Global Markets Update – Monday 29 November 2021

Coronavirus

Global stocks tumbled on Friday after a new COVID-19 variant, which was first discovered in South Africa and had a record number of mutations, caused many countries to halt all flights from southern Africa and tighten restrictions. The WHO classified the strain, which is called Omicron, as a “variant of concern” even as scientists rushed to better understand whether it was more transmissible and may evade vaccines. Investors reduced risk in portfolios, with travel-related stocks, such as airlines, hotels and cruise operators, which had already been hit by surging infection rates in Europe, particularly negatively affected.

UK

The FTSE 100 lost 2.5% over the week.

November’s flash estimate of the composite IHS Markit/Cips survey of UK economic activity was virtually unchanged from October. Manufacturing activity picked up despite supply chain disruption, with manufacturers saying they were able to pass higher costs onto customers.

The Bank of England’s chief economist backed calls for higher interest rates.

US

The S&P 500 fell 2.1% over the week.

US stocks, particularly tech stocks, were hit by news of Jay Powell’s renomination as Fed chair. Traders took it as a sign that the US president approves of a hawkish pivot by the central bank to fend off soaring inflation.

The core personal consumption expenditure index, the Fed’s preferred measure of US inflation, rose 4.1% in October compared with a year ago. This marks the biggest year-on-year jump since the 1990s.

Europe

The FTSEurofirst 300 tumbled 4.5% over the week.

The flash estimate of the eurozone IHS Markit flash composite purchasing managers’ index unexpectedly increased to a two-month high of 55.8 in November from 54.2 in October. Services outperformed manufacturing for a third straight month, recording the strongest growth in activity for three months, while costs and average selling prices rose at the fastest pace since the survey began in 1998.

Olaf Scholz is to become German chancellor after clinching a coalition deal. He unveiled the coalition agreement between the Social Democrats, Greens and liberals that will allow him to succeed Angela Merkel as German chancellor, promising the “biggest industrial modernisation of Germany in more than 100 years”.

EU consumer confidence fell to -8.2 in November, taking it below its pre-pandemic level for the first time in eight months as several countries in the region tightened coronavirus restrictions.

German consumer confidence fell, dropping to -1.6 from +1.0 in October, reflecting rising Covid-19 infections and accelerating inflation.

Spain’s chamber of deputies approved the biggest budget in the country’s history after Prime Minister Pedro Sánchez won the support of a Catalan pro-independence party in return for a deal for regional languages on digital platforms such as Netflix.

Italian prime minister Mario Draghi, called for reform of the EU’s fiscal rules to reflect the high cost of the pandemic in economic and social terms as well as the fight against climate change.

Japan

The Nikkei 225 declined 3.3% over the week.

Pacific Basin ex Japan

For the second time in two months, the Reserve Bank of New Zealand raised interest rates as it seeks to take the heat out of the economy and rein in surging house prices. Borrowing costs rose by 25 basis points to 0.75%.

South Korea raised interest rates by 25 basis points to 1.0%. This was the second-rate hike in three months and reflects concerns over higher prices and rising household debt.

Bonds

Government bond yields initially rose amid concerns over higher inflation and interest rates but reversed direction as the Omicron variant led to a flight to safety. However, corporate debt markets were shaken by concerns that coronavirus would continue to weigh on economic activity and hurt borrowers’ ability to repay their debts.

The yield on the 10-year US Treasury bond closed the week at 1.50%, a drop of 3bps over the week, while the yield on the 10-year German Bund ended the week little changed at -0.34%.

The yield on the two-year Treasury note touched 0.58%, its highest level since March 2020, on news of Jay Powell’s renomination as Fed chair.

Currencies

The Turkish lira suffered a historic retreat after President Recep Tayyip Erdogan praised a recent interest rate cut and declared that his country was fighting an “economic war of independence”.

Mexico’s president prompted fears that he wants to interfere in the bank’s policymaking by nominating an obscure public sector economist to head the country’s central bank, causing the Mexican peso to slide to its lowest level since March. The announcement came a day after unexpected news that President Andrés Manuel López Obrador had withdrawn his previous nominee Arturo Herrera, a former finance minister better known to investors.

Commodities

Oil prices lost about 10% on Friday amid growing fears that the Omicron variant would hit growth.

Image by Tumisu from Pixabay