Speed bumps along recovery path


For now, we expect this volatility to continue to plague global markets albeit of a smaller scale when the market cools down. The situation can go both ways depending on the latest development of the coronavirus.

AS economies across the globe prepare to embrace the new norms of living with the pandemic while trying to return to the normalcy of pre-pandemic days, the world was stirred yet again by the discovery of a new variant called Omicron.

Said to have originated from South Africa, it is found to be more transmissible than the Delta variant, due to its more than 30 changes in the spike protein that make it unrecognisable to human antibodies. As a result, numerous cases have emerged across the world including in the United States, Japan and South Korea.

This raises the red flag for policymakers and thus, we are seeing a series of restrictions being reimposed to curb the outbreak.

However, in terms of the effects or severity of illness that Omicron could cause, more data is needed.

Understanding the level of severity of the new variant could take several days or even weeks.

As of now, the World Health Organisation (WHO) has categorised the new variant as “very high” risk but reassured the public that current vaccines are more than able to combat severe Omicron cases.

Also, some physicians from South Africa have described the related cases as mild rather than severe.

Uncertainties have permeated the financial markets triggering “flight-to-safety” responses among investors and traders across global financial markets.

Both the Dow Jones and S&P 500 tumbled sharply by more than 2% by the end of last Friday when news of Omicron appeared.

At the same time, the Japanese yen strengthened by 1.7%, taking advantage of its safe-haven status.

The FBM KLCI sank below the psychological level of 1,500 points.

Oil prices dropped with Brent losing 11.5% while the WTI shed 13%.

For now, we expect this volatility to continue to plague global markets albeit of a smaller scale when the market cools down.

The situation can go both ways depending on the latest development of the coronavirus.

Fed’s hawkish turn adds fuel to fire

As if facing the Omicron concerns are not enough, the market was also shaken by the US Federal Reserve’s (Fed) pivot on its monetary policy outlook to more hawkish than before.

On Tuesday, in an appearance before the Senate committee, Fed chair Jerome Powell stated that the central bank could accelerate the removal of bond-purchasing programme to cool down the inflationary pressure and the discussion could happen during the upcoming meeting this month.

According to Powell, it is probably time for the Fed to abandon the word “transitory”: a view that the policymakers have been insisting on previously.

Market players viewed this statement as a shift from preventing disruptions arising from the pandemic to fighting inflation as the economy is strong and inflationary pressure is to stay high.

By the end of Tuesday, major US stock indices tumbled with the Dow Jones shedding 1.86% to 34,484, S&P 500 losing 1.9% to close at 4,567 while the technology-concentrated Nasdaq fell 1.6% to 15,537.

Currently, Fed is maintaining its tapering at US$15bil (RM63bil) per month, US$10bil (RM42.3bil) in Treasuries and US$5bil (RM21.1bil) in mortgage-backed securities.

This means that we may see the bond purchases wrap up by June. But if they decide to quicken the pace, it could end in the first half of 2022.

The dovish-turned-hawkish stance is on top of what other Fed officials have stated in the minutes from last November’s meeting. They were prepared to not only trim the asset purchases’ volume but also to raise interest rate in the event of persistent inflation surge.

We believe there are several points that need to be taken into consideration while assessing the current heightened volatility situation.

A quicker tapering move does not necessarily mean that the rate lift-off will happen earlier.

Therefore, based on the hearing alone, we do not see any reason to revise our monetary policy outlook.

As of the time of writing, there is a slim chance that Omicron may turn out to be more aggressive to the point where the US government is compelled to take strict measures and bring back the previous blanket pandemic-curbing measures.

In that case, we may see the rate hike being delayed and the tapering process may get suspended.

Also, we see that the move by the Fed chair was in line with expectations and the market has already priced in the pivot.

With the annual inflation in the United States hitting 6.2% in October, Powell’s change in stance is deemed as long-overdue.

In addition, investors and traders seemed to be more focused on Omicron instead of the Fed’s stance.

So far, the market’s sudden turn has been in tandem with news regarding the new variant.

The plunge of major stock indices on Tuesday coincided with the Moderna CEO’s views that existing vaccines might not be effective against Omicron.

Based on the developments, we are maintaining our view that the Fed will only lift its interest rate during the second half of 2022 although tapering could end earlier than June 2022.

Domestically, we expect Bank Negara to maintain its current overnight policy rate at 1.75% through the first half of 2022, and will only raise it sometime in the second half of the year.

For FX enquiries, please contact:

ambank-fx-research@ambankgroup.com. For Fixed Income enquiries, please contact:

bond-research@ambankgroup.com

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