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Ok. Got itNovember was the month of local municipal election results, the discovery of a new Covid-19 variant, and a mixed outcome from the Medium-term Budget Policy Statement.
The pandemic once again dominated headlines in November. An increase in Covid-19 cases in Europe led to new lockdown restrictions in several countries, the extent of which varied depending on the number of hospitalisations. The identification of the new Omicron variant, however, solicited a more pronounced response across the world, given concerns of the near-term threat that it could pose to lives, mobility, trade and economic growth.
Financial markets responded negatively to the news of the new Covid-19 variant, leaving most equity markets down over the month. Information technology was one of the few global equity sectors in the green, with the technology heavy Nasdaq 100 gaining 1,9%. A preference for safe-haven assets saw the US dollar gain 2,0% and gold rally towards month end. The S&P 500 lost 0,7% in November, weighed down further by anticipation of faster tapering or withdrawal of liquidity.
Emerging markets bore the brunt of the risk-off sentiment and the MSCI Emerging Markets Index declined 4,1%. Despite some constructive export and domestic economic data, ongoing regulatory changes and a challenged property sector added to sizeable losses in the Chinese markets, with the Hang Seng losing 7,1% over the month. With this backdrop, the MSCI World Index declined 2,2%, bringing returns over the year to 17,3%.
Brent crude oil traded down roughly 16,4% over November, firstly when OPEC + retained its gradual production increases rather than responding to increased demand, even as the Biden administration were expected to release oil from its strategic petroleum reserves, and secondly, due to concerns about the new Covid-19 variant, Omicron.
Global bond markets traded under pressure for much of the month, as investors price for earlier rate hikes against inflation data that has yet to show signs of moderation. Concerns about the new variant brought about a turn, with US treasuries and other developed market government bonds benefiting from a flight to safety, despite facing headwinds from rising bond yields for most of the month.
The US Federal Reserve (Fed) formally announced its tapering programme, which will see the Fed buy a decreased amount of bonds every month, in essence providing less liquidity to markets than before. While this was largely expected, minutes from the November Fed policy committee revealed consideration of a faster pace of tapering, implying an accelerated path to potential interest rate hikes. Inflation data has remained stubbornly high, spurred in great part by high global energy prices. As if to emphasise the potential for persistence, global inflation prints remained high in October. The Fed’s preferred measure of inflation, personal consumption expenditure), rose to 5% over the year, while US CPI reached its highest reading in 31 years at 6,2%. German CPI printed at 4,5% year on year, the highest reading since 1993, while 12-month CPI data from China doubled in October from the prior month. Current Fed Chairman, Jerome Powell, was reappointed for another four-year term, interpreted by many as the more hawkish choice, but one that does provide policy continuity.
Against expectations, the Bank of England kept interest rates unchanged, at least for now. Hungary hiked interest rates five times in three weeks into December, and Poland raised interest rates by 0,75% in November – more than expected by the market. The European Central Bank has communicated a more patient and gradual approach, given fourth wave concerns and renewed restrictions, although tapering is likely to start earlier.
While base effects will in time tilt the direction downwards, upside risks to inflation remain – and increasingly, no policy maker wants to be behind the curve.
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