2H October Global Market Recap
16th October 2021 – 31st October 2021
FULL REPORT ACCESS LINK: First Plus Market Update 2H October 2021
Macro: The job market in the United States rebounded faster than expected in October, with nonfarm payrolls growing 531,000 and the unemployment rate decreasing to 4.6%. The leisure and hospitality industry contributed the biggest job growth with 164,000 new jobs added while labor supply remains a concern. The labor participation rate remained stable at 61.7%, 1.7% lower than pre-pandemic levels. The ISM manufacturing PMI index was at 60.8, remaining in the expansion zone for 17 straight months. While global pandemic-related challenges continue to impede industrial development potential, the sentiment remains upbeat. ISM service PMI index registered at 66.7 in October, growing for 17 straight months and reaching a new all-time high.
China’s NBS manufacturing PMI slipped to 49.2 in October from 49.6 in September, falling short of consensus view of 49.7 and staying in the contraction zone for 2 consecutive months. Notably, energy-intensive industries continued to drag on total PMI because of industrial production and power usage limitations. China’s retail sales grew by 4.4% in September, and the two-year compound growth rate increased by 2.4% from August. Since October, the pandemic situation has deteriorated in various sections of the country, potentially weighing on offline spending. However, the magnitude of this outbreak was smaller than that of July-August so the drag on total consumption may be less than that of July-August outbreak.
Stocks: All three major U.S. indexes recorded strong gains in October amid strong job market and robust economy recovery, with S&P rising 6.9%, Nasdaq up 7.3% and Dow Jones increasing 5.8% in the month. Market was muted to Fed’s tapering announcement as it was widely anticipated months ago.
The A-share market diverged in October with the Shanghai Composite Index and CSI Small Cap 500 Index falling while the CSI 300 Index, Shenzhen Component Index and ChiNext Price Index rising. We believe that the market will continue to fluctuate sideways in the short term as it digests various concerns, such as rising commodity prices, supply challenges and persistent policy uncertainties. Valuation wise, the current broad market PE(TTM) is 19.1x, which is at the 43.3% quintile since 2005.
Rates: The Fed recently announced on 3rd November to start reducing their bond purchases. However, it was stressed that the tapering does not mean interest rates will hike anytime soon as the Fed emphasized on the desire to not hinder potential job gains. The Fed has pushed back against rising market expectations for multiple 2022 interest rate increases from the middle of the year. According to the Financial Times, The Bank of Canada surprised investors by abruptly ending its bond-buying program and pulling forward its expected timeline for interest rate rises. China maintained its benchmark lending rate for corporate and household loans for an 18th month at its October fixing, matching market expectations. Tenors between 1 to 30 years on the yield curve saw a major upward shift as compared to 3 months ago.
Credit: China recently sold a 4 billion U.S. dollar bond in Hong Kong, even as strains emerge in the credit market amid deepening concerns over the financial health of the country’s property developers. Sale of new dollar junk bonds by Chinese borrowers in October have fallen by about 90% from the five-year average to US$352m, according to Dealogic’s data. A surge in Chinese junk dollar bond yields in October, briefly reaching 20%, has made it all but impossible for stressed developers to refinance their maturing debt. Such firms have just over $2 billion of onshore and dollar-bond payments due in November, according to data compiled by Bloomberg. At least four builders defaulted this month, while China Evergrande Group twice averted that fate by paying overdue coupons at the 11th hour.
FX: The Chinese Yuan briefly rose to its highest point against the Dollar in four and a half months. The Japanese yen fell by 2.4% against the dollar, hitting levels back in 2018. The Australian Dollar rose by 3.9% largely due to a dramatic rise in Australian bond yields and aggressive market pricing of interest rate hikes by the Reserve Bank of Australia.
Commodities: Brent and WTI crude oil prices rose by 7.5% and 11.4% as demand continues to increase from reopening economies together with supply side shortages due to slow replenishment rate for crude oil storages. The Brent crude oil price exceeded US$85 per barrel for the first time since late 2018 while the WTI crude oil price last exceeded US$80 per barrel back in the middle of 2014. Bitcoin’s price rose by 43.6% and reaches a new all-time high at US$66,974 for the first time as the first bitcoin futures exchange-traded fund debuted on the New York Stock Exchange. The CoreCommodity CRB Index has reached levels back in late 2014 as the global economy recovery continues.