Investors spooked by Omicron risks

The discovery of the Omicron COVID-19 variant in late November rattled UK markets. Equities tumbled, sterling weakened and corporate credit spreads jumped. And, while the initial reaction was not unique to the UK, it does seem that investors remain a bit more downbeat on the UK’s prospects relative to elsewhere. Compared to the US and euro-zone, credit spreads remain higher, sterling is still weaker, government bond yields have fallen further and the downward shift in investors’ interest rate expectations has been striking. Admittedly, equities have more-or-less recovered in line with other major benchmarks, but that seems mainly due to global factors pushing up the internationally-focused FTSE 100. For our part, we agree with investors that the UK’s near-term outlook looks fairly gloomy. In fact, we expect GDP to contract by 0.1% m/m in December, and the risks to even that subdued forecast are on the downside. But where we differ from investors is in our view of the likely pace of interest rate hikes by the Bank of England. We expect Bank Rate to reach 0.50% by end-2022, well below the 1.00% currently discounted in markets. Note: Central Bank Drop-In – The Fed, ECB and BoE are just some of the key central bank decisions expected in this packed week of meetings. Neil Shearing and a special panel of our chief economists will sift through the outcomes on Thursday, 16th December at 11:00 ET/16:00 GMT and discuss the monetary policy outlook for 2022.