Inflation, faster than anticipated rate hike likely to pose a risk to global equity markets: Standard Chartered Bank

COVID concerns are on the rise, globally. The World Health Organisation has flagged a new COVID variant - b.1.1.529 indicating a large number of mutations, which will require further study. This new variant has also triggered an alert in India with the government calling for rigorous screening & testing of international travellers coming from and transiting through South Africa and Hong Kong.

Now renewed COVID fears have spooked markets globally. There is a big sell-off that is noticeable across Asian markets. To discuss the impact on markets, CNBC-TV18 spoke to Manpreet Gill of Standard Chartered Private Bank.

He said, “Our advice would be to just monitor the news as it comes through because I think what we are seeing here is a few pieces of bad news coming together. It is COVID-related, as you just mentioned, the headlines over the potential variant today. But it does come at a time when market position, whether it is on the equity side or on the currency market, was quite one sided. We have also, over the last week or two, seen quite a strong break in the US dollar, and we have got some fairly strong momentum there as well. So from that perspective, it is a few different factors coming in at the same time.”

He added, “In our view, it doesn't change our expectations on the broader trends. Year-end is usually a good environment for risky assets. Unless, of course, news on COVID takes us by surprise. From an FX market perspective, it does look like strong dollar momentum is going to be with us for the next couple of months. So those are two anchors at least, I would keep in mind, when thinking about markets over the next few months.”

Gill added, “For equity markets, it is usually a seasonally strong period going into year-end. So to us, that will be the baseline unless there is a reason to expect bad news.”

On liquidity, Gill said, “I think a few different pieces of challenging information have come together when positioning of liquidity is a little bit one sided or low. But I think it is important to look through this. I think it is important to monitor downside risks from the COVID outbreak in Europe in particular, but also to not lose sight of the fact that some of the underlying fundamentals for the immediate global markets, at least, are still holding up.”

On inflation and Fed hiking rates, Gill believes that it would be a risk but markets are already more than pricing it.

“The biggest divergence today is that the analyst consensus community is looking for one rate hike in 2022. But markets are pricing in almost three rate hikes in 2022. So yes, inflation could very well end up being a little bit higher or long-lasting than we expect. But equally important is the risk that markets are being far too aggressive in interpreting how quickly the Fed may need to tighten,” he mentioned.

Gill further said, “So inflation is one of those risks we need to monitor. But a good indicator for us is the long-term inflation expectation- the 10-year inflation expectations, it's risen but it's risen back to its usual ranges where it used to be pre- COVID.”