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November Market Update: virus back in focus

For financial professionals only

In a nutshell:

  • Emergence of the Omicron Covid variant triggered a broad sell-off across Equities
  • Central bank in-action from early November had boosted Fixed Interest returns, particularly Gilts and Index Linked Gilts
  • Equities had a positive run prior to Omicron driven by strong fundamental data
  • The Turkish Lira sold off heavily – a reminder of the instability associated with the current leadership.

What’s moving markets…

November’s notable events will likely be overshadowed by the emergence of the new Omicron variant, and Friday 26th November saw investors’ initial reaction to this. Unlike the Beta and Delta variants, Omicron comes with greater risk to the efficacy rate of vaccines due to the large number of mutations – 32 vs 2 to 5 for Beta and Delta.

Internationally, countries began to close their borders in reaction to the dangers, and irrespective of the outcome of this variant, this has had an immediate impact on mobility and economic growth.

Markets entered this new phase of the virus at a point of valuation high, not least within the US. Equities had been supported by decent economic growth and positive fundamental data. US retail sales came in above expectations at 1.7% month on month, while household spending was up 1.3%. Importantly Industrial Production was also up 1.6% in October, having fallen by 1.3% in September.

Closer to home, Inflationary pressures further materialised in the UK. Data released in November showed core inflation for October was 3.4%, up sharply from 2.9% in September. While there were again temporary drivers such as used car sales materially driving this uplift, there continued to be broad based price appreciation within the inflation bucket. Contrary to the strong demand seen in the US, the UK saw a dip in summer demand that led to quarter on quarter GDP growth of just 1.3%, compared to 5.5% in Q2. However, September and October have shown reassuring signs of renewed acceleration.

At a company level, continued positivity was delivered through Q3 earnings releases. In general, high-level demand remained strong and there was a degree of pricing power that led to revenue growth. Companies were finding short-term solutions to supply disruptions and inflationary pressures.

Earlier in the month there was a boost to long duration fixed interest asset classes across developed markets due to Central Bank in-action. The nomination of Fed chairman Jerome Powell for another term in office was a welcome status quo compared to more hawkish alternatives. Meanwhile the Bank of England (BOE) refrained from raising rates at their November meeting, despite regular communication to the markets of rising inflation expectations in the months ahead.

Finally, emerging markets saw a violent depreciation of Turkish Lira following a dramatic change in their monetary policy. The Central Bank has cut rates by 4% to 15% since September, despite inflation close to 20% and GDP growth circa 10%. The Lira is down 40% this year, and only a reversal of this loosening monetary policy is likely to stabilise the currency.

Asset class implications…

Reaction to the Omicron variant was textbook – rotation away from Covid exposed cyclical recovery stocks, while secular growth and high quality growth stocks were more stable. We also saw a reduction in bond yields as markets reacted to the decreased probability of the monetary tightening that had been signposted due to improved economic growth and inflationary pressures seen earlier in the month.

At an asset class level, Equites sold off in unison – high valuations and fading tailwinds from fiscal and monetary support have left stocks vulnerable, with the Omicron variant a significant trigger. Initially, the sell-off on Friday was seen as a buying opportunity as has often been the case of late, but by Tuesday a risk-off environment was dominating again. The move came after the CEO of Moderna, Stephane Bancel, highlighted that existing vaccines will be less effective at tackling this variant.

Market participants widely expect an elevated level of volatility before more information is accumulated about Omicron, with the volatility index (VIX) rising above 28, the highest level since February. The immediate hit to expectations of economic activity in the coming month was most obvious from the 14% drop in Brent Crude – falling from $82 on Friday to $70 by Tuesday.

Earlier in November, we saw strong returns from long duration fixed interest assets with the conducive Central Bank in-action coming from both sides of the Atlantic. In particular, the lack of a rate rise from the BOE delivered a significant shift downwards in the UK yield curve. This was exacerbated by the emergence of the Omicron variant and the negative impact this may have on global economic recovery.

Asset classes in numbers

Name 1m 3m YTD 1yr 3yr
FTSE Actuaries UK Conventional Gilts All Stocks TR in GB 2.99 1.32 -2.57 -0.99 15.23
ICE BofA Global Broad Market Hedge GBP TR in GB 2.54 0.79 -1.81 -3.73 8.03
IA UK Direct Property TR in GB 1.54 3.09 6.86 6.87 2.91
FTSE All Share TR in GB -2.25 -1.42 13.04 17.4 16.92
FTSE USA TR in GB 3.88 6.32 25.46 29.31 69.97
FTSE World Europe ex UK GTR in GB -1.25 -1.89 13.14 16.29 41.85
FTSE Japan TR in GB 1.04 0.48 2.53 4.84 21.74
FTSE Asia Pacific ex Japan TR in GB -0.4 -2.17 -0.26 4.26 32.61
FTSE Emerging TR in GB -0.34 -2.2 1.39 5.02 27.35

Source: FE Analytics, GBP total return (%) to last month end