Weekly market update - 29th of November 2021
Written and accurate as at: Nov 29, 2021 Current Stats & Facts
The emergence of Omicron halted a week of positive news flow in its tracks.
Up until the US Thanksgiving holiday, the market had been gaining confidence that the Chinese government was taking steps to underpin economic growth and stem the risk of a sharper slowdown.
News that Jay Powell would be appointed for a second term as Fed Chair — coupled with talk of faster tapering —bolstered the view that the US central bank was not falling behind the curve on inflation.
Then Friday saw a sharp risk-off trade after the WHO flagged the Omicron mutation as a variant of concern.
As a result, the S&P 500 ended the week down 2.18% and the S&P/ASX 300 lost 1.64%.
Stocks related to the re-opening fell far further. Commodities were generally down (except iron ore), and US 10-year government bond yields fell 7bps.
COVID and vaccines
Prior to the WHO announcement, Covid concerns remained centred on Europe.
Austria re-entered full lockdowns, though other countries resisted this move. Hospitalisations continue to remain very low.
Although the health outcomes in Europe remain encouraging, this wave is being felt in stock prices. Even prior to the Omicron news, re-opening stocks in Europe were under pressure from the latest wave and consequent mobility restrictions.
The risk with Omicron is that it may make vaccines less effective.
It has a spike protein dramatically different to the original variant on which the vaccines were based. The spike protein is the component of the virus that binds to cells. Because of these mutations, Omicron could have increased resistance to vaccines — plus greater transmissibility and severity compared to other variants.
The WHO said it will take weeks to better understand the efficacy of current vaccines as well as Omicron’s severity in terms of health outcomes and hospitalisation.
Vaccine maker BioNTech said initial lab results on the variant could come within two weeks. Pfizer indicated a variant-tailored vaccine could be available about 100 days after genetic sequencing.
In Australia, mobility rates continue to rebound at a similar rate in Victoria and New South Wales. This is despite the fact that new daily cases in Victoria have plateaued at a far higher rate than in NSW.
Macro and policy
Jerome Powell was reappointed for a second term as chair of the US Federal Reserve. Lael Brainard replaced Richard Clarida as vice-chair.
The markets welcomed this news. Powell’s more hawkish bent (compared to Brainard) is seen as reducing the risk that the Fed would be too loose in the face of inflationary pressure.
This narrative was reinforced by signals from other Fed members that it could withdraw support more quickly from the economy to deal with rising inflation.
Vice-Chair Clarida noted they will be watching data between now and the December meeting closely and may have a discussion about accelerated tapering if warranted.
Fed Governor Christopher Waller called for tapering to be possibly done by April, making way for a possible interest rate hike in Q2.
The key argument remains that a combination of easing supply bottlenecks, slowing wage gains on the back of rising labour participation and faster productivity growth ought to bring inflation down without the Fed having to act more aggressively.
Three to six months ago an acceleration of tapering would have been met with great concern by the markets.
But rhetoric from the Fed governors will be priming the market for just such a move. Tapering could be over by mid-March. Rate rises in 2022 are now baked in by the market — perhaps as early as June.
US data prints were generally positive. US Initial Jobless Claims came in at 199,000, well below consensus. It is expected to reverse to about 250,000 before resuming a downward trend to pre-Covid levels of about 210,000.
A re-rebound in existing homes sales continues, rising from 6.2 million to 6.34 million. Consensus expectations were 6.2 million.
The percentage of cash buyers — as opposed to mortgages — has risen from 19% to 24% year-on-year.
Low inventory means prices are still soaring, up 18% annualised in the three months to October. This ensures the rent component of the CPI will continue to rise for some time yet.
Markets
There have been some notable developments in commodity markets.
Over the weekend Peruvian Prime Minister Mirtha Vasquez announced her government planned to close four gold and silver mines that have had conflicts with local communities.
Peru is the world's second-biggest copper producer after Chile, accounting for about 10 per cent of 2021 global production.
OPEC+ has indicated they see the release of strategic reserves by countries such as the US as unjustified in current conditions and they may respond with higher production when they meet next week.
Bonds had been selling off very calmly and modestly over the course of the prior week, rallying very strongly on Friday with US 10-year government yields up 15bps.
More generally the underperformance of the non-mega cap tech stocks in the US continued last week.
There was very little in the way of stock-specific news for the Australian bourse.
The iron ore miners were among the week’s best performers. Fortescue Metals (FMG) was up 11.12%, Mineral Resources (MIN) +5.20%, Rio Tinto (RIO) +4.66% and BHP (BHP) +4.33%.
AMP (AMP, -11.89%) was the weakest on the ASX 100 after management flagged impairment charges.
Tech names were generally weaker. Friday’s Omicron news saw re-opening stocks such as Qantas (QAN, -8.76%) hit hard.