VIDEO: Market Snapshot November 2021

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of November 2021.  

Global equity markets were broadly negative in November following the discovery of a new more-transmissible variant of the Coronavirus, Omicron, and its potential impact on global growth. This came on top of stricter lockdown measures imposed in Europe earlier in the month. Other news weighing on investor sentiment came from the US, where the Federal Reserve began tapering its asset purchases and suggested that inflationary pressures in the US may not be transitory as initially thought. The Bank of England, meanwhile, signalled that interest rates would likely increase in the coming months in a bid to bring inflation back to within its prescribed target. Inflationary concerns remained a common theme in November across global markets, even as global bonds saw some support on the back of risk-off sentiment. Turning to South Africa, stronger Resources and Industrials sectors helped lift the local bourse, particular on the back of rand weakness relative to the US dollar, while travel restrictions to and from South Africa weighed on investor sentiment.

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned -2.4% for the month. Developed markets outperformed emerging markets, with the MSCI World Index returning -2.2% and the MSCI Emerging Markets Index delivering -4.1%. The Bloomberg Global Aggregate Bond Index (US$) returned -0.3%, while the EPRA/NAREIT Global Property REIT Index (US$) produced -1.6%.

The spot price of Brent crude oil closed the month 16.4% lower at around US$69 per barrel over concerns of a reduction in demand following the discovery of the Omicron variant. Metals were broadly negative in November, retracing last month’s gains, with platinum returning -6.9%, copper -3.5%, palladium -11.4% and aluminium -2.2%. Gold and nickel were among the only outliers, gaining 0.5% and 3.6% respectively.

US

In the US, the Federal Reserve (the Fed) announced that it would begin reducing the pace of its monthly net asset purchases by $10bn for Treasury securities and $5bn for mortgage-backed securities, suggesting that similar reductions in its emergency pandemic support programme may also be appropriate. The Fed noted that supply and demand imbalances – related to the slowdown in production during the pandemic and the increase in demand following the reopening of the economy – have contributed to sizable price increases that are likely to linger well into next year. This, coupled with the emergence of the Omicron variant, have increased the risks to employment and economic activity, thereby placing additional uncertainty around the inflationary outlook. The Fed stated that inflation should no longer be considered as being transitory, thereby signalling the prospect of interest rate hikes in the near future. The annual inflation rate in the US surged to 6.2% for October, above forecasts of a 5.8% increase and marking the highest level since November 1990.

In other news, the US economy expanded by an annualised 2.1% q/q in Q3, slightly above the previous estimate of 2%, but still below market forecasts of a 2.2% expansion. Unemployment surprised on the upside, falling to 4.2% in November from 4.6% in October, well below market expectations of 4.5%, with employment participation showing signs of improvement. Meanwhile, supply delays and slowing demand continued to place downward pressure on the manufacturing sector, with Manufacturing PMI being revised lower to 58.3 in November, slightly below the previous month's reading of 58.4 and well below the preliminary estimate of 59.1.

Equities closed the month broadly lower, with the S&P 500 returning -0.7%, the Dow Jones Industrial 30 -3.5%, and the technology-heavy Nasdaq Composite 0.3% (all in US$).

SOUTH AFRICA

The South African Reserve Bank (SARB) raised the repo rate by 25bps to 3.75% in November, marking the first rate hike in three years. The SARB noted that a gradual rise in the repo rate should be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. The decision came against the backdrop of increased inflationary risks and a relatively fragile economic recovery. Annual inflation in South Africa increased to 5% in October, in line with market expectations but still above the 4.5% midpoint of the SARB’s monetary policy target range.

The FTSE/JSE All Share Index slipped nearly 3% during daily trading, its biggest daily decline since March 2020, following the detection of the new strain of the Coronavirus in the country. The new Omicron variant, believed to be more transmissible, saw several countries banning travel to and from South Africa and its neighbouring countries, placing additional pressure on an already struggling tourism sector. The new variant is believed to be behind the spike in new infections across the country, particularly in the Gauteng region. The government has subsequently embarked on a more vigorous vaccination campaign to increase uptake, while mandatory vaccines may become an option if the situation worsens.

Turning to economic indicators, Manufacturing PMI rose to 57.2 in November from 53.6 in the previous month, as both business activity and new orders rebounded after the prolonged strike action in the steel sector and load-shedding in October. Retail sales surprised on the upside after increasing 2.1% y/y in September, beating market estimates of a 0.2% contraction after consecutive declines in July and August.

The FTSE/JSE ALSI returned 4.5% in November. The largest contributors to performance were the Resources and Industrials sectors, which gained 6.5% and 5.7% respectively. Listed Property gained 2.2% while Financials and detracted from performance, shedding 2.6%. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 0.9%. SA bonds (as measured by the FTSE/JSE All Bond Index) delivered 0.7%, SA inflation-linked bonds returned -0.1% and cash (as measured by the STeFI Composite) delivered 0.3%. 

Finally, the rand depreciated against the major currencies, losing 4.9% against the US dollar, 2.3% against the pound sterling and 3.2% against the euro.

UK and the EUROPEAN UNION 

In the UK, the Bank of England kept its benchmark interest rate at a record low of 0.1% and its bond-buying programme unchanged during its November meeting. The central bank noted that it may become necessary to increase interest rates over the coming months in order to return inflation to the 2% target. Annual inflation in the UK spiked to 4.2% in October, its highest reading since December 2011 and above market forecasts of 3.9%. In other news, initial estimates showed that the UK economy advanced 1.3% q/q in Q3, below market forecasts of a 1.5% expansion and well off the 5.5% posted in Q2.

Elsewhere in Europe, the European Central Bank (ECB) indicated that its monetary policy support to the economy would need to be reassessed and brought towards a more neutral configuration over time in light of its higher inflationary outlook. Policymakers noted that the uptick in inflation was largely driven by temporary factors that should fade over the course of 2022, but agreed that the recent price pressure may be more persistent than previously anticipated and that uncertainty around the medium-term prospects was elevated. Annual inflation in the Euro Area increased to 4.1% y/y in October, the highest reading since July of 2008, as the bloc continued to battle a surge in energy costs and supply shortages. Preliminary estimates showed that inflation is expected to accelerate to 4.9% y/y in November, reaching a new 30-year high and well above the ECB’s target of 2.0%.

For the month, the UK’s FTSE 100 returned -5.6%, Germany’s DAX -6.4% and France’s CAC 40 -4.2% (in US$).

CHINA and JAPAN

In China, disappointing earnings from tech stocks dragged the local index lower, as the lingering economic impact of Beijing’s regulatory crackdown weighed on the sector. Detracting further from investor sentiment was the prospect of renewed US/China tension, after the US government blacklisted Chinese firms over allegations of helping its military’s quantum-computing efforts, while Chinese regulators requested DiDi Global to delist from the New York Stock Exchange over data security concerns.

Turning to economic indicators, the People’s Bank of China (PBoC) kept its benchmark interest rates unchanged for the 19th straight month in November.  China's annual inflation unexpectedly accelerated sharply to 1.5% in October from 0.7% a month earlier, marking the highest recording since September 2020. Manufacturing PMI plunged into contractionary territory for the second time since April 2020, falling to 49.9 in November from 50.6 in September and missing market forecasts of 50.5. Meanwhile, retail sales surprised on the upside, expanding 4.9% y/y in October, beating market expectations of a 3.5% rise.

Preliminary estimates showed that the Japanese economy contracted by an annualised 0.8% q/q in Q3, well below market expectations of a 0.2% fall amid a resurgence of Covid-19 cases and persistent global supply chain disruptions. Some reprieve came in the form of the Japanese government unveiling a record $490 billion stimulus package, which will include cash handouts and aid to ailing businesses. Meanwhile, Japan’s inflation accelerated for the second consecutive month to 0.1% y/y in October, still well below the BoJ’s target of 2%.

Japan’s Nikkei 225 delivered -3.3%, the MSCI China -6.0%, and Hong Kong’s Hang Seng -7.7% (in US$).