Financial markets were again affected in December by developments of the omikron variant of the COVID virus. In addition, high inflation, temporary or otherwise, was a dominant factor. This put pressure on central banks to start raising policy interest rates. Times of “free” money thus seem to be over.
Shares
The broad world index (developed countries) edged 3% higher in December. At +0.8%, emerging markets did significantly less well. Due to rising long-term interest rates, growth stocks (Tech companies such as Tesla), especially compared to value stocks (such as Banks), appreciated significantly lower. This is because growth stocks generally suffer more from rising interest rates than value stocks.
Bonds
With the announcement by the U.S. central bank that policy rates are likely to be raised several times in 2022, we saw U.S. 10-year rates rise 0.06% to 1.51% in December. In Europe, the levels are still a bit lower, but the increase for the month was somewhat larger. In German government bonds, for example, 10-year yields rose 0.17% to -0.18%.
The risk premium for less risky and more risky corporate bonds fell to 0.98% and 3.73% respectively, resulting in positive returns for the month.