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.