Market Commentary: Week to 7 December 2021

7 December 2021

Market News

Markets were pulled from pillar to post as the forces of Covid and inflation gave battle to investor enthusiasm for buying the dips. Federal Reserve Chairman Powell tempted fate early in the week by announcing an acceleration in the Fed’s plan to wind down its $120 billion-a-month asset purchases, when investors were expecting his tone to have softened in the face of the Omicron variant. In the space of a few weeks the Fed has gone from dismissing inflation as being “transitory” to inflation being its main concern. Powell even refused to admit that an Omicron-induced lockdown would reduce inflationary pressures, saying that it merely “increased uncertainty for inflation”. As a result, investors now face a hitherto unanticipated scenario where new lockdowns depress growth but, unlike over the past fifteen years, monetary policy actually becomes more rigid. 

Bond markets rallied, overcoming their fear of reduced asset purchases and marking down their expectations for growth. Their reasoning is that, should the Fed be forced to clamp down on economic growth by tightening monetary policy, there will be plenty of other investors willing to replace the Fed’s buying power in the bond market. Bond-buyers were rewarded later in the week when US job creation for November plunged below expectations, sending bond yields crashing and bond prices soaring. It was the third time in four months that US employment data had dramatically underwhelmed, but none of the previous occasions phased markets for long and neither did this one. Buoyed by a rate cut in China, or perhaps it was just the sight of a buyable dip, equity markets staged a comeback towards the end of the week. 

Nevertheless, the fact that equity markets just experienced their worst stretch of volatility in a year could indicate that markets have entered a new phase, where the opinions of bulls and bears are more widely divided. This was in evidence last week, when net purchases of stocks by US retail investors spiked to their highest on record while, simultaneously, the volumes of (defensive) put options bought on US stocks also surged to a record. The reaction of equity markets to the Omicron variant was brutal and, some would say, was an overreaction given the uncertainty surrounding Omicron’s severity. This has led some commentators to highlight that the underlying issue is really the withdrawal of support from central banks in the face of rising inflation. After all, most stock markets had already begun to sell off in the week before Omicron hit the newswire. 

The fact that inflation is still rising, and is expected to rise further over the next few months, while the Delta variant is already gathering pace as the winter months approach, suggests that the interests of central banks and equity markets are unlikely to be aligned in the short-term. Throw Omicron risk into the mix and it’s no wonder there are jitters.

Stock Focus

AstraZeneca is rumoured to be considering a separate listing of its newly-created vaccine and immune therapies division. This division houses its Covid vaccines and antibody treatment, and also includes a flu shot. The AstraZeneca stock price has suffered from the company’s decision not to profit from its Covid vaccine during the pandemic, which was partially reversed last month. The market was unimpressed by the rumour, and the company’s shares have gained only 7% since the start of the pandemic, compared with 37% for Pfizer and 865% for Moderna. 

Apple bucked the weak performance among technology stocks despite telling suppliers of iPhone components that demand for its new iPhone 13 is softening. The iPhone represents about half of Apple’s revenues, and the company had told investors only two months ago that demand was “very robust”, even forecasting a record fourth quarter. Apple’s suppliers weren’t so lucky, with their share prices suffering declines of 5-10%. Analysts were divided on whether the slowdown reflects supply chain problems or a broader squeeze on consumer spending. 

Luxury goods maker Hermes International is to be rewarded for its stellar pandemic performance with inclusion in the blue-chip Euro Stoxx 50 stock market index from December 20th. Hermes shares are up 120% from their pre-pandemic level, benefiting from the boom in demand for luxury products during the pandemic which has taken the company’s market value to EUR165 billion. Hermes shares will replace those of Universal Music Group, which joined the index upon its IPO in September.

The Chinese equivalent of Uber, Didi Global, began the process of delisting from US stock exchanges, following a disastrous listing in June and the subsequent halving of its share price. The company apparently ignored a plea from Chinese regulators that it ensure the security of consumer data before listing on the New York Stock Exchange, and has been the focus of regulatory ire ever since. More broadly, Chinese technology stocks continued their meltdown in the face of regulatory pressure and the Hang Seng Tech index is now down 45% from its February high. 

Highlights

• In a headline that is now familiar, inflation in the Eurozone jumped to a record-high 4.9% in November, far above its October rate of 4.1% and also surging past expectations for an acceleration to 4.5%. Energy prices drove most of the increase, but there was also a notable increase in the cost of services.
• Job creation sputtered badly in America in November, falling far below last month’s tally. The 210,000 jobs created represents the worst performance of the year to date, and is also the third time in the last four months that the figures have fallen far short of expectations.
• Surveys of Chinese business activity told conflicting stories last week. Activity boomed in the construction industry despite the woes afflicting property developers, while service sector activity softened due to a Covid outbreak in the east of the country.

Calendar

• Inflation in the US is expected to have continued its rapid ascent in November, climbing to 4.9% from last month’s figure of 4.6%, with prices soaring for new and used cars, airline fares, and rents.
• GDP in the UK is expected to have risen by 0.4% between September and October. Expectations have been buoyed by strong retail sales data over this period but the figures have also recently become prone to huge swings in spending on healthcare. The threat of rising virus cases and the risk of Omicron mean that historic data now has less influence on capital market behaviour.

Important information

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