ease. Private consumption, employment, and business confidence are picking up, although exports are “almost flat”, and headwinds remain in the form of supply-side constraints and raw material prices. Confidence amongst Japanese businesses improved in December, according to the Bank of Japan’s quarterly Tankan survey; however, Japan’s economy contracted more severely than previously calculated during the third quarter of 2021, shrinking by 3.6% rather than by 3.1%. The Nikkei 225 Index increased by 3.5% during December and by 4.9% over the year.