International Communique No. 315 – 23rd November 2021


This time last year the world was pondering how pandemic-related lockdowns would impact financial markets. Despite the uncertainty, the outcome for 2021 – as the year nears its completion – has shattered all expectations, with companies reporting healthy sales and margin figures and many equity market indices stretching to all-time highs.

Encouragingly, US retail sales were also up 1.7% in October month-on-month, showing that consumers are still buying despite soaring prices. Some may have even brought forward their Christmas shopping, fearing in-store shortages. A hint of improvement in supply chains offset fresh concerns about the accelerating spread of Covid-19 in Europe and the effects this could have on economic recovery.

The fourth wave of the pandemic stole the attention last week. Main indices were modestly impacted by the renewed health emergency and the announced lockdown in Austria. However, a two-speed equity market could be observed, at the same time as the euro ebbed to a 16-month nadir against the US dollar.

Sector rotation was in full swing, with energy stocks falling in tandem with receding oil prices. Travel & leisure companies also recorded lower share prices while financial stocks declined amid falling bond yields. Consumer goods did well, by contrast, while tech was helped along by lower yields and the prospective improvement in semiconductor shortages announced by some component manufacturers. Nasdaq rose by 1.2% over the week, driven forward by large caps (Apple +7% and Microsoft +2%).

Real (i.e. inflation-adjusted) government bond yields remained broadly negative in Europe and the US (US 10yr -1.14%) despite the economic recovery and the inflation surge. All the same, there is increasing demand for risk assets. Admittedly, for US government yields, demand is being driven by significantly higher nominal rates than in Europe and Japan and by the Fed’s asset-buying programme. It is indicative of the move towards monetary normalisation. Central bank support will gradually be withdrawn, with a rate hike by the Bank of England expected for the 6 December meeting. Overall, more volatility in equities is expected, given their lavish multiples.

The re-appointment of Republican Jerome Powell as Fed chief will also be announced soon. If a Democrat were to be appointed – say Lael Brainard – in his place, political pressure could mount, placing the blame squarely on her if inflation were to persist.

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