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    Weekly multi-asset update: November

    Weekly multi-asset update: November

    26 November 2021 Multi-asset
    Week to 26 November, 2021


    • As coronavirus wave and mutations take centre-stage, markets react sharply
    • US data better than expected, PMIs stable, Powell remains Chair at the Fed
    • German ‘traffic light’ coalition announced; oil reserves released in an attempt to counteract rising oil prices
    • Outlook: Coronavirus impact, US non-farm payrolls and potential government shutdown

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    Weekly review

    Coronavirus wave and mutations take centre-stage, markets react sharply

    There was a very sharp market reaction on Friday after a new COVID-19 variant was identified in southern Africa that may have a higher immune escape potential; this could undermine the positive impact vaccinations have made this year. Some countries reinstated travel bans to the region raising fears this variant may lead to a broader renewal of lockdown measures.

    Initial market reaction has been a sharp risk-off move across all asset markets, albeit in less liquid conditions given the Thanksgiving holiday in the US, with equity markets falling 2-4% and government bond yields 7-10bp lower at the time of writing. Sectors and indices more sensitive to further disruptions in global trade or reduced travel and tourism reacted more severely, with European volatility trading at the highs of the year. It remains too early to make definitive judgments on the impact this new variant may have upon the broader recovery.

    Prior to Friday, the rise in cases across Europe had already led to several countries either discussing or introducing fresh lockdown measures, despite many of them having relatively high levels of vaccinations. A tightening of restrictions could offset some of the more positive growth data we have seen in recent weeks. The market’s ability to look through what would likely be a temporary growth slowdown, as boosters and anti-viral pills get rolled out, remains the key question.

    US data better than expected, Global PMIs stable, Powell retains the Chair at the Fed

    The US labour market posted some strong data; the weekly initial jobless claims fell to 199k (vs 268k prior and 260k expected), highlighting the tight nature of the US labour market given the near-record low number of unemployment claims. Seasonal adjustments made around Thanksgiving may have played a role in the significant drop, however this is still the lowest figure in over 50 years.

    The preliminary PMI data for October was stable if unspectacular. The US Manufacturing PMI stayed in line with expectations at 59.1 but improved relative to October’s figure of 58.4. The services and composite PMIs both declined month-on-month, however with services seeing a downside miss of 57.0 vs the 59.0 that was expected. Finally, the University of Michigan Consumer Sentiment Index saw an upside beat of 67.4 versus the consensus of 66.9, however it remains at a decade low and is likely to be affected by the news of another covid variant. In Europe, the composite PMI increased to 55.8 in November, from 54.2 in October, well above the consensus expectation for a fall to 53.2. It was particularly notable for the strength of European services activity, despite the more negative news flow on COVID-19 restrictions noted above, however it may be the case that the surveys were taken too early in the month for this to have a major impact.

    Elsewhere in the US, the long-awaited announcement regarding the Chair of the Federal Reserve resulted in the incumbent Jerome Powell being re-instated in the role for four more years, with Dr Brainard (the other leading candidate) set to become vice-chair. Brainard (seen by the market as a more dovish candidate) had been priced by betting markets at around 30% probability and hence real yields reversed some of their recent move lower on the announcement as a more dovish Fed pivot was priced out.

    German ‘traffic light’ coalition announced, oil reserves released in an attempt to counteract rising oil prices

    Following on from September’s federal election, the German political parties SPD, Green, and FDP agreed on a coalition deal this week. Angela Merkel’s 16-year tenure as Chancellor will end on the 6 December to be replaced by the centre-left SPD’s Olaf Scholz. Deal highlights include ending the use of coal for energy production by 2030 and raising the minimum wage from €9.60 to €12.

    In other news, Tuesday saw numerous countries announce the release of reserve barrels of petroleum in an attempt to counteract the recent surge in oil prices. The US announced it would be releasing 50m barrels of oil from the Strategic Petroleum Reserve while China, India, and the UK announced the release of 7m, 5m, and 1.5m barrels respectively. Prices, which had been depressed by the anticipation of this announcement, moved higher on the news as markets were disappointed by the volumes. Furthermore, there were concerns over the reaction of the OPEC+ group, which may look to cancel plans for increased production. 

    Outlook: Coronavirus impact, US non-farm payrolls and potential government shutdown

    The potential impact of the new COVID-19 variant and the spread of the virus through continental Europe more broadly are likely to remain a key driver for markets. The World Health Organisation is meeting to assess the threat raised by this new strain. Aside from the impact of the virus, the US is set to provide an update on the state of the labour market with the release of the latest non-farm payrolls report on Friday; unemployment and wages remain a key input into the pace at which the US Federal Reserve tapers their asset purchase programme. The US government also faces a funding deadline and although a last-minute deal is typically agreed, failure to do so would lead to a government shutdown on 3 December. In terms of economic data, we will also see the latest European inflation prints and final PMI from a broad range of countries over the course of next week.

    Week to 19 November, 2021


    • COVID-19 cases rise across Europe, leading to renewed lockdowns, ECB reconfirms monetary policy stance
    • UK inflation exceeds expectations, unemployment falls, December rate hike becomes more likely
    • Markets grind higher, $1.7trn US Build Back Better bill passes
    • Outlook: Busier week ahead; potential announcement of Fed chair, COVID-19 developments, German politics and November flash PMIs

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    Weekly review

    COVID-19 cases rise across Europe, leading to renewed lockdowns, ECB reconfirms monetary policy stance

    The number of COVID-19 cases continues to rise sharply across Europe with Germany now seeing a doubling in cases every 12 days. Notably however, the spread of the virus is 30 times higher amongst the unvaccinated population and the overall death rate is at its highest since May 2020. Chancellor Angela Merkel stated on Thursday that the country is facing a “dramatic situation”. Over the last week both Austria and the Netherlands announced fresh lockdown restrictions to counteract rising cases, and while German authorities have not yet introduced such restrictions, they have begun encouraging people to work from home and restricting public transport for unvaccinated individuals. Any reintroduction of severe lockdown restrictions has obvious implications for the growth outlook in the region and therefore asset prices.

    In a speech during the week, European Central Bank (ECB) President Christine Lagarde stated that, while inflation pressures were clearly building – eurozone inflation in October at a 13-year high of 4.2% – and were likely to remain long-lasting, the economic recovery from COVID-19 remained fragile. As mentioned, the recent tightening of virus-related restrictions in some countries has demonstrated that the pandemic can still dampen the economic recovery. Additionally, the ECB expects current inflationary pressures to ease from mid-2022. Bond yields in most major eurozone government bond markets fell, and the euro currency index dropped to its lowest level since early 2020.

    UK inflation ahead of expectations, unemployment falls, December rate hike becomes more likely

    Year-on-year CPI for October came in at 4.2% for the UK, easily surpassing the expectations of both the market and the Bank of England’s November Monetary Policy report for a 3.9% increase. This, together with strong labour market data, once again raised expectations for a December rate hike, despite the disappointment from November being fresh in the eyes of investors. Core CPI also had a 0.3% beat on expectations coming in at 3.4%. Looking at the underlying components, the key drivers were higher prices in transport, rents, food, restaurants and hotels. Transport, which contributed 1.4% to the final CPI figure, was led by a 5.5% month-on-month increase in the price of airline fares amid strong demand. Additionally, year-on-year RPI registered a fifth consecutive month of above-consensus data, coming in at 6% (vs 5.7% expected). The Bank of England’s Chief Economist Huw Pill stated that bringing inflation back in line with the 2% target does not have a quick fix and the current plan is to steer aggregate demand in the UK to relieve pressure on the supply chain.

    In other UK news, unemployment continued to tick lower with October seeing a -14.9k change in jobless claims. This is a slight slowdown compared to Septembers drop in jobless claims of -51.1k, however it still implies a falling unemployment rate. The ILO three-month rolling unemployment rate to September now sits at 4.3%, its lowest level since July 2020.

    Markets grind higher, $1.7trn Build Back Better bill passes

    Thursday saw the S&P 500 grind out a new all-time high as it finished +0.34% on the day and +0.49% on the week after moving broadly sideways for the most part. What did stand out was the narrowness of the move, with only a third of its constituents having a positive return on the day. This is its narrowest move since 2000 and highlights the current reliance of the index on the big tech names.

    On Friday, the House of Representatives voted to pass President Biden’s $1.7trn Build Back Better bill. This comes one week after the passing of the $1.2trn infrastructure plan. The two bills have been the cause of much intra-party tension for the Democrats over the last few months, with progressives and moderates struggling to agree on the size of each package and the order in which they were to pass through the house. The next stage for the bill is the Senate, where further analysis of the details of the bill is expected, especially from outspoken Senate Democrat Joe Manchin who has continually voiced concerns over the effect of this stimulus on current inflationary pressures.

    Outlook: Busier week ahead; potential announcement of Fed chair, COVID-19 developments, German politics and November PMIs

    Next week is likely to be busier on both the data and political front. The market is expecting President Biden to announce his choice of the next chair of the Federal Reserve (Fed) before Thanksgiving on Thursday. The two front runners are current Chair Powell and Governor Brainard. There are other posts to fill too, so this gives the Biden administration the opportunity to shape much of the senior leadership function of the central bank. Elsewhere, the market is expectant that a coalition announcement remains close in Germany, with the likely result a centre-left CPD, liberal FDP and green coalition. Given the rise in COVID-19 cases (both hospitalisations and deaths) across Europe, the political response will also be closely watched, in Germany in particular. From an economic perspective the latest flash estimate of the purchasing manager indices (PMIs) will also be closely watched for an update as to the path of future growth and indications as to how the moderating growth environment is evolving.  We will also receive the minutes from the October meetings of both the Fed and the ECB.

    Week to 12 November, 2021


    • US inflation beats expectations, reaches 30-year high
    • Singles’ Day sales break records, China property stabilises
    • Markets end upward run, Fed chair election story continues, signs of compromise emerge between EU and UK over Northern Ireland
    • Outlook: Relatively quiet week; UK inflation, US retail sales as well as Fed chair headlines

    Responsible investment in multi-asset

    Please read our white paper on our responsible approach to multi-asset investment.

    Weekly review

    US inflation beats expectations, reaches 30-year high

    The supply-demand gap came to the fore once again this week as US CPI figures continued to climb, with the year-on-year headline figure reaching 6.2%, its highest level since 1990. This was above the market consensus of 5.9%, while the month-on-month data also beat expectations at 0.9% vs. 0.6%. Although the upward move in prices was fairly broad-based, a key driver was an increase in rental prices, which matched September’s 0.44% rise (the biggest in 15 years). Supply issues in the auto sector reflected a 1.4% growth in new auto prices while strong consumer demand meant a rebound in used car prices too. The continued reopening of the US economy from the delta variant also played its part, as hotel rates rose amid an uptick in hotel occupancies. The main laggard remains airline fares which fell -0.7%, however this fall is much less extreme than the -9.1% and -6.4% seen in August and September respectively this year. There is market opinion that November will see airline fares rebound as passenger numbers continue to recover.

    President Biden has since spoken on the topic, listing the fight against high inflation as his top priority, highlighting his $1.2 trillion infrastructure bill as a key player in bringing down costs and reducing bottlenecks.

    Singles’ Day sales break records, China property stabilises

    Thursday was 11/11 and the commencement of Singles’ Day, the popular annual shopping festival in China. The headlines have been record-breaking, with China’s largest e-commerce firm Alibaba reporting 540.3bn yuan ($84.5bn) in sales while Jingdong, another large Chinese online retailer, says consumers placed 349.1bn yuan ($54.6bn) in orders. To put this in perspective, the combined sales of these two companies during Singles’ Day was equivalent to a third of Amazon’s full year revenue. The positive news reflected in the share price for Alibaba which ended the day +2.4%, a relief to shareholders who suffered through a -30% slump earlier in the year amid heightened regulatory concerns.

    Meanwhile, on Friday evening the People’s Bank of China reiterated its stance on its prudent monetary policy, further stating it will “resolutely curb monopoly and the disorderly expansion of capital in the financial services sector” and will “maintain steady and sound development of the property market”. The property market had surged in the days prior on expectations of softer regulations, helping to improve sentiment in a recently beleaguered sector.

    Markets end upward run, Fed chair election story continues, signs of compromise emerge between EU and UK over Northern Ireland

    Tuesday saw the S&P 500 fall from an all-time high to end its eight days of consecutive gains, one day short of its longest positive daily run since November 2004. Markets eased off, led by a selloff in Tesla which finished -11.99% on the day, itself a reversal of its sharp outperformance of recent days. This followed from a Twitter poll posted by the company’s CEO Elon Musk on Friday, asking his followers whether he should sell 10% of his stake (c. $20bn). He did sell 4.5 million shares over the course of the week, however it has been noted that some of these transactions had been pre-arranged in September.

    Meanwhile, headlines surrounding Federal Reserve appointments, including a Fed chair, continued this week, with some sources indicating a decision before the Thanksgiving holiday. Fed Chairman Powell’s current four-year term comes to an end in early February, and while he remains one of the favourites to keep his seat, he faces stiff competition from Fed Governor Brainard, who is seen as more dovish pick. This decision comes at a crucial time for the Fed, with the recent initiation of asset purchase tapering and important rate hike decisions on the horizon.

    In the UK, there have been signs the EU may be prepared to improve its offer of compromise over reducing custom checks. This is a potential easing of tensions that threaten to derail the Brexit agreement with speculation rising of the UK considering triggering Article 16 of the Northern Ireland Protocol, which could lead to a suspension of the entire trade deal agreed last year.

    Outlook: Relatively quiet week; UK inflation, US retail sales as well as Fed chair headlines

    Next week is relatively light on significant economic releases with the headlines being the latest inflation print from the UK, where headline CPI is forecast to rise from 3.1% to 3.9% (year-on-year). The latest employment data from the UK will also provide more colour on any wage pressures ahead of the Bank of England’s December meeting. In China, we will also receive an economic update on industrial production, retail sales and fixed asset investment. The most significant data prints in the US are on retail sales, industrial production and housing starts. More significant would be any announcements concerning the nominations for the next Fed chair. Although the exact timing is uncertain, the last three appointments had already been nominated by this time. Away from economic data the market will be closely watching political events from COP26, the progress of EU-UK discussions on Northern Ireland and geopolitical tensions between Russia and the Ukraine.

    Week to 5 November, 2021


    • Fed meets expectations with taper; Bank of England surprises market with no rate hike
    • Strong US labour market data supports risk assets, forward looking PMIs revised upwards
    • Earnings season continues, companies able to pass on pricing pressures to end-customers
    • Outlook: US CPI release key; may see detail on possible successor to Fed Chair Powell

    Responsible investment in multi-asset

    Please read our white paper on our responsible approach to multi-asset investment.

    Weekly review

    Fed meets expectations with taper; Bank of England surprises market with no rate hike

    Central banks took centre stage this week; starting with the US Federal Reserve (Fed) who met market expectations by tapering asset purchases by $15bn a month. They also pre-announced the purchase pace for November and December, further commenting that as long as the economy evolves as expected, a similar pace would continue into the new year. Fed Chair Powell explained that they expected the elevated inflation levels to return to the Fed’s long-term goal as supply bottlenecks abate and COVID-19 restrictions are eased. The market reaction was muted, with the Fed broadly delivering upon market expectations and in-line with previous guidance.

    By contrast, the Bank of England’s announcement yesterday failed to meet market expectations for a rate hike; the MPC voted by 7-2 to keep the policy rate on hold at 0.1%, with only the most hawkish members favouring a 15bps increase. This came despite upgrading their inflation forecasts yet again, now seeing CPI peaking “at around 5% in April 2022”. They also shied away from committing to a December hike, merely stating that if the data was in line with their projections it would “be necessary over coming months to increase” rates. Investors were surprised by the dovish tone; gilts rallied and outperformed sovereign bonds elsewhere, with five year yields (-20bps) seeing their biggest move lower in over five years, and sterling (-1.37%) had its worst performance against the US dollar so far this year, which left it as the worst performer among the G10 currencies. This also triggered a broader rally in other sovereign bond markets. Lastly, European Central Bank (ECB) President Lagarde indicated the ECB was firmly on hold, stating that its three conditions for raising rates “are very unlikely to be satisfied next year”, as “the outlook for inflation over the medium term remains subdued” in spite of the recent inflationary surge.

    Strong US labour market data supports risk assets; forward looking PMIs revised upwards

    Alongside inflationary pressures the central banks are monitoring the growth outlook; this week saw some solid data releases in the US that supported risk assets. Firstly, there was the ISM services index for October, which rose to a record high of 66.7 (vs. 62.0 expected). We also had the ADP’s report of private payrolls for October, which showed an increase of +571k (vs. +400k expected), which is the strongest growth since June. Those strong prints came ahead of Friday’s non-farm payroll in the US with an above expected 531k rise (expectation of 450k) and an upward revision to last month’s more disappointing release. The unemployment rate ticked down to 4.6%. From a forward-looking perspective, the US composite PMI was revised up three-tenths to 57.6, and in the UK the composite PMI was revised up a point from the flash reading to 57.8, firmly in expansionary territory. Turning to inflation, investors got a further glimpse of ongoing supply chain issues from the ISM manufacturing print; the overall reading for October came in slightly above expectations at 60.8 (vs. 60.5), but the prices paid index similarly rose to 85.7 (vs. 82.0) in its second successive increase, and there were further signs of supply-chain issues from the supplier delivery time measure, which hit a five-month high of 75.6.

    Earnings season continues, companies able to pass on pricing pressures to end-customers

    Turning to the ongoing earnings season, we saw strong results from S&P 500 companies that reported. This included Pfizer, which raised its full-year forecasts on the back of strong vaccine demand and noted it had the capacity to produce as much as 4 billion shots next year, and another notable result was Avis Budget Group (+108.31%). We also received an updated from IAG group, highlighting the continued recovery in airline travel over Q3 and into Q4. A notable characteristic of this earnings season has been the comments from companies confirming that they have, so far, been able to pass input price increases on to end customers and maintain profit margins. The impact of results upon individual share price performance has been asymmetric, with companies beating expectations seeing only muted price reactions, with those missing seeing larger share price falls.

    Outlook: US CPI release key, may see detail on possible successor to Fed Chair Powell

    The week ahead is somewhat quieter after the central bank activity this week; nonetheless, inflation will be back in focus with the US CPI release for October, which will be closely watched amidst the debate on how transitory inflation will prove. Last month was another upside surprise from CPI, which marked the 5th time in the last seven months that the month-on-month figure has been above the median estimate on Bloomberg. This time round, CPI is expected to come in at +0.5% month-on-month, the strongest monthly reading since July. Other data will provide further clues on inflation pressures next week, in particular the PPI reading on Tuesday, as well as the JOLTS job opening figures on Thursday. Another area to keep an eye on will be any developments on Fed appointments, with Chair Powell’s current four-year term coming to an end in early February. Otherwise, earnings season is starting to wind down now, especially in the US, as 440 companies in the S&P 500 having now reported. Looking at the week ahead, we will receive updates from the likes of PayPal, Porsche, Disney, Allianz, Credit Agricole, Merck and AstraZeneca.

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