International Communique No. 314 – 9th November 2021


Equity indices gained further ground last week, and many reached new all-time highs. Tech, luxury goods and automotive stocks were particularly in demand, while the oil sector was hit by ebbing crude prices. The impetus for the gains stemmed from solid corporate earnings and guidance, coupled with decisions from central bank, which also stood firmly in the spotlight. Rate-setters reaffirmed that monetary conditions would stay accommodative. Much of the prospective good news is priced into equity index levels, but are receiving a further boost from the seasonality effect, with the prospect of buoyant holiday-season spending.

Markets have continued to trend upwards, particularly thanks to the support from Chinese exports and approval by the House of Representatives of the USD 1 trillion five-year infrastructure plan. Pfizer’s experimental Covid pill, which reportedly slashes the risk of hospitalisation and fatalities, is also fuelling the upbeat mood. In contrast, many pharma stocks – especially those exposed to vaccines – fell back sharply.

A Federal Reserve that is more open about its intentions, one that voices changes in monetary policy well ahead of time, is undoubtedly a stabilising factor for financial markets, which are given far more time to react. Following its meeting on 2 and 3 November, the Fed finally announced that the tapering of asset purchases would begin in mid-November. Relative to the current monthly volume of USD 120 billion, buying will be reduced by USD 15 billion per month from that point. This means that quantitative easing will peter out in mid-2022, if the economy performs well per expectations. Powell also pointed out that tapering cannot be used as a tool for timing interest rates increases. He stated that the conditions for rate hikes are different and more stringent, and include a return to full employment. This endorses the Fed’s view that the economic recovery is sustainable and the current giddy levels of inflation will not last. The likelihood of several upward nudges in short-term rates has therefore receded in the minds of investors. Tellingly, the yield on ten-year Treasury bonds has fallen to around 1.45%. Meanwhile, the Bank of England unexpectedly held its benchmark base rate at an all-time low of 0.1%. In the wake of that positive news, the yield on five-year Gilt-edged securities recorded its biggest fall since the Brexit referendum in 2016.

In the US, job creation for October was much stronger than expected, clocking in at 531,000. The figures for the previous two months were thus revised upwards significantly, thereby reversing the weaker trend witnessed since early this year.

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