Key Themes

After Delta, here comes Omicron. While supply chain bottlenecks and persistent inflation prints have not materially subsided, recent economic indicators including those from US and China do not point to a rapid loss of growth momentum. However, the emergence of the more transmissible Omicron variant contributed to a kneejerk market pullback, although anecdotal evidence suggests mild symptoms so far. Headed into the year-end, trading liquidity and volumes are likely to dry up, while familiar headwinds like the US debt ceiling and China’s continued prioritization of common prosperity objectives remain. Still, barring any nasty surprises, 2021 has been a relatively benign year for risk assets even though the global bond yield market recalibration has begun as investors frontloaded hawkish rate hike expectations across the FOMC, BOE, and even the BOE.

The key is whether the Great Re-opening theme will be derailed with Omicron? If you recall, many tourist hubs in Asia, including Singapore, have recently opened up to great expectations that this could aid the recovery of lagging sectors like aviation and hospitality-related industries. With the Omicron variant, there could be some downside growth risk due to its greater transmissibility, albeit this could be mitigated by less severe symptoms. It may be premature to gauge if economic growth and bank loans demand would be significantly dented by Omicron at this juncture, but I suspect it may not materially move the needle for 4Q21 growth momentum unless current vaccines are useless against this variant and/or international borders lock down again.

China’s Central Committee of the Communist Part of China (CPC) concluded its sixth plenary session in early November. The meeting adopted a landmark resolution, third in Party’s 100-year history. The 2021 resolution showed that CPC is more confident in seeking a development path based on China’s own culture and history. From market perspective, the smooth political transition will give China more room to contain those tail risks to strike a balance between breaking new ground and remaining committed to self-reform. China has moved swiftly recently to contain the tail risks such as property debt problem, energy crunch and US-China relationship. One of the most important changes in November is that China’s top leadership reiterated that growth is still the top priority in pursuit of common prosperity and defusing financial risk. This is likely to alleviate the concern about the loss of growth momentum. Overall, we expect Chinese economy to grow by 8.2% in 2021.

The OCBC SME Index (SMEI) is expected to decline to 50.5 in November from 51.2 in October but remain expansionary above the 50 handle for the 10th consecutive month.

Oil falls. A coordinated release of oil reserves from the US, China and four other countries briefly pushed prices below $80/bbl. The emergence of a new coronavirus variant also added selling pressure to oil. As repeatedly mentioned, we are not of the opinion oil is headed for $100 – with the latest headwinds, we expect oil to continue trading around the $80 level for the time being.