2021: A Year Defined by Soaring Inflation, Covid Variants & Market Resilience
After an extremely chaotic 2020, the world pinned hopes on stability and normality returning this year.
Indeed, 2021 kicked off on a positive note as the mass vaccinations against Covid-19 and confirmation of Joe Biden’s victory in the presidential election boosted investor confidence.
Renewed stimulus hopes from Biden’s $1.9 trillion economic rescue plan fuelled the risk-on mood, propelling US stocks to record highs during the first month of 2021. Console retailer GameStop also hijacked the headlines by surging over 1600% in January as a group of investors on Reddit fuelled a short squeeze in the company’s shares.
In February, a sense of caution enveloped global markets as investors mulled over the possibility of rising inflation becoming a major theme. Signs of inflation were already spotted across the globe amid supply-chain disruptions, while prices pressures were expected to return amid an economic boom powered by vaccines and pent-up consumer demand. Taking a look at commodities, gold tumbled to an 8-month low under $1720 thanks to rising yields, dollar strength, and growing global risk appetite.
Things started getting sticky in March as coronavirus variants appeared across the globe. In the United Kingdom, the B.1.1.7 strain was initially considered more lethal than earlier variants. Different variants of the novel coronavirus were also reported in Brazil and even India which saw a spike in cases despite vaccine rollouts. On the currency front, the dollar appreciated against almost every single G10 currency as investors speculated that the massive fiscal stimulus and aggressive vaccinations would help the US economy recover.
Q2 kicked off on a positive note despite global economic uncertainty caused by the ongoing pandemic. Equity bulls remained in the driving seat amid robust Q1 earnings, the Fed’s pledge to keep rates lower for longer, and China’s eye-popping 18.3% growth in the first quarter.
In other news, Coinbase made its debut on Nasdaq on April 14th which was seen as a watershed moment for the cryptocurrency industry.
Everyone was talking about copper in May as the commodity surged to a record high of $4.9. The rally was triggered by the reopening of major economies and the robust demand for minerals needed for the green energy agenda. Given how copper is used in everything from electric vehicles to home appliances like washing machines, the outlook was heavily bullish – especially amid the bigger global focus on green energy. The commodities boom, fuelled by rising global demand and supply shortages fuelled fears around inflation across the globe.
In the United Kingdom, the Delta variant of Covid-19 clouded economic recovery hopes in June. As the third wave of Covid-19 cast doubt on more lockdown easing before July, the British Pound tumbled against every single G10 currency, sinking as low as 1.3790 against the dollar.
It was not only the UK affected by the Delta variant, it swept across Europe and started gaining ground in the United States. Hotspots were also found in Asia and Africa.
A sense of unease gripped markets in July as Covid-19 cases across the globe surged. The International Monetary Fund (IMF) warned that unequal access to Covid vaccines risked derailing the global recovery. Global stocks displayed resilience despite the Delta variant fuelling the surge in coronavirus cases worldwide. Infact, the S&P500 concluded the month of July almost 2% higher despite the growing uncertainty. Down under, the Australian dollar collapsed like a house of cards due to a surge in virus infections and lockdown restrictions in Australia.
Hong Kong stocks stole the spotlight in August as the tech-heavy Hang-Seng Index briefly tumbled into bear market territory, dropping more than 20% from its mid-February peak. The descent was driven by China’s regulatory crackdown on sectors ranging from financial technology to education and gaming.
Risk-off was the name of the game during the final month of Q3 thanks to inflation fears, growth concerns, and mounting uncertainty over Covid-19. As inflation made itself at home in the United States, Federal Reserve policymakers were forced to accept that inflation proved to be larger and more long-lasting than expected. The terrible combination of growth doubts, turmoil surrounding China’s Evergrande and Fed taper fears saw the S&P500 fall 4.8% in September.
Oil prices exploded higher in October, with WTI rising beyond $80 for the first time since 2014 as surging natural gas prices spurred greater demand for crude ahead of winter.
Tight global supply and robust fuel demand in the United States and beyond energized oil bulls. WTI concluded the first month of Q4 roughly 10% higher while Brent was not too far behind gaining 6%. Interestingly, the IMF and World Bank both issued warnings over rising inflation.
After “talking about talking about” tapering for many months, the Federal Reserve finally made a move in November.
This marked a crucial turning point as it stepped away from its emergency policy. In a process known as tapering, the Fed was set to reduce $120 billion in monthly purchases of Treasuries and mortgage-backed securities. The mighty dollar appreciated across the board, boosted by increased expectations for a reduction in the Fed’s asset purchase and interest rate hike, possibly in late 2022. During this month, the World Health Organization (WHO) also declared a new coronavirus variant to be “of concern” and named it Omicron. It was first reported to the WHO from South Africa on 24 November.
Growing uncertainty over the Omicron variant weighed heavily on market sentiment in December. With the new variant in town spreading faster than the more prevalent Delta, this clouded the global growth outlook as countries across the globe announced tighter restrictions.
The end of 2021 saw major central banks turning hawkish in the face of rising inflation.
As one of the largest central banks in the world embarked on the path to policy normalization, other banks wasted no time to tighten. We saw the Reserve Bank of New Zealand (RBNZ) raise interest rates in November, the Fed doubling down on its stimulus taper in December, and the Bank of England (BoE) also surprising markets by hiking rates. Indeed, with US inflation skyrocketing 6.8% in the year through November and consumer prices soaring across the globe, this offers a taster of what to expect in 2022.
One key thing to keep in mind is that the S&P500 closed at record highs 69 times this year despite the global growth fears and covid related uncertainty.
US equity bulls were certainly in the driving seat throughout 2021 with the S&P500 up over 27% year-to-date, marking its third straight annual increase.
There is no doubt that 2021 was a historic year defined by runaway inflation, coronavirus variants, and resilient stock markets.
With persistent inflation likely to remain a major theme in 2022, it will be interesting to see whether this forces more central banks to tighten monetary policy. Let’s not forget about the current Omicron menace and risks of new variants potentially clouding the global economic outlook. Equity bulls dominated the scene this year but will we see the same in 2022? Or will the combination of rising inflation and tighter monetary policy end the bull run?
We saw some extreme events throughout 2021 with the show set to continue in 2022. It may be wise to fasten your seatbelts in preparation for another eventful and potentially volatile year for financial markets as 2021 slowly comes to an end.
By Lukman Otunuga Senior Research Analyst
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