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First Plus Market Update 1H November 2021

1H November Global Market Recap

1st November 2021 – 15th November 2021

FULL REPORT ACCESS LINK: First Plus Market Update 1H November 2021

Macro:

Consumer prices in the United States increased 6.2% in October, at the highest annual rate in 30 years and exceeded economists’ forecast. Core inflation also rose at the highest rate in 30 years. Both the 5-year and 10-year breakeven rates on Treasury TIPS have reached new highs, as traders increasingly see the risks that the outsized pace of the increase in consumer price would be longer lasting than what the Fed presently anticipates. The spike in inflation is putting pressure on Fed policymakers to raise interest rates. According to the CME’s FedWatch Tool, traders see a 77% chance that the Fed will start to raise interest rates in June next year, with the probability rising to 88% in September 2022.

Although the latest COVID-19 resurgence has spread to more than 20 provinces in China since late October, the impact on the economy was relatively small judging from October’s economic data. Total retail sales rose 4.9% YoY and the two-year CAGR was 4.6%. Consumption may be more affected in November while we think the impact of the latest COVID-19 resurgence may be milder than in July-August. Industrial value-added rose by 3.5% YoY in October thanks to the government’s measures to assure supply and stabilize raw material prices. Overall, employment remained stable, with 880,000 new jobs added in urban areas in October. However, unemployment rate in 31 major cities increased marginally due to power and production constraints and the COVID-19 resurgence. PPI surged at a record rate of 13.5% YoY in October, with relatively muted market reaction, as commodity prices may face a downward infection point after China revealed a series of initiatives to boost supply and stabilize prices. Market sentiment in the real estate industry has improved as both the central and local governments have lately adopted several regulations aimed at stabilizing the sector

 

Stocks:

All three major U.S. indexes recorded solid gains in the first half of November despite rising concerns over surging inflation figures. S&P rose 1.7%, Nasdaq was up 2.3% and Dow Jones increased by 0.7% in the first half of November.

The A-share market performance diverged amid the combined effect of the resurgence of Covid-19, concerns over economic stagflation, easing regulations on real estate sector, a series of pro-growth policies and progress in US-China relations. Market turnover remains high by historical standards despite minor decreases from recent record highs. Looking ahead, policy expectations continue to be the most important element influencing the stock market, and we expect the market to be volatile in the short term but there’s not a need to be overly negative.

 

Rates:

The 10-year U.S. treasury yield increased by 6.24bps in the first half of the month as the Fed announced earlier in the month that they will scale back on their asset purchases by US$15 billion a month starting from November. The UK is set to become the first major economy to hike interest rates since the Covid-19 pandemic began after inflation data showed prices rising at the fastest rate in a decade. Momentum is faltering in China’s economy due to fresh curbs to control COVID-19 outbreaks, while chances of a rate cut look slim, the central bank may opt to cut the amount of cash banks must hold as reserves against their loans if growth suffers.

 

Credit:

China’s higher-quality dollar bonds are suffering their worst selloff in about seven months as property woes spill into the broader credit market. The credit crunch at Evergrande Group and other junk-rated developers have begun spreading to higher-rated peers, banks and even some tech companies. The government plans to let property companies resume issuance of asset-backed securities, ending a three-month market freeze as authorities move to insulate higher-rated developers from an industry wide funding crunch. China’s central bank also unveiled a new lending programme that, by one estimate, could lead to nearly $1 trillion of annual investment in projects related to clean energy, according to Reuters.

 

FX:

The Dollar Index rose by 1.4%, hitting a 16-month high, fueled by global growth and inflation concerns. The Chinese Yuan remains resilient despite the recent Dollar upswing and has gained over 2% since the beginning of the year, with one of the main domestic factors being the resilient exports growth. Both the Euro and British Pound slipped by 1.6% and 1.9% respectively as concerns about soaring U.S. inflation rippled across Europe’s currency markets. The Australian Dollar fell by 2.3% as iron ore prices continues to drop.

 

Commodities:

Brent and WTI crude oil prices fell by 2.8% and 3.2% as prospects of tight inventories worldwide were offset by forecasts of a production increase in coming months and concerns over rising coronavirus cases in Europe. US Natural Gas price fell by 7.7% as well due to rising output and expected lower demand. The CoreCommodity CRB Index has reached levels back in late 2014 as the global economy recovery continues.