Sabco® Investment's Monthly Market Report - November, 2021

Sabco® Investment's Monthly Market Report - November, 2021

November saw a resurgence of volatility in the financial markets, leading to a sharp decline in stocks towards the end of the month following the emergence of the Omicron variant.

Global equities experienced a decline in November, particularly noticeable in the later part of the month. The energy sector took the hardest hit, with oil suffering its largest monthly decline since March 2020. Financial stocks and airlines also faced declines due to concerns surrounding the latest wave of Covid-19. On the other hand, the technology sector performed well, driven by gains in Apple and semiconductors, while cloud-related stocks lagged behind.

Major indices plummeted by more than 2% on the Friday after Thanksgiving as fears grew that the new virus strain could derail the ongoing economic recovery. Although detailed information on Omicron's characteristics will take some time to emerge, Moderna's CEO's statement regarding the reduced effectiveness of current vaccines against the variant triggered selling pressure. He also mentioned that it would take months before Omicron-specific vaccines could be produced on a large scale. However, health officials emphasized that existing vaccines should still provide some level of protection, particularly against severe illness. Even prior to the news of Omicron, the rising number of infections, particularly in Europe, weighed on investor sentiment.

On the fiscal policy front, the House of Representatives approved the approximately $1 trillion infrastructure plan and the $1.75 trillion "Build Back Better" social spending plan. However, the latter's approval in the Senate remained complex. The third-quarter earnings season continued throughout November, with positive results highlighting resilient profit margins and robust demand.

Government bonds performed well as investors sought safer assets amid concerns about economic growth due to the new variant. The US 10-year yield declined by 0.11% to 1.44% in November, while the German 10-year yield fell even more significantly from -0.11% to -0.34% by the end of the month. High-yield corporate bonds faced declines as risk aversion increased among investors. The US 2-year rate experienced significant volatility, reflecting changes in expectations regarding short-term US monetary policy. Although it rose during the month in response to inflation and positive macroeconomic data, the rate fell towards the end of November as investors reassessed the economic outlook following the emergence of the new variant.

The Federal Reserve's early November meeting did not bring any surprises in monetary policy, as the anticipated reduction in asset purchases of $15 billion per month was confirmed. The possibility of adjusting the pace of tapering based on the changing economic outlook was also expected. However, there was a noticeable change in the Fed's tone as the month progressed. The Fed Vice Chair hinted at the potential discussion of accelerating the tapering process at the December meeting. Similarly, the Atlanta Fed president expressed comfort with ending quantitative easing by the end of the first quarter, while the Chicago Fed president signaled increased openness to raising interest rates next year, acknowledging the challenges of maintaining patience in the face of inflationary pressures. The shift in the Fed's rhetoric towards a potentially more aggressive reduction in asset purchases can be attributed to the October inflation report, which revealed the highest inflation levels in over 30 years, with consumer prices rising 0.9% for the month and 6.2% year-over-year. Towards the end of November, Fed Chair Powell, who was recently reappointed by the US President, acknowledged the increased risk of persistently higher inflation and suggested retiring the term "transitory" to describe the current inflationary situation.

The dollar index experienced a 2.0% increase in November, strengthening against the euro and briefly falling below 1.12. Currencies of oil-exporting countries, such as Russia, Norway, and Canada, suffered due to the decline in oil prices. The Turkish lira reached an all-time low following President Tayyip Erdogan's comments defending recent rate cuts by the central bank. The Turkish currency has depreciated by over 40% against the dollar since the beginning of the year.

WTI crude oil faced a significant decline of 20.8% in November as the increase in global infection cases and the emergence of a new variant threatened the recovery of oil demand. Gold prices initially rose but fell in the second half of the month, ending November at a relatively unchanged level.