MACRO: Central banks finally take action!

For some time now, central banks around the world have changed the direction of monetary policy. Now, changes are also introduced by the largest and most important central banks in the world. Let's take a look at how the global stock market is doing now and whether we can see any difference between the Old Continent, the United States, and Asia?

The Federal Reserve lived up to market expectations. In fact, it even surprised with a clearly hawkish look, after it announced a faster wind-down of its pandemic-era stimulus and signaled three interest rate hikes by the end of 2022, aiming to ease ongoing price pressure as the economy nears full employment.

Today's data showed the number of Americans filing new claims for unemployment benefits increased by 206 thousand last week, still remaining around pre-pandemic levels. Source: Bloomberg via ZeroHedge

 In turn, the Bank of England also surprised the markets. The UK became the world's first major central bank to raise borrowing costs since the coronavirus pandemic hammered the global economy to curb inflation. Interest rates increased by 15 basis points to 0.25%. This is a small raise, however, it is worth noting that the BoE decided to make such a move despite the uncertainty related to the omicron variant. 

After today's BoE decision markets are now pricing in 30bps more hikes by Feb 2022. Source: Bloomberg via ZeroHedge

Meanwhile, in the case of the European Central Bank, it is difficult to talk about hawkish movements. ECB announced a reduction in the pace of its pandemic asset purchases over the coming quarter, citing the progress on economic recovery and towards its medium-term inflation target. However, the core asset purchase program is to be significantly enlarged and then slowly reduced. The ECB indicates that it does not expect rate hikes next year.

Today's decisions were not necessarily supportive for the whole stock market, although on the other hand, as history shows, limiting asset purchases during the economic recovery did not have such a negative impact. Therefore, after yesterday's rally on Wall Street, optimistic moods prevail today on most markets. Gains during Asian session have been limited, but in the case of Europe, increases have already exceeded 1%. The situation on Wall Street is mixed, as S&P500 and Nasdaq are trading in red while Dow Jones gains, but it is worth noting that yesterday the Nasdaq and the S&P 500 rose sharply.

As one can see, the implementation of risk factors has a positive effect on investors. As shown by the seasonality, the second half of December is crucial for the "Santa Claus Rally”. While December can be mixed for equity markets, the last days of the year are often very good as well as January.