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Market Updates

Weekly Market Update January Monday 24th 2022

US technology stocks suffer a correction as bond yields surge

US Treasury yields backed up sharply this week as investors priced in further rate hikes by the Federal Reserve in response to rising inflation, with the consumer price index having recorded a 7% rise last year. This led to a further sell-off in growth and technology stocks, with the latter having fallen close to 12% since their peak last November. Many of the poster child beneficiaries of the pandemic have experienced some of the heaviest falls, with Netflix, the online streaming television service having fallen over 25% since its high. Peloton, the manufacturer of exercise bikes and online cycling classes has dropped over 30% year to date and a massive 85% since its all-time high in January of last year. The weakness in share prices has been more broadly spread this week, not helped by results from Goldman Sachs which highlighted a huge increase in expenses, rising by 33% over the year, largely due to higher wage demands. However, the investment bank still achieved a net profit of the year of $21.2bn, more than double the level achieved in 2020 and its highest on record.

Monetary policy easing in China as growth falls to its lowest level in 18 months

On Monday, China’s National Bureau of Statistics revealed that the Chinese economy had expanded by 4% year on year in the fourth quarter, its slowest rate of growth for eighteen months, but ahead of forecasts. On the same day, the People’s Bank of China cut rate interest rates on one year lending facilities to 2.85%, whilst on Thursday, the mortgage lending rate was lowered for the first time in nearly two years. The five-year prime rate was lowered to 4.6% and the one-year rate cut to 3.7%. This reminded investors that monetary policy across the globe could be increasingly divergent this year due to contrasting rates of growth and inflation.

Broad sell-off in equities, with technology and growth stocks suffering the most

As of 12pm London time on Friday, US equities fell 3.9% over the week, whilst the US technology sector lost 5.0%. European and UK stocks, less highly valued and with a greater exposure to economically sensitive sectors fell 1.1% and 0.6% respectively. Japanese equities fell 2.6%, although the Yen rallied by over 1% versus most major currencies, cushioning the fall for overseas investors. Australian equities fell 3.0%, whilst emerging markets only lost 0.1%. Emerging markets were supported by Hong Kong stocks which rose 2.4% on the back of Chinese monetary easing, and Brazil, which increased by 2.0%, boosted by strong oil prices.

10-year US Treasury yields hit 1.9% mid-week

10-year US Treasury yields, which move inversely to price, rose to 1.9%, before dropping back to 1.78% by Friday, benefitting from risk aversion in stock markets due to inflationary concerns, and an increasingly belligerent Russia in respect of a build up of armed forces on the Ukrainian border. German yields briefly rose into positive territory for the first time in over two years, touching 0.02%, before settling back down to -0.06%. UK gilts touched 1.28% mid-week, now trading back down at 1.19%.

Metals and energy prices rise

Gold rose 1.0%, currently priced at $1,837 an ounce. Whilst industrial metals also rose, with copper trading up 2% to back over $10,000 and iron ore responding positively to Chinese monetary easing, rising over 8%. Brent crude traded above $89 a barrel for the first time in over seven years, before falling back down to $87.2 on Friday

Weekly Market Update January Monday 17th 2022

US inflation hits a near 40-year peak

Despite a brief rally intra week, growth stocks, led by technology, continued to sell off this week as the latest inflation data for the US, as represented by the consumer price index, continued to rise. The index rose 7% for the year to the end of December, its fastest pace of increase for almost forty years. Whilst this was in line with market expectations, the figure for the month of December exceeded forecasts, coming in at 0.6%. To further confirm the inflationary picture, the latest Producers Prices Index, which measures prices that producers receive for their finished goods, increased by 9.7% for the year.

The yield on 10-year US Treasuries, having touched 1.8% on Monday, has now moderated to 1.74%, but remains sharply higher than one month ago when it was trading beneath 1.40%. The market is currently pricing in four US interest rises this year, with the first hike expected in March, taking the Fed funds rate to 1% if this is borne out. Futures markets are also pointing towards moderating inflation, and with several rate hikes already priced in, the US dollar actually weakened this week despite the strong inflation data, providing a much-needed fillip to emerging markets.

As of 12pm London time on Friday, US stocks fell 0.4% over the week whilst US technology stocks declined by 0.9%, taking them down almost 8% since their peak last November. European equities lost 0.8%, whilst the more economically sensitive UK market rose 0.4%. Japanese equities gave up 0.9%, and Australian stocks similarly fell 0.9%, whilst emerging markets rose 3.0% with Latin America rising 4.6%. At a broad sector level globally, it was energy, materials and financials that led the way, whilst technology was the notable laggard.

Government bond yields in Germany and the UK also moderated this week, with the 10-year bund now trading at -0.07% and UK gilts 1.13%, whilst both being sharply up versus one month ago.

Gold rose 1.3% to $1,821 an ounce, with copper rising by just over 2% and Brent crude oil up over 4%, priced at $85.2 a barrel.

Issues under discussion

Inflationary numbers continue to climb

Whilst inflationary numbers continue to climb to new highs, there is at least some consensus that inflation will peak this year, probably by the summer for the US economy and earlier for Europe. However, thereafter is where the divergence in views become stark. Those on the transitory side of the debate expect inflation to fall to levels closer to what we had become accustomed to pre-pandemic, whilst those on the inflationary side believe inflation will remain at levels close to 4% or 5% in the US. The latter view would leave the Fed still having to do a lot of heavy lifting if interest rates have only reached 1%, whilst the former view may see less than four rate rises if the Fed interprets a drop in inflation as transitory, even if it is too early to call.

Market Update January Monday 10th 2022

Bond yields jump as fears over Omicron recede

Global equity markets have started the New Year on a weak footing as fears over the economic impact of the Omicron covid variant have receded, leading to a sharp increase in bond yields as expectations of monetary tightening rise to combat inflationary pressures. In what feels like a repeat of January last year, the 10-year US Treasury yield has jumped up from 1.51% to 1.73% in a matter of days, sending richly priced growth stocks downwards, whilst the energy and banking sectors have enjoyed a strong rally, building on their recovery from last year. Later today the latest US non-farm payrolls are released, with expectations that 400,000 new jobs were created in December. If this proves to be close to the mark, this will reinforce expectations for sooner monetary tightening from the US Federal Reserve.

As of 12pm London time on Friday, US equities had fallen 1.5% over the week, whilst US technology stocks were down 3.6%. European equities were down 0.2%, whilst UK stocks, which have a greater weighting towards financials and energy, were up 0.5%. The Japanese market rose 0.2%, whilst Australian equities gained 0.1%. Emerging markets fell 1.2% with a large divergence of returns at a country level, with Indian stocks rising 2.6%, whilst domestic Chinese stocks fell 1.7%.

Following on the heels of US Treasuries, the yield on 10-year German bund, which moves inversely to price, rose to -0.06%, reaching the highest level since May 2019. The latest European inflation numbers were released today, with the latest consumer prices index for December coming in higher than forecasted at 5.0% for the year. A number of commentators have begun to forecast this number to rollover in the coming months, therefore it is definitely one to watch out for. The 10-year UK gilt yield also rose to 1.15%, with the Bank of England having already raised interest rates from 0.1% to 0.25% in December.

Crude oil has risen by over 6%

Crude oil has risen by over 6% in the first week of the year, as traders price in higher demand as fears of Omicron wane. Brent crude is currently trading at $82.8 a barrel, whilst US WTI (West Texas Intermediate) is trading at $80.1. Meanwhile gold fell by 2.0% as expectations of US monetary tightening grow, with the precious metal now trading at $1,792 an ounce.

Issues under discussion

Leaning into cheaper, more economically sensitive stocks, whilst keeping a foot in growth stocks

Whilst it is too early to be totally confident as to the economic impact of the omicron variant, the early signs are encouraging that whilst it is more contagious, it is indeed less virulent than previous variants, as the early indications from South Africa suggested. Therefore, the focus on investors’ minds has returned to inflation.

There are solid reasons to think that inflation may peak in the coming months, not least the fact that inflation is a year-on-year comparison and very soon we will no longer be making comparisons to a period of lockdown.

Weekly Market Update December Monday 20th 2021

Global equities on the back foot

Global equities started the week on the back foot as investors took profits ahead of a busy week of central bank meetings. These were expected to include further measures to combat high rates of inflation as a report indicated US wholesale prices rose at a record pace last month, increasing pressure on the Federal Reserve (Fed) to bring its bond purchase programme to an end. Investors were also grappling with almost daily updates on the effectiveness of vaccines against the Omicron coronavirus variant.

US stocks jump on Fed decision to accelerate taper

Wednesday’s hawkish update from the Fed indicated that US interest rates were now expected to rise three times in 2022. The Fed also said that it would begin cutting its bond purchases by $30bn a month in January, double its previous pace. Investors, however, were not put off by the prospect of reduced direct market stimulus from the Fed, and instead focused on the message that the central bank would not let inflation spiral out of hand and equity markets rallied as a consequence.

This meeting of the Fed was extremely important as it took place just after Jerome Powell removed the term “transitory” from his definition of inflation. Expectations were heightened by the fact that producer prices for November rose nearly 10%. The last time US inflation was at such a level, US interest rates were in double digits.

US technology stocks slide after central bank policy shifts

The rally was short-lived as US technology stocks slid after central bank policy shifts. The declines in US stocks on Thursday, however, stood in sharp contrast to rallies in European and Asian stocks earlier in the day. The Bank of England’s Monetary Policy Committee voted 8-1 to increase rates by 0.15 percentage points to 0.25 per cent, surprising some economists who had expected the bank to hold fire given the rapid spread of the Omicron coronavirus variant. The Committee also voted unanimously to maintain the stock of UK government bond purchases. Over in Europe, policymakers at the European Central Bank (ECB) also confirmed on Thursday plans to end net purchases under the central bank’s pandemic-era bond-buying programme next March. Policymakers in the UK and the Eurozone are extremely concerned with the soaring inflation in the regions and these measures are deemed necessary to combat this rising inflation.

As of 12pm on Friday, London time, US equities fell 0.9%, however, US technology stocks had a much tougher week, falling by 2.9%. European stocks fared better falling by 0.4% and UK equities fell by 0.4%. Japanese equities increased by 0.5%, and Emerging markets fell 1.2%.

Governments Bonds

After the Fed’s hawkish tone, US Treasuries started to rise again after falling earlier in the week, with the 10-year Treasury yield, which moves inversely to price, ending the period down 0.07% at 1.41%. In the UK, the 10- year Gilt yield was up 0.02% at 0.758% and there was a very small move in the German 10-Year Bund yield which declined 0.02% to end the period at -0.367%.

Crude Oil

Crude oil prices fell over the week on Covid concerns but rallied on Thursday in the face of a weaker dollar and a larger-than-expected drop in US crude reserves. According to the latest report from the Energy Information Administration, US commercial crude reserves fell by 4.6 million barrels in the week ending December 10, almost triple what analysts had expected. Brent Crude ended the period at $73.74 USD down 1.88% with WTI Crude falling 0.77% at $71.12 USD.

Gold

Gold ended the period up 1.42% at £1,810.10 as US dollar weakness backed by the downbeat Treasury yields boosted the metal’s price.

Omicron update

South Africa’s health minister said on Friday that the government believes that vaccines and high levels of prior Covid-19 infection are helping to keep disease milder in a wave driven by the Omicron variant.

Anecdotal reports suggest that the Omicron variant driving the fourth wave, which saw the country report a record number of daily infections earlier this week, is causing less severe illness than previous variants in South Africa. Over in the UK, prominent scientist Professor Tim Spector said Omicron appears to produce a “fairly mild” illness with most people recovering “after about five days”. It is too early to draw firm conclusions but early signs indicate that Omicron could be a much milder albeit, more transmissible variant. Early data also suggest that three vaccine doses are extremely effective in slowing transmission and avoiding serious disease with booster programmes accelerating globally. Governments are keen to avoid lockdowns but restrictions are inevitable until we have more clarity.

Market Update December Monday 13th 2021

Markets bounce back as investors reassess the risk of Omicron

Equity markets bounced back this week, as a combination of factors eased fears as to the likely impact of the Omicron covid variant. Data out of South Africa continued to suggest that the variant induces less serious illness versus previous covid strains, whilst Pfizer/BioNTech said that early trials show that a third vaccine booster shot is effective against Omicron. Despite this, whilst there remains some doubt as to the impact of the Omicron variant, some countries have tightened restrictions, with a corresponding impact on businesses, particularly within the leisure sector, leading to renewed weakness in markets towards the end of the week. All eyes are on the release of US inflation data later today, with expectations that inflation will have risen to 6.8% year-on-year in November, whilst weekly filings for unemployment benefits fell to 184,000 in the week to the 4th of December, the lowest level since 1969.

As of 12pm on Friday, London time, US equities rose 2.8%, having been within just 0.1% of their all-time high mid-week. Similarly, US technology stocks bounced by 2.9%. European stocks increased by 2.9% and UK equities rose 2.6%, however, sterling fell to USD 1.32, its lowest level in over a year. Japanese equities increased by 0.9%, Australian stocks were up by 1.6% and Emerging markets climbed 1.9%.

Government bonds give back

Government bonds gave back some of their near-term gains, with the yield on the 10-year US Treasury, which moves inversely to price, rising to 1.51%. There was a smaller move in German bunds and UK gilts, but nonetheless, prices fell, with yields now standing at -0.34% and 0.78% respectively.

There was a strong rally in crude oil prices, with Brent climbing by 7.5% to $75.1 a barrel and US WTI (West Texas Intermediate) rising by 8.2% to $71.7. Iron ore also increased by 6.5%, whilst copper, which has barely been troubled by concerns over Omicron in recent weeks, increased by 1.7% to $9,540 a tonne. Gold is now trading at $1,772 an ounce, a fall of 0.6% over the week.

Evergrande, the world’s most indebted property developer, defaults on bond interest payments

The world’s most indebted property developer, Chinese company Evergrande, defaulted this week as it missed a coupon payment on Monday, having failed to pay $82.5m to investors. Subsequently, the rating agency Fitch downgraded the company to “restricted default”. Although investors were reminded that it is far from the only Chinese property company in a precarious position, as Kaisa also failed to repay a $400m bond that matured on Tuesday. On Monday, the People’s Bank of China, unleashed $188bn of liquidity into the financial system in order to limit the risk of contagion.

Weekly Market Update December Monday 6th 2021

The threat of Omicron collides with the threat of tightening monetary policy

It has been a volatile week for markets as investors wait for further clarity on the potential impact of the Omicron covid variant. Markets oscillated between falling on concerns that current vaccines may prove to be less effective against the new variant, whilst rallying as investors sort out bargains whilst betting that Omicron proves to be a milder strain of the virus. Amidst this noise, Jay Powell, chair of the US Federal Reserve (Fed), about turned on their patient approach to inflation, dropping the term ‘transitory’ from their rhetoric, whilst signalling a willingness to accelerate the tapering of their $120 billion a month bond purchasing programme.

As of 12 pm on Friday, London time, US equities were down 0.4%, whilst US technology stocks fell 0.7%, with the latter underperforming the wider market as, unlike last year, fears of rising inflation and interest rates surpassed fears of further covid induced lockdowns. European equities rose 0.1%, held back by governments introducing tougher social mobility restrictions in order to slow the spread of the new Omicron variant. Whilst, in contrast, UK equities rose over 1%, with both large-cap international stocks and mid-cap domestic stocks performing strongly. Japanese equities were down 1.4%, Australian stocks fell 0.5%, whilst emerging markets rose 1.1%.

Short-dated government bonds sell-off on expectations of US tapering

Government bonds, having rallied at the start of the week, sold off on the back of Jay Powell’s seemingly hawkish statement on monetary policy, before rallying towards the end of the week. 10-year US Treasuries are now trading at a yield of 1.42%, slightly down on the week (with yields moving inversely to prices), whilst 2-year Treasuries, which are much more sensitive to interest moves, s off over the week, with the gap between 2-year yields and 30-year yields narrowing by the most since March of last year.

This is an indication that bond markets are increasingly expecting interest rates to rise soon, with the global economy commensurately slowing down. 10-year German Bunds are currently trading at -0.37% and UK gilts 0.78%. Gold sold off by 0.8% over the week, as markets priced in rising real interest rates (interest rates minus the rate of inflation).

Crude oil falls further as Opec+ agrees to increase production

Crude oil fell further, with Brent crude now trading at $71.3 a barrel and US WTI (West Texas Intermediate) $68.0, as Opec+ (Organisation for Petroleum Exporting Countries plus Russia) agreed to increase their production by 400,000 barrels a day in January, despite the threat of Omicron on the global economy.

Confused picture as to the effectiveness of existing vaccines against the new Covid variant

The week began with the chief executive of US vaccine manufacturer, Moderna, saying that he expected existing vaccines to be less effective at tackling Omicron versus earlier strains of covid. However, this was somewhat contradicted later in the week when the University of Oxford and BioNTech, the two organisations behind the AstraZeneca and Pfizer vaccine respectively, said they expected existing vaccines to continue preventing severe disease, even in the case of the new variant.

It will be up to a further two weeks before it is known conclusively what the impact of Omicron on the global economy is likely to be, meaning volatility in markets is expected to remain elevated. The VIX index, a measure of volatility on the US equity market, rose above thirty this week, versus its long-term average of twenty.

US jobs data due to be released this afternoon

Markets are now waiting for the latest non-farm payrolls jobs numbers from the US, due to be released this afternoon, with an expectation of 550,000 new jobs having been created. This continues to be a key focus for investors trying to ascertain when and by how much the Fed is likely to tighten monetary policy.

Market Update November Monday 29th 2021

Inflation concerns give way to a new Covid variant B.1.1.529

All thoughts of recovery, inflation and monetary policy tightening were put to one side this week, as investors were rudely reminded that we remain in a global pandemic. The emergence of the Covid mutation B.1.1.529, first identified in Botswana, had governments racing to introduce travel restrictions, with Israel and the UK amongst the first to stop incoming flights from a number of southern African countries.

The concern is that this new variant, in the space of less than two weeks, now dominates all new infections in South Africa, with the effectiveness of vaccines presently unknown. The R value, or the effective transmission rate, is currently at 2 where it was first identified in South Africa, with anything above 1 indicating exponential growth.

Equities markets fall heavily on Friday

As of 12pm on Friday, London time, European equities were down 3.5% over the week, having already fallen prior to Friday due to several European countries reintroducing restrictions to combat rising Covid cases. UK equities lost 1.9% over the week, having suffered a fall of 2.7% on Friday.

Japanese stocks fell 2.9% over the week, whilst the Australian market dropped 1.6%. Emerging markets fell 1.1%, however, many markets do not open until the afternoon London time. Amongst those whose time zone had opened in the morning, India was down 4.2%, whilst Hong Kong stocks fell 3.9%. Similarly, the US stock market has yet to open on Friday, having recorded returns of 0.1% for the week to Thursday’s close. Whilst US technology stocks were down 1.3%, but this reflects rising expectations of monetary policy tightening in the US, rather than concerns over the new Covid variant.

Covid trumps inflationary concerns for the moment

Prior to Friday, the latest data for the US Federal Reserve’s (Fed) preferred measure of inflation was released for the year to October, with the core PCE index (Personal Consumption Expenditure, excluding food and energy) coming in a 4.1%, higher than the previous month’s recording of 3.7%, and the highest level in three decades. However, the market flipped from concerns over inflation and tightening monetary policy, towards fears of further lockdowns by Friday.

Haven assets rally

Government bonds, which had been selling off earlier in the week, rallied. 10-year US Treasury yields, having touched a high of 1.68% intraweek, were back down at 1.52% on Friday. It was a similar story elsewhere. German bunds, having climbed to a yield of -0.21%, fell to -0.32% whilst UK Gilts, which had risen to 1.04% on Wednesday, were back down to 0.85% by Friday.

Gold rallied on Friday, after selling off earlier on in the week on the back of various Fed officials pointing towards a faster reduction in the bond-buying programme in the face of rising inflation. Having hit a low point of $1,780 intraweek, it is now trading at $1,814 an ounce, although this still represents a loss of just over 2% for the week.

Industrial commodities sell off

Crude oil also fell sharply, with Brent crude now trading at $77.5 a barrel, having almost touched $83 mid-week. Similarly, US WTI (West Texas Intermediate) is trading back down at $73.1, having peaked at slightly over $79 on Wednesday.

Issues under discussion

Covid mutations and vaccine efficacy

Since the pandemic began, Covid mutations have always been a key risk for the global economy. Those stocks most at risk from economic lockdowns are likely to take the most pain once again whilst vaccine efficacy against this new variant is established. Travel stocks, amongst many others, being the most obviously at risk. However, we must not lose sight of how effective the vaccination effort has been to date, both in terms of efficacy and speed of delivery.

Further to this, companies such as Astra Zeneca and Pfizer have repeatedly said that should a mutation arise that evades vaccines, it would not be that difficult or long-winded to reformulate vaccines against new variants. Therefore, although we can not rule out further lockdowns, we can be reasonably confident that the length of any future restrictions and the economic damage would be commensurably less than that experienced during 2020. Markets often overreact, both to the downside as well as the upside, and we will be mindful of opportunities that this period may produce.

Market Update November Monday 22nd 2021

US stocks continue to hit new highs, despite increasing expectations for a rate rise

The US stock market hit its 66th all-time high this year, setting the market up for its second-biggest number of annual records ever, only behind that of 1995, as large-cap technology companies continue to outperform with strong earnings and positive outlooks. This contrasts with the emerging markets which have been hit by a number of headwinds, including a policy-induced economic slowdown in China, rising inflation leading to a number of emerging market central banks tightening monetary policy, a slower Covid vaccine rollout and a strengthening US dollar.

As of 12 pm London time on Friday, US equities rose by 0.5% for the week, having risen by over 25% year to date. European equities were down 0.1%, whilst the UK stock market fell by 1.6%, as energy and financial stocks sold off. Japanese equities were up 0.2%, whilst Australian stocks dropped 0.6%. Emerging markets were down 0.9%, with Latin America falling particularly hard, losing 4.9% over the week. The US dollar strengthened by over 2% versus a basket of emerging market currencies, piling pressure on those countries dependent on overseas financing.

US and UK retail sales exceed expectations, despite rising prices

Despite US retail sales data for October coming in ahead of expectations, rising 1.7% over the month, and raising further questions as to how long the US Federal Reserve can hold out before raising rates, Treasury yields, which move inversely to price, fell.

It was a similar story for the UK, as inflation came in higher than forecast at 4.2% and retail sales climbed by 1.6% in October (excluding auto fuel), also ahead of expectations, yet gilt yields also fell. 10-year US Treasury yields are currently trading at 1.53%, with German bunds and UK gilts trading at -0.34% and 0.86% respectively. However, both the US dollar and the British pound strengthened versus the Euro, with the European Central Bank not expected to raise rates anytime soon.

Crude oil eases as China and the US consider releasing reserves

Within industrial commodities copper fell just over 2%, now priced at $9,508 a tonne, and iron ore rose just over 3%, but still having given up close to 60% versus its year to date high reached in May. Brent crude fell 4.3%, now trading at $78.7 a barrel, as both China and the US said they were considering releasing reserves to ease price pressures. Gold is trading at $1,866 an ounce, broadly flat for the week, but having rallied over 8% since the end of September, benefitting from rising inflation whilst central banks continue to sit on their hands.

Investors underwhelmed by Japan’s fiscal stimulus plan

The new Japanese Prime Minister, Fumio Kishida, has begun to prepare a new fiscal stimulus plan equivalent to $350 billion, however, so far investors appear somewhat underwhelmed. The proposal involves distributing ¥100,000 (equivalent to $873) to households with children younger than 18 years old. However, last time this was done, it is estimated that recipients of the cash hoarded 70% of the money in bank savings rather than spending it. Few see any reason why it would be different this time around. At the same time, public debt to GDP stands at a massive 266% in Japan, something that will likely only deteriorate even further with such a proposal.

Turkey cuts interest rates in the face of rising inflation

The central bank of Turkey, under pressure from President Erdogan, cut interest rates for a third time since September, down to 15%. This is despite inflation spiralling out of control, having hit 20% in October. President Erdogan considers high-interest rates as part of the inflation problem. However, the Turkish lira has fallen by over 20% versus the US dollar since the rate-cutting cycle began, with the currency having weakened by close to 40% since its February peak this year.

Market Update November Monday 15th 2021

US inflation exceeds expectations once again

It has been a mixed week for markets as US inflation data has once again exceeded expectations, coming in at 6.2% for the year ending in October, higher than forecasts of 5.9%. Whilst on the positive side, company earnings results have continued to exceed expectations, with the majority of companies having been able to pass on rising costs to customers.

Congress also passed an additional $500bn of spending on US infrastructure last Friday, with the ‘Build back better’ plan covering education, social and environmental issues still to come. And if that was not enough positive news, Pfizer’s late-stage trials for its antiviral Covid 19 pill produced positive results as to its effectiveness.

Cheaper equity markets take the lead

Short-dated US Treasuries sold off on expectations of nearing US interest rate rises, despite the US Federal Reserve (Fed) re-confirming that it expected inflation to be transitory and so would remain patient. More expensive growth stocks sold off versus more economically sensitive companies trading on cheaper valuations. Against this backdrop, as of 12 pm on Friday, London time, US equities were down 1.0%, having completed their longest all time streak of closing highs since 1997 on Monday. The US technology sector fell 1.7%.

European and UK stocks, which have greater cyclical exposure, both rose 0.5%. Japanese stocks were flat, whilst the Australian market fell 0.2%. Emerging markets rose 1.4% with positive returns being experienced across broad swathes of the index.

Government bond yields rise

The 10-year US Treasury yield, which moves inversely to price, rose to 1.56% following the release of the latest US inflation data. UK gilts and German bunds rose in concert, now trading at 0.91% and -0.24% respectively.

Gold rises whilst the Fed remains patient

Gold rose by over 2%, benefitting from higher inflation and now trading at $1,855 an ounce, whilst there is no immediate prospect of rates rising until the Fed drops its line of remaining patient in the face of what it sees as transitory inflation.

UK’s GDP growth rate disappoints for the 3rd quarter, but picks up in September

The UK economy’s growth in the third quarter came in beneath expectations, with GDP growing by 1.3%, lower than forecast by the Bank of England and sharply down from the proceeding quarter when GDP grew by 5.5%, benefitting from the end of lockdown. Output in the third quarter was negatively impacted by rising cases of Covid 19 and a shortage of goods and workers hitting growth. However, September’s output was encouraging, coming in higher than expected as the economy expanded by 0.6%, a significant uplift from 0.2% in August. The UK economy remains around 2.1% below its pre-pandemic size, a much larger gap than any other country in the G7, whilst the US and China have both exceeded the size of their pre-pandemic economies.

Issues under discussion

Inflation, inflation, inflation

The start of this year, value (more economically sensitive) stocks outperformed the market materially as growth and inflation expectations rose, whilst growth stocks (companies less affected by the economic cycle) have outperformed from the summer onwards as the emergence of the Delta variant of Covid and supply chain bottlenecks have impacted the growth rate from reopening.

The US Federal Reserve continues to tell investors that it expects inflation to be transitory, despite it having exceeded its 2% target every month since April. What is interesting is what the bond market is telling us. Short-dated treasuries are selling off, which suggests investors are increasingly expecting interest rates to rise sooner rather than later, with futures markets pricing in a 75% chance of two 0.25% rate rises in the second half of next year. Whilst longer dated Treasuries have rallied. This tells us that the bond market accepts that inflation is here today, but once interest rates start to go up, growth is likely to come down relatively quickly and inflation with it.

Since the financial crisis of 2008, the US’s public debt to GDP ratio has risen from 68% to 128% today. A very similar picture can be seen in many other countries across the globe, including China where it has risen from 27.2% to 67%. Indebted countries are much more sensitive to rate increases with, as an example, a 1% increase in rates for the UK adding about £18 billion to the UK Treasury’s financing bill, which ultimately has to be paid for by taxpayers. Therefore, although rates are more than likely to increase in the short term, the level that they peak at may be much lower than historically we would associate with current rates of inflation.

Market Update November Monday 8th 2021

Investors await signs at Fed’s Wednesday meeting of a move towards interest rate rises

The week started with markets hovering around record highs as investors awaited the latest responses by central banks to months of above-target inflation. US consumer price inflation has run at 5 per cent or more for five months, sparking bets of interest rate rises across government bond markets. German inflation is at a 29-year high after energy prices spiralled and global supply chains became choked up by pandemic-related shutdowns.

The S&P and the Nasdaq closed out their best month of the year on Friday as strong corporate earnings (companies listed on the MSCI World index of leading shares have beaten analysts’ forecasts by 10 per cent on average during this third-quarter earnings season, according to Bloomberg data.) dispelled fears that spiralling costs of commodities and industrial materials had hurt companies’ profitability. That marks a contrast from when global stock markets dropped back in September, as investors feared that price pressures caused by supply chain glitches would harm earnings.

Japanese equities had a particularly strong start to the week after the ruling Liberal Democratic party held its majority in Sunday’s Japanese parliamentary election, cementing hopes of more government stimulus spending to counteract the economic shocks of Covid-19.

Fed confirms taper to begin this month

On Wednesday, the US Federal Reserve (Fed) confirmed its long-telegraphed intention to shrink it’s $120bn-a-month Treasury and mortgage-backed bond purchases by $15bn a month. At the same time, chair Jerome Powell scotched concerns that the world’s most powerful central bank would respond to surging consumer prices with a rapid interest rate rise cycle.

This boosted US equity markets to all-time highs and on Thursday morning European stocks headed for their fourth session of all-time highs as they played catch up. US Treasury yields fell, and the curve steepened as a result as the market unwound from expectations of quicker Fed rate hikes.

Bank of England defies markets and keeps rates on hold

On Thursday, the Bank of England surprised the market and kept interest rates on hold, dashing investors’ expectations of a hike that would have made it the first of the world’s big central banks to raise rates after the COVID-19 pandemic. The move, following hawkish comments from some policymakers, sent the pound sliding by almost two cents, to below $1.35. It also triggered a rally in government bonds. Stocks also jumped, on relief that higher borrowing costs would not hamper the recovery.

The BoE expects UK inflation to hit 5 per cent next spring, but it has largely been driven by supply-side factors including Covid-19 disruptions to the production and movement of goods and higher energy prices.

Equities end their week wavering around record highs, boosted by dovish central bank policy

Most global equity bourses ended the period around record highs. At the time of writing, the regional European index, which has closed higher for nine of the last 10 sessions, ended the period up 1.72%. In the UK, the main index ended the period up 0.93% and over in the US, both the main index and the technology-focused US index ended the period at record highs up 1.62% and 2.85% respectively.

Asian equities ended the period flat and emerging markets equities were up 0.29%. Over in Japan, which had a particularly strong week, the main equity index ended the period up 2.01%.

Tough week for bond traders

This marked a week in which bond traders have been somewhat battered by dovish central bankers and US Job data out later today could compound this as the Fed Chair, Jerome Powell, said he won’t entertain interest-rate increases until the labour market heals itself, intensifying the scrutiny on all employment data. Global bond markets extended a rally that kicked off after the Bank of England’s surprise decision to keep interest rates on hold led traders to trim expectations policymakers will raise borrowing costs to cool inflation.

Short-end securities were hit the hardest, with Australia’s three-year yield tumbling toward its biggest weekly retreat in almost a decade (bond yields move inversely to price). Germany’s two-year yields fell to the lowest in two months and the U.S. five-year yield dropped to near a three-week low, as yields on similar-maturity UK gilts sank the most since the Brexit vote. The long-end fared better with the UK 10-year yield falling 0.13%, the German 10–year Bund yield falling -0.13 & and the US Treasury 10-Year Yield falling -0.01%.

OPEC Reject Biden’s plea to increase oil production

OPEC rejected President Biden’s pleas to hike production, instead OPEC + stuck to its original plan to raise oil production by 400,000 barrels per day in December. Saudi Energy Minister Prince Abdulaziz bin Salman blamed the shortfall on the knock-on impact from the tight gas markets. OPEC+ are concerned about the demand picture for next year as the cartel see a looming surplus on the horizon as inventories start building into Q1 next year.

At the moment inventories remain at very low levels, causing concern. The crude oil price steadied, however, as investors assess the response of the model OPEC + hike in production. At the time of writing Brent Crude ended the period at $81.12, down 3.86% and WTI Crude ended the period at $79.55, down 4.81%

Gold advances on dovish rate bets

Gold held the biggest gain in three weeks as traders pared their expectations for interest rate hikes after dovish turns from the Federal Reserve and Bank of England. Bullion is heading for a weekly advance, though remains below $1,800 an ounce at $1,795 at the time of writing, as central banks signal they’re preparing to rein in stimulus while balancing inflationary pressures and an uneven economic recovery. Silver, platinum and palladium all advanced. Focus turns to the US jobs report due later today to gauge the strength of the labour market, which could shift views on monetary policy once more.

In other news

World leaders are gathering in Glasgow for the highly anticipated COP26 climate summit. Delegates are being asked to accelerate action on climate change and commit to more ambitious cuts in their countries’ emissions, all in an effort to limit global temperature rises. The future of the planet is at stake but whether we get the action to match the pledges, only time will tell, but with more people now seeing climate change as a major issue, politicians will find this issue hard to ignore.

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