Market Commentary 6th December 2021 from Charlie Hancock

Posted by Telford Mann

Market Commentary 6^th December 2021

Equity Indices

During a volatile week in which most equity indices around the globe declined, the UK’s FTSE 100 index rose by 1.11%. The mid-cap FTSE 250 gained 0.48%. Concerns around the impact of the Omicron coronavirus variant continued to impact investor sentiment during the week.

The FTSE 100 was lifted by strong performance in energy related stocks, with BP (+7.30%) and Royal Dutch Shell (+5.80%) regaining most of the ground lost during the previous week. Leisure companies were notably weak, with investors concerned about the prospect of harsher coronavirus related restrictions. Pub chain Wetherspoon (JD) PLC declined by 4.99%, whilst The Gym Group PLC suffered a 6.13% pullback.

A member of the Bank of England (BoE) monetary policy committee, Michael Saunders, stated during a speech that he wanted to see more data on the potential public health impact of the Omicron variant. Whilst Mr Saunders has typically been a hawkish member, he explained there may be advantages in waiting to see what impact the new variant has on the UK economy before hiking interest rates.

Europe

European equity indices declined across the week, with the broad FTSE All World Index – Europe ex UK declining by 0.58% and Germany’s DAX index moving 0.57% lower. Italy’s FTSE MIB index rose by 0.89%, with a sovereign credit rating uplift by ratings agency Fitch helping to boost sentiment on Italian equities.

With infection rates continuing to climb in Germany, the government tightened restrictions for unvaccinated individuals. Several regional authorities in Spain adopted a similar approach. Austria extended their lockdown measures until 11^th December, whilst the Netherlands imposed a 5pm curfew for leisure venues.

Eurozone inflation rose to 4.9% in November, up from the 4.1% recorded in October. Surging energy costs were cited as one of the main drivers for the Consumer Price Index (CPI) increase. In Germany, inflation rose to the highest level for nearly 30 years, with CPI reaching 6.0% in November. German economist Isabel Schanbel, who is a member of the European Central Bank (ECB), stated that November’s inflation reading will prove to be the peak.

All of the major US equity indices moved lower across the week. The S&P 500 declined by 1.22%, the Dow Jones Industrial Average fell by 0.91% and the NASDAQ 100 suffered a pullback of 1.96%.

Concerns around the Federal Reserve tightening monetary policy appeared to contribute to the volatility in risk assets during the week. Fed Chair Jerome Powell stated during a testimony to Congress that it may be necessary to accelerate the tapering of their bond purchase programme. Powell acknowledged that the central bank did not predict the current supply side problems driving inflation and said that it “was a good time to retire the word transitory”.

The US economy added 210,000 jobs during November, significantly below economist expectations for 550,000. Despite the softer than expected jobs data, the unemployment rate declined to a lower than expected rate of 4.2%.

Asia

Asian equity markets experienced mixed performance, with the broad FTSE All World Index – Asia Pacific declining by 0.88%. China’s Shanghai Composite gained 1.22%, whilst Japan’s Nikkei 225 moved 2.51% lower.

Industrial activity in China unexpectedly rose during November, with a manufacturing Purchasing Managers Index (PMI) moving back into expansionary territory. A PMI for the services sector declined from October’s reading, suggesting that consumer confidence deteriorated during the month.

The Japanese government announced strict travel restrictions in response to the spread of the Omicron variant, banning non-resident foreigners from entering the country. The strict measures impacted sentiment on Japanese stocks and particularly travel related companies.

The 10-Year Gilt yield declined from 0.82% to 0.75% during the week. Some investors appeared to be in risk-off mode, rotating into government bonds, whilst concerns around the Omicron variant also prompted bond traders to cast doubts on how quickly the BoE will hike interest rates.

Europe

Despite a stronger than expected inflation reading, demand for government debt rose, with the 10-Year German Bund yield moving deeper into negative territory. Across the week, the yield declined from -0.34% to -0.39%.

Italy’s 10-Year government bond yield declined from 0.97% to 0.93%, with demand for Italian government debt rising after Fitch upgraded the country’s credit rating.

The 10-Year US Treasury yield declined from 1.48% to 1.35%, with bond traders ignoring hawkish comments from Jerome Powell to bet that a renewed surge in coronavirus cases would hinder the Federal Reserve’s ability to tighten monetary policy over the coming months.

Currency

GBP / USD – Current 1.3236 Previous 1.3337

GBP / EUR – Current 1.1698 Previous 1.1782

The Pound moved 0.76% lower against the US Dollar and 0.71% lower against the Euro. Stronger than expected Eurozone inflation data appeared to boost the Euro last week, whilst the US Dollar was in demand as a ‘safe haven’ asset.

Commodities

Gold

The Gold spot price declined by 1.07% to reach $1,783.29 per ounce last week. Sentiment on the precious metal remained muted, with the spot price remaining below the $1,800 mark throughout the week.

Oil

The Brent Crude spot price declined by 3.91% to $69.88 per barrel. Oil prices remained volatile as traders attempted to price in renewed coronavirus related restrictions around the globe, whilst OPEC voting to proceed with planned production increases in January (400,000 barrels per day) added to the downward pressure on prices.