Market Update November Monday 1st 2021

Stronger earnings offset lacklustre economic data

Markets in the US and Europe made further gains this week, as a continuation of positive earnings results offset any economic data and concerns over sustained inflation. In the US in particular, notable names such as UPS and General Electric posted strong results whilst in the technology space, the likes of Microsoft and Google far exceeded analyst forecasts when third-quarter results were released this week. This helped the main US market finish higher by 1.13% as of 9.30 am London time, with the technology-focused US index up even higher by 2.37%. In the UK, the main market finished up by 0.7%, whilst the European market was also robust, gaining 1.15%. Investors were unfazed by the announcement that the European Central Bank (ECB) would slow its bond-buying programme. The ECB revealed that its €1.85tn pandemic emergency purchasing programme would continue at a “moderately lower pace”. It also decided to keep the eurozone’s benchmark interest rate unchanged at minus 0.5%.

The positive equity market gains also came about despite data showing the US economy expanded at an annualised pace of just 2% in the third quarter, behind forecasts of 2.7%. This reading is sharply lower than the previous quarter, of 6.7% GDP growth. Slower consumption was the key factor, with personal consumption only up by 1.2%, much lower than the 12% recorded in the second quarter. A resurgence of Covid-19 cases did not help matters, whilst supply-chain disruptions and shortages of inputs and workers also weighed on growth.

In contrast, Asian equity markets falter

It was a different story in Asia where the Hong Kong index and Shanghai Composite finished down by 2.62% and 1.64% respectively over the week. The fall in the region was attributed to fresh fears over the property sector, following concerns over Evergrande last month. This time, Chinese developer Modern Land missed a payment on its dollar bond worth $250m.

In addition, unlike in the US, company earnings results disappointed. Some of China’s biggest companies incurred losses or generated sharply lower earnings for the third quarter as the economic recovery faltered. They included Ping An Insurance, oil producer PetroChina, carmaker BYD, developer China Vanke and heavy machinery maker Zoomlion, showing a wide impact across industries. Elsewhere Japanese equities traded slightly lower by 0.14%.

Government bond markets volatile ahead of monetary policy decisions next week

It was a choppy week for Government bonds, especially as bond investors continue to monitor potential monetary policy changes and guidance across major central banks. Traders globally are primed for announcements about potential monetary policy tightening and the tapering of pandemic-era bond-buying programmes, as governments respond to persistent inflationary pressures. Consequently, shorter-dated bonds, which are more sensitive to potential interest rate rises, sold off this week.

For example, the Bank of Canada jolted markets by abruptly ending its bond-buying programme and signalling that it could raise interest rates by the middle of next year, as it responds to stubbornly high inflation. Canadian two-year government bond yields, which move inversely to their price, surged by 0.21% to 1.07%. Also in Germany, where the latest inflation prints remain high, investors ramped up their bets on potential eurozone interest rate rises. Consequently, the price of the Germany’s two-year Bund dropped significantly. Its yield rose to 0.58%, its highest level since January 2020.

Elsewhere, longer-dated bonds fared better. In the UK, a planned reduction in UK Gilt supply helped support prices. The 10-year Gilt yield (which moves inversely to its price) fell by 14bps after the Debt Management Office announced gilt sales for 2021-22 will fall by £57.8bn to £194.8bn when compared with April’s projection. Meanwhile, the US 10-year Treasury yield also fell by 5bps to trade at 1.58% as of 9.30 am London time.

Interest rate decision announcements are due next Tuesday, Wednesday and Thursday respectively from the Reserve Bank of Australia, the US Federal Reserve and the Bank of England.

Oil falls after increases in US fuel stockpiles.

Oil prices trended lower over the week, with Brent Crude oil down by 1.26% to trade at $84.45 per barrel. Oil prices fell as supply had unexpectedly increased, with US oil inventories increasing unexpectedly by 4.3 million barrels, ahead of expectations of just 1.9 million barrels.