Markets corrected after reaching record highs

New COVID variant spooked investors
Central bank taper decisions in focus

In the first half of November equity markets continued to reach new highs, but during last weeks of the month, momentum faded and indexes consolidated for a while. In the end of the month, volatility spiked and equity indexes experienced a sharp decline after the new COVID-19 variant was identified in South Africa, which could be more transmissible than other variants. Together with surging COVID cases in Europe, it raised fears of another wave of lockdowns. For example, Austria had already reimposed a full lockdown, prior to the new variant, while Germany warned it may follow suit.

Newest data shows mounting pressure for central banks to act, as rising prices pushed higher above 2% inflation target. US Federal Reserve (FED) president Jerome Powell told, that it is time to retire word “transitory”, when talking about inflation and opened doors for sooner than expected rate hikes. Preferred inflation ratio by the FED is Personal Consumption Expenditures (PCE), which measures goods and services targeted towards and consumed by individuals and uses slightly different calculation methodology, than the widely known Consumer Price Index (CPI). Meanwhile, in the euro area, the Harmonized Index of Consumer Prices (HICP) is used to measure inflation.

Inflation in US and eurozone

Source: Bloomberg LP

Markets cautiously evaluated the US President’s decision to reappoint Jerome Powell as a chairman of the Federal Reserve for a four year term beginning next February. Investors and analysts expect continuation of the current policy – anticipating FED rate hikes starting mid-2022 and preparing for diminishing support for the US economy as FED started to pare its monthly asset purchases by 15 billion USD each month.

In the Financial Stability Review, ECB warned, that stretched prices in property and financial markets, as well as high debt levels in corporate and public sectors pose a threat to the euro-area stability. ECB pointed out, that the pandemic continues to be one of the main risks to economic growth, as disruptions to global supply chains and possibility of new lockdowns to stem the latest virus wave present fresh challenges. The Central bank also mentioned about the risks posed by stubbornly high inflation, but did not elaborate on monetary policy before the key meeting in December. Persistent high inflation levels could translate into an untimely tightening of financial conditions, weighing on the economic recovery.

One positive development was observed in November, when the US President Joe Biden and the Chinese President Xi Jinping had a virtual summit, with both sides aiming to stabilize the relationship between the two nations. No major breakthroughs have been achieved, but it still indicates, that both sides are willing to avoid conflicts between the world’s two biggest economies, as tensions built up over a wide range of issues, including tariffs, sanctions and human rights. Xi came to the summit with a strong position, having recently secured his third term as a Communist Party Chief. Meanwhile, Biden signed infrastructure bill into law, which should boost US competitiveness with China.

It seems, that prior to the crucial year-end period, stores were able to ship goods despite supply chain bottlenecks, while shipping rates started to ease across the world. Rates paid for the transport of dry bulk materials necessary to produce goods reached a peak in October and declined more than 50% since then, while a price to ship containers from China to US and Europe declined 10-16% over the same period. Hopefully, this trend will persist in 2022, helping to contain inflation.

Shipping costs started to go down

Source: Bloomberg LP

More encouraging news about the state of the consumer comes from the new records reached during the Singles Day (11.11) event, which was pioneered by Alibaba in 2009 and has become one of the biggest shopping events globally. Alibaba gross merchandise volume (GMV) grew 8% (YoY) to ~ 84.5 billion USD during the 11-day period, while JD.com’s transaction volume during Singles Day period increased by 28% (YoY) to almost 55 billion USD. In US, retailers witnessed shift in consumer behavior as sales were more distributed throughout November and not concentrated during Black Friday and Cyber Monday events.

“House view” update

Our investment team still thinks that a lot of positive and negative factors currently warrant neutral risk allocation. The new COVID-19 variant and a higher probability of full lockdowns, a rise in volatility and diminishing support from central banks provide reasons to be cautious. On the other hand, present fiscal and monetary stimulus, favorable end-of-the-year period and encouraging retail sales provide ground to be cautiously optimistic.

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