Can easing Omicron fears lift Asian markets despite inflation worries?

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Asian Markets Climb on Omicron Relief, Though Inflation Concerns Persist

Asian markets experienced gains, mirroring a strong performance on Wall Street, as investor sentiment improved due to diminishing concerns surrounding the Omicron variant and sustained optimism for economic recovery. While the Omicron variant continues to spread globally, its seemingly less severe nature has bolstered hopes for overcoming the pandemic and a return to normalcy. However, persistent issues such as inflation, supply chain disruptions, central bank monetary tightening, and geopolitical tensions continue to cast a shadow over market sentiment, with analysts cautioning that the exceptional gains seen in recent years may be more challenging to replicate in 2022. Despite these headwinds, equities are anticipated to remain an attractive investment class compared to other liquid assets.
Wall Street Sets a Positive Precedent

The positive momentum in Asian markets was initiated by a strong lead from Wall Street, where major indices reached new milestones. The Dow Jones Industrial Average and the S&P 500 both closed at record highs, while the Nasdaq Composite also saw a significant rally. This performance was partly driven by the notable surge in technology giants, including Apple, which briefly achieved a valuation of US$3 trillion, and Tesla. This upward trend on US exchanges provided a strong foundation for Asian markets to follow.
Key Asian Markets Show Gains

Following the lead from the US, several major Asian markets registered gains. Sydney's market saw an increase of approximately two per cent, and Tokyo's Nikkei 225 index rose by 1.8 per cent. Other markets such as Singapore and Taipei also experienced gains exceeding one per cent. Hong Kong's Hang Seng Index edged up by 0.1 per cent, while Mumbai, Bangkok, and Jakarta also reported positive movement. Conversely, Shanghai's Composite Index experienced a slight dip of 0.2 per cent, and Seoul's market remained flat.
Federal Reserve Minutes and Inflation Under Scrutiny

Investors are closely monitoring the release of the minutes from the Federal Reserve's December policy meeting. The market is seeking clarity on the Fed's future plans regarding interest rates, particularly in the context of surging inflation. The central bank has already commenced tapering its bond-buying program, and the focus has now shifted to potential interest rate hikes, with some anticipating multiple increases before 2023. Furthermore, expectations of rising US interest rates have contributed to the dollar reaching its highest levels since late 2017 against other currencies.
Outlook for 2022: Challenges and Opportunities

Looking ahead to 2022, market strategists anticipate a more challenging investment landscape compared to the preceding years, which saw substantial double-digit returns from 2019 to 2021. While equities are expected to continue offering attractive returns relative to other liquid asset classes, the potential for such high growth rates is viewed with caution. Inflation is projected to persist, although it may moderate in the latter half of the year. Strategists also foresee a strong January, characterised by increased trading volumes and robust sales and earnings reports. The private sector is expected to be the primary driver of GDP growth in 2022, and the Federal Reserve is anticipated to maintain an accommodative stance, potentially fostering a sustained "Goldilocks" economic environment.

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Can easing Omicron fears lift Asian markets despite inflation worries?

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