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Article | 09 December 2021 | Investments
The prospect of tighter monetary policy from central banks, and the emergence of the Omicron variant of Covid-19, pushed global equities lower in November. The best-performing region was the US, where the S&P 500 fell 0.8% and the Nasdaq gained 0.3%. In Europe, rising Covid-19 cases pulled the Euro Stoxx 50 index 4.4% lower. Asian and emerging markets didn’t fare any better. The MSCI Emerging Markets index lost 4.1%, with continued property sector issues weighing down the Chinese stock market in particular.
Despite ongoing concerns over high inflation (which tends to be bad news for bonds), government bonds had a strong month, with US and European prices rising (and yields falling). Perceived safe haven assets were in high demand as fresh Covid-19 concerns dampened investors’ risk appetite. In corporate bond markets, investment grade bond prices were slightly higher in the US and Europe, while high yield bond prices fell on both sides of the Atlantic.
The US dollar rose against the euro and sterling in November, on the prospect of an upcoming tightening of US monetary policy. Sterling had a tough month, losing value versus the dollar, the euro and the Japanese yen as the Bank of England left interest rates unchanged. The euro was higher against sterling but fell against the dollar and the yen. The Japanese yen, which is considered a safe haven asset, rose against the dollar, euro and sterling over the month.
Oil posted its first negative month since March, and the price of Brent Crude fell 16.4% to $70.60 per barrel. The oil price faced downward pressure as the US announced the release of 50 million barrels from its strategic reserves over the coming months. Oil also sold off heavily at the end of the month, as new Covid-19 concerns dampened the demand outlook. Despite a mid-month rally, the price of gold fell 0.5% over November to finish at $1,774 per ounce.
Stock market volatility (measured by the VIX index) spiked at the end of November, as news of the Omicron Covid-19 strain spread through the markets. The so-called fear gauge peaked at 28.6, before cooling off slightly to finish the month at 27.2.
A new three-party coalition government, consisting of the Social Democrats, Greens and Liberals, was announced in Germany with the aim of making the country a ‘pioneer on climate protection’. The Green party will take control of a newly created economy and climate protection ministry, and will target 80% of electricity from renewable sources by 2030. Coal will also be phased out by the same deadline.
The newly discovered Omicron variant of Covid-19 rocked financial markets, as the WHO (World Health Organisation) declared it a ‘variant of concern’. Safe haven assets including currencies were in demand, as the CEO of Moderna cast doubt over the efficacy of existing vaccines.
The UN’s COP26 gathering on climate change brought a new spirit of co-operation between the US and China, as well as new targets on deforestation and methane emissions. However, commitments on reducing the use of coal as an energy source failed to match aspirations.
Jay Powell was confirmed for a second term as chair of the US Federal Reserve (Fed). He promptly pivoted to a more hawkish stance on monetary policy, abandoning the contentious term ‘transitory’ in favour of ‘persistently higher’, as US inflation hit a 30 year high of 6.2%.
Varying degrees of policy response to the new Omicron variant will be outlined by governments across the world. In the US, President Biden will look to vaccine development, as well as boosters and mandatory mask wearing, in preference to full scale lockdowns.
Central bank meetings mid month will focus on inflation expectations, with the Fed likely to discuss faster tapering, the Bank of England possibly hiking interest rates and the ECB (European Central Bank) due to raise inflation forecasts.
Financial market volatility, as indicated by the rising VIX index, could be set to increase given lower seasonal volumes, as the severity of the Omicron variant becomes clearer. The potential impact on both growth and inflation prospects will be closely analysed.