Weekly Market Cap
Our Multi-Asset Solutions team produce a weekly market recap which aims to summarise the previous week’s major events and developments that may impact markets. They try to include points that may aid you in your decision making or conversations with clients. This is supplemented by a market data sheet, offering a summary of financial market performance. Last week’s summary is below.
Economic and Political Backdrop
Federal Reserve Chair Jerome Powell acknowledged in testimony before Congress that inflationary pressures, while still expected to abate over the next year, had become broad enough and remained elevated for long enough that the central bank may consider accelerating the pace at which it tapers its monthly bond purchases. The market appeared to interpret this development as potentially moving forward the timeline for the Fed to begin increasing short-term interest rates. Powell also cited the uptick in the number of COVID-19 cases and the emergence of the omicron strain of the coronavirus as possible catalysts for further supply chain disruptions as well as potential headwinds to the economic recovery and the labour market’s gradual rebalancing.
Nonfarm payrolls increased by 210,000 sequentially in November – well below the 546,000 positions added in October and less than half of analysts’ consensus estimate. However, the Bureau of Labour Statistics also revised its estimate of the number of jobs created in October to 546,000 from 531,000 and the September increase in nonfarm payrolls to 379,000 from 194,000. The unemployment rate improved by 0.4% relative to October, falling from 4.6% to 4.2%. Average hours worked also ticked up. Albeit disappointing, markets seemed to view the deceleration in job creation as unlikely to shift the Fed’s plans regarding its asset purchases and monetary policy.
Cases of omicron were detected across Europe. A renewed surge in COVID-19 infections prompted Germany to tighten restrictions on those unvaccinated against the coronavirus. A law on mandatory vaccination could be submitted to parliament for implementation in February or March. Austria extended its lockdown until 11 December. Portugal and France reintroduced tighter requirements for mask-wearing and toughened border controls. In France, from 15 January all adults will need a booster jab at least seven months after being fully vaccinated to keep their health passes. From mid-December, people over the age of 65 will need a booster to extend their health passes. Several regions in Spain imposed stricter measures for the unvaccinated ahead of the Christmas season, extending the use of the COVID-19 certificate to enter public places.
Inflation in the eurozone accelerated to its highest level since the single currency was introduced in 1999. Consumer prices rose an annualised 4.9% rate in November, up from 4.1% in October, as energy costs surged. In Germany, annual inflation climbed to 6% – the highest level since 1992. Isabel Schnabel, a senior European Central Bank official, asserted in a television interview that “November will prove to be the peak” for inflation in the country and that “there is no evidence to suggest that inflation is spiralling out of control.”
Euro area retail sales rose 0.2% in October, after dropping 0.4% in September, as consumers spent more on non-food purchases, Eurostat data showed. Meanwhile, consumer sentiment weakened for a second consecutive month in November, according to a survey by the European Commission. Households are less upbeat about the general economic situation and their intentions to make major purchases.
Cases of omicron more than doubled in the UK on Friday, now totalling 150. The news comes as GPs across the nation were told to temporarily scrap services, such as giving over-75s routine health checks, in a bid to speed up the booster jab rollout.
In a major reversal of policy, Japan closed its borders to foreign nationals – except for those with special permission to enter – citing the emergence of omicron (in November, Japan eased its strict coronavirus-related entry rules, letting foreigners visit the country for short business trips, study abroad and technical training.) Prime Minister Fumio Kishida announced the border closure on 29 November, and it came into effect the following day, which was when the first infection of omicron was confirmed in Japan. There were indications that a blanket ban on inbound international flight bookings would come into effect, but the request by Japan’s Ministry of Transport was withdrawn amid public confusion and some criticism.
Kishida’s cautious stance is in contrast to that of his predecessor, Yoshihide Suga, who resigned in September, in part, due to public perceptions that his administration had been too slow to respond to the social and economic threats posed by the coronavirus.
Healthcare workers were prioritised as Japan began administering COVID-19 booster shots amid the spread of omicron. The third doses of the vaccination will be administered free of charge to all residents aged 18 and over, and there have been requests from some regional authorities for flexibility to shorten the period between the second and third doses – from the current eight-month interval that is adopted as standard practice in Japan to six months, which would align the country more closely with some European countries and the US.
Industrial production rose 1.1% in October from the previous month, with the motor vehicle industry the largest contributor to the increase. The unemployment rate unexpectedly edged lower, to 2.7% in October, amid labour market tightness, while October’s 1.1% month-on-month rise in retail sales likely reflected a recovery in demand following the easing of coronavirus restrictions.
China’s factory activity unexpectedly rose in November for the first time in three months as surging raw materials prices and power rationing eased. The official manufacturing Purchasing Managers’ Index (PMI) rose to 50.1 in November from 49.2 in October. Readings above 50 indicate growth, while those below 50 indicate contraction. However, the official gauge stood in contrast to the private Caixin/Markit Manufacturing PMI, which fell to 49.9 in November from 50.6 in October. The Caixin/Markit Services PMI fell to 52.1 in November from 53.8 in October, indicating a slowdown in service sector activity.
On Friday, Kaisa Group said it failed to receive bondholders’ approval to extend the maturity of a USD 400 million note due next week, making it the latest Chinese property developer to edge closer to default. EXM Capital’s credit analysts believe a restructuring for Kaisa is a likely outcome and that a restructuring could result in a recovery rate higher than where its bonds are currently trading. The last restructuring for Kaisa – which gained notoriety in 2015 when it became the first Chinese developer to default on its dollar bonds – took 1.5 years, and the process could be just as slow this time around, they cautioned.
Looking ahead, EXM Capital credit analysts believe China’s government could issue some kind of policy response to help the ailing property sector as the effects of recent defaults start to spread from the offshore high yield bond markets into Chinese investment-grade bonds and eventually the domestic economy. Moreover, they note that some developers have started to sell off assets, repay debt and undertake other “self-help” measures to raise liquidity. Though bond markets in Asia will likely be volatile in the near term, EXM Capital analysts believe that China’s property sector should emerge from the turmoil with healthier balance sheets and credit profiles in the long run.
Given the expected negative impacts of the lockdowns in the third quarter, not much attention was paid to the third quarter GDP data. At -1.9% quarter-on-quarter, third quarter GDP was better than expected though. Manufacturing PMI also came in strongly at 59.2, increasing from the previous month. Consumer spending is also on the rise after lockdowns. Housing prices experienced a weaker growth, however, rising by only 1.1% month-on-month in November.
Last week, MSCI All Country World Index (MSCI ACWI) returned -1.2% (-2.4% in November, 14.1% YTD).
In the US, in a volatile week of trading, the S&P 500 pulled back 1.2% (-0.7% in November, 22.4% YTD), on news the Fed could curtail its monthly asset purchases at a faster rate and fears that the emergence of omicron could weigh on global economic growth and contribute to supply chain disruptions. Large-capitalisation stocks outperformed smaller- and mid-cap benchmarks and the value style outperformed growth. Russell 1000 Growth returned -2.1% (0.6% in November, 22.0% YTD), Russell 1000 Value -1.1% (-3.5% in November, 18.8% YTD) and Russell 2000 -3.8% (-4.2% in November, 10.3% YTD). Within the S&P 500 Index, the communication services sector gave up the most ground. Utilities was the only sector to post a gain.
In Europe, the Euro Stoxx 50 ended 0.2% lower (-4.3% in November, 17.8% YTD). Shares in Europe posted mixed results after a volatile week of trading, highlighted by concerns about the omicron variant and further evidence of inflationary pressures. Germany’s DAX gave up 0.6% (-3.8% in November, 10.6% YTD), France’s CAC 40 rose 0.4% (-1.5% in November, 24.7% YTD) and Italy’s FTSE MIB gained 0.3% (-3.4% in November, 20.3% YTD). Switzerland’s SMI returned -0.2% (0.4% in November, 17.0% YTD). The euro was little changed against the US dollar, ending the week at 1.13 USD per EUR. During November, the euro depreciated from 1.16 to 1.13.
In the UK, the FTSE 100 advanced 1.2% (-2.2% in November, 14.1% YTD) and the FTSE 250 gained 0.6% (-2.4% in November, 12.6% YTD). The British pound depreciated against the US dollar, ending the week at 1.32 USD per GBP, down from 1.33. During November, the pound depreciated from 1.37 to 1.33.
Japan’s stock markets registered losses for the week, with concerns about the spread of omicron and the country’s decision to close its borders to foreign nationals weighing on sentiment. The Nikkei 225 fell 2.5% (-3.7% in November, 3.7% YTD), the broader TOPIX was down 1.4% (-3.6% in November, 10.7% YTD) and the TOPIX Small Index lost 1.0% (-5.9% in November, 9.2% YTD). The yield on the 10-year Japanese government bond fell to 0.05%, from 0.07% at the end of the previous week, primarily on safe-haven demand. The Japanese yen finished the week stronger at 112.8 versus the US dollar compared with JPY 113.4 at the end of the prior week. During November, the yen appreciated from 114.0 to 113.2.
In Australia, the S&P ASX 200 returned -0.5% (-0.4% in November, 15.3% YTD) amid investors assessing the potential impact of omicron on the future state of the economy. While it is still too early to make any definitive conclusions, markets reacted on any news regarding the virus, leading to a broadly risk-off environment for the week. The Australian dollar also finished lower for the week as the yield curve flattened with the 10-year yield dropping by more than 10 basis points.
Emerging Markets And Other Markets
MSCI Emerging Markets Index returned 0.2% last week (-4.1% in November, -3.2% YTD), with positive contributions to performance from all major emerging market regional equity markets: China, Taiwan, South Korea, India and Brazil.
Chinese stocks recorded a weekly gain despite a resurgence of US-China tensions after Chinese ride-hailing app Didi said it would delist its US-listed shares from the New York Stock Exchange. The CSI 300 Index of large-cap stocks rose 0.8% (-1.6% in November, -4.3% YTD) and the Shanghai Composite Index added 1.2% (0.5% in November, 6.1% YTD). News of Didi’s delisting came shortly after the US Securities and Exchange Commission said Chinese companies that list on US stock exchanges must disclose whether they were owned or controlled by a government entity and provide evidence of their auditing inspections.
Yields on China’s 10-year government bonds jumped to 2.926% from 2.881% the previous week, tracking the rise in US Treasury yields after US Fed officials signalled that there could be a quicker end to the US central bank’s monthly bond purchases. The yuan strengthened to 6.3718 per US dollar from the prior week’s 6.3917 per dollar, tracking the stronger midpoint rate set by China’s central bank. The People’s Bank of China allows the exchange rate to rise or fall 2% from the midpoint rate it sets each morning.
Elsewhere in Turkey, the BIST 100 Index returned 7.6% (19.3% in November, 27.3% YTD). The Turkish equity market performed well in local currency terms, as various world markets were pressured by news of omicron, as well as concerns that the US Fed may consider tapering its asset purchases at a quicker pace. The lira, however, continued to slide, as President Recep Tayyip Erdogan removed Treasury and Finance Minister Lutfi Elvan from his post and spoke in defence of what he called Turkey’s “new economic model.” The lira weakness prompted the Turkish central bank to intervene in the currency market.
EXM Capital sovereign analyst Peter Botoucharov believes the intention of this “new economic model,” while not yet clearly defined by Erdogan, may be to allow the lira to depreciate in an orderly manner so that exporting companies will be more competitive in international markets. He believes exports could also be supported by new structural measures, such as the issuance of cheap credit, as well as central bank credit facilities. The downside of this model, however, is higher inflation and currency weakness that would likely be suppressed by the government’s close monitoring of currency speculation and by price-setting behaviours.
In Chile, the S&P IPSA Index pulled back by 4.6% (8.3% in November, 6.1% YTD). On Tuesday, a mixed, 10-member congressional committee voted 6 to 4 to return the revised pension withdrawal legislation – the fourth since the beginning of the pandemic – to both houses of the legislature for a final vote. The Chamber of Deputies failed to pass the bill on Friday: It fell four votes short of the 93 needed to reach the required three-fifths majority. The voting session was brought forward from next week upon the government’s request, a move that was criticised by the opposition since it coincided with several deputies being absent due to travel or sickness.
Fixed Income Markets
Last week, Bloomberg Global Aggregate Index (hedged to USD) returned 0.4% (0.7% in November, -0.7% YTD), Bloomberg Global High Yield Index hedged to USD 0.6% (-1.4% in November, 1.4% YTD) and Bloomberg Emerging Markets Hard Currency Index 0.7% (-1.1% in November, -1.9% YTD).
Concerns about the omicron variant and Fed policy likewise moved fixed income markets. The US Treasury yield curve flattened over the week, with short-maturity yields rising and long-term rates decreasing. The benchmark 10-year Treasury yield ended the week at 1.35%, down 13 basis points from 1.48% (11 basis points lower in November, 43 basis points higher YTD).
Core eurozone bond yields fell, as negative headlines concerning the omicron variant outweighed hawkish comments from Fed officials. Over the week, German 10-year bund yield decreased five basis points, ending the week at -0.39%, down from -0.34% (24 basis points lower in November, 18 basis points higher YTD). Peripheral eurozone bond yields ended the week broadly unchanged.
UK gilt yields fell, broadly tracking core markets. Furthermore, Bank of England Monetary Policy Committee member Michael Saunders indicated that he could vote against a rate hike this month given the uncertainties surrounding the omicron. This also applied downward pressure on yields. The 10-year gilt yield ended the week seven basis points lower, down from 0.82% to 0.75% (22 basis points lower in November, 55 basis points higher YTD).