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Daily Wrap Up 16 December 2021

16 Dec 2021 03:59 PM

Fed boost stocks, BoE lifts sterling  

It has been a surprisingly volatile 24 hours in the markets as the Federal Reserve announced it will be doubling the speed of its tapering policy last night, and the Bank of England unexpectedly hiked interest rates today. The US central bank adopted a more hawkish approach that anticipated, as the forecast is for three rate hikes next year, and three more in 2023. Usually, such an update would weigh on stocks, at least on a temporary basis, but the upbeat assessment of the US economy acted as a cue for the buyers to step into the fold. The DAX, the FTSE 100 and the CAC are showing gains more than 1% on the session, while on Wall Street the Dow Jones is up 0.5%.

In a surprise move, the Bank of England increased interest rates by 0.15% to 0.25%. The meeting was closely watched, and the consensus estimate was for rates to be kept on hold. Last month, only two of the nine members voted to hike rates, and recently policymakers were expressing concern about the omicron variant of the coronavirus, so it caught many off guard that they decided to increase rates. The rate rise was small, but it sent out an important big, that the cost of borrowing will not remain at near zero levels forever. Individuals and businesses need to prepare themselves for the possibility the UK might see several hikes in the next couple of years. GBP/USD is driving higher today, partially due to the reversal in the US dollar, and partially on account of the BoE move.

Last night’s Fed decision initially prompted a jump in the US dollar, but the positive run was short lived, and the greenback was already offside before we heard from the BoE and the European Central Bank (ECB) today. Things went from bad to worse for the dollar and now it is down 0.25%.

The ECB maintained rates at 0.00%, in line with estimates. The bank’s Pandemic Emergency Purchase Programme will come to an end in March, but the Asset Purchase Programme will be upped to €40 billion in the second quarter, and €30 billion from the third quarter. Not long after the announcement, the markets were pricing in a rate hike 0.15% for December 2022, but Christine Lagarde, the ECB chief, talked down that prospect at the press conference.

Gold was drifting lower on the run up to the Fed meeting yesterday, but thanks to the sizeable decline in the US dollar the metal has jumped today. It neared the $1,800 mark but has since retreated a little.

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