Key watchpoints for markets as U.S. Fed meeting looms

On a special, blog-only edition of Market Week in Review, Head of Equity Portfolio Management for North America, Megan Roach, recapped recent market performance and discussed recent actions taken by China's central bank to boost economic growth. She also provided an update on the omicron variant of COVID-19 and discussed key watchpoints for markets in the coming week.

Stocks rise, government bond yields climb following recent volatility

After a recent bout of weakness in markets, the week of 6 December brought a recovery in equities, Roach said, with both the S&P 500® Index and the MSCI All-Country World Index up approximately 3% at week's end. The rebound was led by many of the same technology names that sold off in late November on worries over the omicron variant and decidedly more hawkish comments from U.S. Federal Reserve (Fed) Chairman Jerome Powell, she explained.


"With more positive news in the eyes of investors on both omicron and the situation in China, long-term government bond yields climbed as well, with the yield on the benchmark U.S. 10-year Treasury note rising from a low of around 1.34% on 3 December to approximately 1.45% as of midday Pacific time on 10 December," Roach stated.


China announces cut to reserve ratio requirement for banks


Turning to China, Roach said that although embattled property-developer Evergrande officially defaulted on its debt for the first time on 9  December, Chinese policy makers also made a couple of notable moves toward supporting economic growth. "First, the country's central bank announced it will cut the reserve ratio requirement for banks by 50 basis points starting 15  December . This should release approximately 1.2 trillion yuan ($188 billion in U.S. dollars) of liquidity into the financial sector," she explained.


Shortly thereafter, the People's Bank of China (PBOC) also announced an increase from 7% to 9% in the foreign exchange reserve requirement ratio, also effective 15   December, Roach said. This, in turn, should help boost China's export-driven economy by curbing recent strength in the yuan, she noted.


These stimulative announcements are particularly encouraging, Roach remarked, as she and the team of strategists at Russell Investments had been concerned that if China reacted too slowly to weakness in its property market , it could negatively impact the global demand cycle and performance of emerging-market equities in 2022. "With these recent actions by the PBOC, I believe the likelihood of such a scenario has been reduced," she said.

Omicron news: What the latest studies reveal

Switching to the latest news surrounding omicron, Roach said that while plenty still remains unknown about the new COVID-19 variant, a few more data points have emerged in recent days. "On the negative side, a newly published study in Japan estimates that the omicron variant is 4.2 times more transmissible than the delta variant in its early stages," she stated. However, on the more positive side, other reports appear to indicate the severity of symptoms from the variant may be somewhat mild, Roach added.


In addition, drugmakers Pfizer and BioNTech made headlines 8 December by reporting that three doses of their COVID-19 vaccine are expected to be more effective in neutralising omicron, she said. This news helped trigger some of the recent recovery in equities, Roach noted.


However, with the variant already spreading rapidly through the UK, Prime Minister Boris Johnson issued new guidance on 8 December to slow omicron's spread, she said. "These new restrictions, which are part of what's known as Plan B, urge residents to work from home and also mandate masks and vaccine passports at many UK businesses and venues," Roach stated. As a result, there's been a noticeable uptick in volatility in travel and leisure stocks, she said, particularly with the busy holiday travel season approaching.  

Fed policy meeting looms, with inflation, omicron and accelerated tapering top-of-mind

Roach concluded the segment with a look at key investor watchpoints in the days ahead. Of particular significance, she said, will be the Fed's final policy meeting of the year on 14-15 December. Given Powell's recent comments on accelerating tapering and on retiring use of the word transitory to characterise inflation, investors will be paying close attention to what the central bank has to say, Roach stated.


"Markets will be particularly tuned in to how the triangulation of the messy November jobs data, the highest inflation reading in nearly 40 years - November's U.S. consumer price index rose 6.8% on a year-over-year basis, which is the largest increase since 1982 - and ongoing uncertainty around COVID-19 variants impacts the Fed's path on both tapering and rate increases in 2022 and beyond," she remarked.  


Roach concluded by noting that while central banks in Australia, Canada and India left their policy rates unchanged at recent meetings, additional decisions by the Bank of Japan and the Bank of England the week of 13 December will reveal how coordinated the move toward less-accommodative monetary policy will be around the world.


Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.


Editor's note: Market Week in Review will return in its usual format on Friday, 17 December.