November global commentary: Latest COVID variant weighs on markets

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Risk assets drifted higher at the start of November but, ultimately, an increase in COVID-19 cases, particularly in Europe, and then the discovery of the latest COVID-19 variant (Omicron) late in the month were enough to see a reversal of risk appetite, leaving equity markets lower for the month (MSCI World -2.2% MoM). The US Federal Reserve (Fed) did such a good job of telegraphing its plan to start tapering asset purchases, that when the Federal Open Market Committee (FOMC) chair, Jerome Powell, announced early in November that the Fed would start shrinking the size of its bond purchases by US$15bn per month, US government bond yields actually drifted lower. A week later, when US inflation data surprised to the upside (US headline inflation for October of +5.9% YoY was the fastest pace of price increases since 1990), US government bonds reversed some of those gains.

Energy prices were a key contributor to the US headline inflation surprise, with the Brent crude oil price trading in the mid-US$80/bbl range for most of October. By mid-November, the US announced plans for a release of strategic oil reserves to cool the oil price and, in an unprecedented move, this was done in concert with other countries, including China, Japan, India, South Korea, and the UK. While the strategic reserve releases had a limited impact on the oil price, increasing concerns around the impact of more COVID-related lockdowns ultimately pushed the price of Brent crude oil c. 15% lower to end the month at US$70/bbl.

The COVID-related wobble in markets going into month-end saw US 10-year government bonds end November 0.1% lower at 1.45% and the drop in yields was a key reason that US bank stocks were amongst the worst performers for November (S&P 500 Financials sector -5.7% MoM), while the sharp drop in the oil price drove US energy counters to a 5.2% MoM drawdown. Semi-conductor stocks were one of the bright spots for the month, with the S&P 500 Semiconductor sector up 17% MoM as better-than-expected earnings results combined with guidance for a decent runway of double-digit revenue growth. Apple (+10% MoM) was one of the star performers in November, helped along by reports that it is re-focussing its efforts on self-driving cars. Emerging markets (EMs) underperformed developed markets (DMs) (MSCI EM -4.1% MoM), with Chinese stocks again amongst the worst performers (Hang Seng China Enterprises -6.6% MoM), although Russia was comfortably the worst-performing major EM (MSCI Russia -10.9%), with news that a build-up of Russian troops on the Ukraine border may reignite geopolitical tensions. The Turkish lira fell 29% MoM, leaving it 45% lower against the US dollar YTD as apparent political meddling in central bank affairs saw Turkish rates cut by another 1.5% in November.

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