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7 Dec, 2021 10:06

Fed bigger threat to stock markets than Omicron – Morgan Stanley

Fed bigger threat to stock markets than Omicron – Morgan Stanley

The potential impact of the US Federal Reserve’s move on speeding up the taper of asset purchases may turn into a much bigger headwind for the stock markets than the Omicron Covid-19 strain, analysts at Morgan Stanley say.

Strategists at the US banking major are reportedly “not that concerned about omicron as a major risk factor for equities,” but are warning that the harsh words of US Federal Reserve Chair Jerome Powell about the possible accelerated tapering of asset purchases would build headwinds elsewhere.

“Tapering is tightening for the markets and it will lead to lower valuations like it always does at this stage of any recovery,” the analysts, led by the firm's Chief US Equity Strategist and Investment Officer Michael Wilson, told clients in a note seen by Bloomberg.

Last week, Powell told a Senate panel it was appropriate for the Fed to consider speeding up the taper of asset purchases, and that it was time to retire the word “transitory” when describing inflation.

The analysts see the S&P 500 trending lower and valuations declining with the index forward price-to-earnings ratio to drop about 12%. The decline will reportedly persist “as equity investors start to demand much higher risk premiums in anticipation of considerably higher long-term interest rates.”

“Equity markets are resuming their de-rating process that began over nine months ago for numerous reasons,” strategists wrote.

US stocks finished the Monday session higher, cutting last week’s losses, as investors moved beyond concerns about the emergence and spread of the new Covid-19 variant, directing their attention to key inflation data due out this week.

The Dow Jones Industrial Average closed nearly 1.9% higher, while the S&P 500 rose 1.17%, and the Nasdaq advanced 0.93%.

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