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Rate Hikes, Omicron, Metaverse
Rate Hikes, Omicron, Metaverse
25 Jan 2022
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Stock market returns vs Fed rate hike cycles
What history tells us
Recently, the Fed’s plan in accelerating tapering and rate hikes has become the spotlight, stirring up worries about potential market volatilities looking ahead. Historically, was there any pattern seen between rate hikes and stock market movements?
The chart below reveals some observations between Fed fund rate movements and US stock market performance. In the last 30 years, there were three rate hike cycles and three rate cut cycles. In each cycle, stock performance followed the direction of interest rate movements; when rates hiked, stock market rallied, and vice versa. The bottom-line is, what history tells us is that rate hikes do not necessarily mean stock markets will drop – even though this time it could, as the Fed seems to be behind the curve in containing inflation and reining in excess liquidity.
Besides Fed rate hikes, there are many factors that may contribute to market movements, such as supply-demand effects driven by investor sentiment, corporate earnings, economic growth and among many others. In any case, what’s important for investors is to look into the fundamentals of markets and underlying stocks, while not being distracted by short-term volatilities.
Fed Fund Rate vs US Stock Performance
Source: Bloomberg, as at 25 January 2022
Omicron Variant
Business as usual?
The Omicron COVID-19 variant emerged since the end of Nov 2021 is sweeping across countries with unprecedented speed and scope. In countries such as the US and the UK, the number of confirmed cases has reached all-time highs, with Omicron cases accounting for around 80% of the overall infections1.
A good news is that the Omicron infection is unlikely to be more severe than that of Delta according to preliminary researches2, despite its huge contagion. To illustrate, the world’s 7-day rolling average of fatality rate dropped to historical low since the outbreak of Omicron, even lower than that when Delta variant dominated. What’s more, vaccines targeting Omicron variant would be ready by March this year3, which can hopefully provide protection against hospitalization and severe diseases.
Besides the initial shock after the Omicron variant was reported to the WHO, key equity markets such as the US, the UK, Japan and Australia were hovering in a trading range and did not see a detrimental impact. One reason is because COVID, being around for almost two years, is no longer a surprise for investors. In any case, investors should continue to stay alert with potential market movements on any new development related to the COVID variants.
7-day rolling average of fatality of COVID-19 cases in the world
Source: John Hopkins University CSSE COVID-19 Data, Our World in Data, as at 12 January 2022
Market performance of the US, the UK, Japan & Australia
Source: Bloomberg, as at 13 January 2022
Metaverse
An ecosystem more than just gaming
Metaverse – originated from the science fiction Snow Crash in 1992 – is a term combining “meta” with “universe”, referring to an immersive virtual network in which users can interact with the computer-generated world and other users. Despite not being a new concept, interest of this term on Google has been skyrocketing since late last year – especially after Facebook changed its name.
For decades, online gaming has been the key use case of Metaverse – World of Warcraft, Fortnite, Minecraft and Roblox being the big names. On top of gaming, some pioneers have already extended the concept to other aspects, for example, South Korea’s KB Kookmin Bank developed a virtual branch in late 2021. Overtime, Metaverse has evolved into a social-oriented ecosystem with focus on connection to the real world – the requirement for a more immersive interface, monetary rewards and faster computation. The chart on the right lays out the four main categories.
As the Metaverse continues to bloom, companies across the tech sectors shall be the beneficiaries, such as software developers (e.g. gaming and social network) and hardware manufacturers (e.g. 5G, semiconductors and electronic components). With multiple companies (e.g. Tencent’s investment in Epic Games, Roblox, Discord and more) beginning their moves on Metaverse, the enthusiasm does not seem to be stopping any time soon.
Interest over time for the term “Metaverse”
Source: Google Trends, as at 11 Jan 2022. A value of 100 indicates the peak popularity for the term.
Metaverse Ecosystem
Source: HSVM, Citi Global Insights, as at 30 November 2021.
Other point(s) to note
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Remark(s)
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