What’s happened in markets?

FTSE All Share -2.70 -2.84 -1.49 12.85 15.70 5.02 5.29
Euro Stoxx 50 -6.08 -3.06 -1.49 18.02 19.50 12.12 9.43
S&P 500 -2.18 0.57 3.13 23.89 28.40 21.89 17.86
Japan Topix -2.91 -1.65 3.44 12.19 14.01 9.28 8.69
MSCI Asia Pac. -3.23 -4.64 -2.29 -4.56 0.06 11.90 11.33
MSCI Emerg. Mkts. -3.61 -5.57 -2.94 -3.37 1.82 10.61 10.24
Jo’burg All Shares -2.50 1.49 4.20 20.13 23.42 13.83 9.86
UK Gov’t Bonds 1.24 4.48 0.46 -2.91 -1.66 4.54 3.27
US Gov’t Bonds 0.42 0.86 -0.39 -2.03 -2.96 4.99 3.12
Global Corp. Bonds -0.18 0.21 -0.84 -0.90 -0.07 6.85 4.96
Emerg. Mkt. Local -1.53 -2.79 -5.15 -9.45 -6.86 2.88 3.59

Figures in the respective local currencies as at the end of trading on 26/11/2021.

In economic terms, the last full week of November saw stronger than expected flash purchasing managers’ index (PMI) data globally, signalling an acceleration in the pace of growth in the world’s largest economies. The flash composite eurozone PMI also rose – ending a run of three successive declines – and at 55.8 suggests output remains robust, even if it was not as high as in Q3 (where the composite PMI was 58.5) and Q2 (with a composite PMI of 56.8).

In the US, on 22 November, President Joe Biden’s renomination of Jerome Powell as Federal Reserve (Fed) Chair for a second four-year term buoyed bets on a hawkish pivot by the central bank to fend off soaring inflation through an increase in interest rates. Minutes from the November Fed meeting show that members are willing to tighten monetary policy should inflation continue to run ‘hot’ (i.e. remain above trend), with a growing number of policymakers open to speeding up the tapering of their bond-buying programme if higher inflation holds.

In other news, President Joe Biden announced the release of emergency oil reserves to combat higher energy and fuel pump prices. The Department of Energy declared it would release 50 million barrels of oil from its Strategic Petroleum Reserve – the largest release from the reserve in US history. Other nations, including the UK, India, Japan, Korea and China, also said they would be releasing about 11 million barrels in total in an effort to reduce prices, following the decision by OPEC+ to ignore the calls to accelerate supply.

In the UK, the popular sandwich shop franchise Pret A Manger reported sales rising above pre-pandemic levels for the first time since COVID-19 struck, which is a strong sign that parts of the economy are recovering from the downturn. According to the weekly Bloomberg Pret Index – which tracks the chain’s transaction volume as a proxy indicator for the return to offices, train stations and pre-pandemic shopping habits – sales volumes across the UK were higher than they were in the final week of January 2020.

However, much of the news during the week of 22 November was overshadowed by the emergence of a mutation-rich variant of the COVID-19 virus, triggering fears that this new, highly transmissible strain, labelled Omicron, could set back economic recoveries worldwide.

The Omicron conversation has only just begun. Uncertainty over the new variant and the information available so far on its contagiousness means that markets are likely to react sharply in either direction to further news from health authorities this week.

As markets began to digest the impact of Omicron, we saw a significant sell off of several percentage points across most equities. 30-day returns show generally negative outcomes across all stocks, with large capitalisation (-0.9%) slightly outperforming small capitalisation stocks (-2.2%) and growth (0.0%) outperforming value stocks (-2.0%). IT stocks (+2.6%) did make ground, while areas such as energy (-7.0%) saw significant falls. As a classic safe haven asset, the US dollar often benefits from uncertainty and had edged higher (+2.5%) against the euro by 26 November.

Even before the announcement of the Omicron variant, the reintroduction of travel and social lockdown restrictions across several European countries – coupled with the prospect of a less dovish outlook for monetary policy (i.e. a lower likelihood that central bank intervention will continue as is) following the news on Jerome Powell – is likely to have spooked markets. Furthermore, the new variant has injected a fresh dynamic into the mix, and the initial impact has been to reduce risk, as seen in the sharp sell-off of stocks.

Latest Consensus Forecast
UK GDP (QoQ) 1.3
UK PMI 57.7 57.7
UK CPI (YoY) 4.2
EU GDP (QoQ) 2.2
EU PMI 55.8 55.8
EU CPI (YoY) 4.1
US GDP (QoQ) 2.1
US PMI 66.7 65.0
US CPI (YoY) 6.2

What’s happened in portfolios?

Looking across our portfolios, we continue to see a supportive environment for equities, where defensively positioned funds have benefitted from large cap, growth IT stocks. With signs of growth moderating, our preference remains for domestic developed markets –specifically pan-Europe – where economies are re-opening and valuations are not stretched on a relative basis.

We see a less conducive environment for fixed income assets, where starting yields are at historically low levels and inflation still poses a threat to mid to longer duration positioning. Real assets continue to appear attractive as an alternative to fixed income, not least as they still offer some protection and positive correlation to inflation. Infrastructure is of particular interest, given current valuations and the sector’s recovery potential.

What’s happening this week?

30 Nov • EU Consumer Price Index (Nov) | 02 Dec • US Initial Jobless Claims | 03 Dec • UK Markit Purchasing Managers’ Indices (Nov)