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T&IO Weekly Market Updates

5 minutes read
Last updated on 26th Nov 2021

Market and Economic review for week ending 26th November 2021 

Tactical positioning

Within the LF Prudential Risk Managed Active and LF Prudential Risk Managed Passive portfolios the portfolio manager remains neutral in equities and fixed income, while maintaining a small diversifying overweight to alternatives.

Market and Economic review 

Global equity markets were down on the week, led by Europe. UK investors have fared a little better as the FTSE 100 outperformed and benefitted from the fall in sterling which boosts the earnings of its international earnings base. The UK equity market has also benefited from larger exposures to banks, which have rallied with higher bond yields, and energy and mining companies who are reporting robust profits following higher commodity prices. The timing of the removal of central bank stimulus and a resurgence of COVID-19 cases in Europe were two key themes this week. With a record number of new cases on the continent, authorities have announced booster programmes and a variety of levels of lockdown to try to bring the spread under control, some of which have prompted protests from citizens. This, along with slightly less dovish communications from the ECB, may have contributed to some of the underperformance of European stocks.

In a similar vein, US central bankers are considering the merits of accelerating the tapering of their QE programme, which would allow some flexibility in the timing of the first US interest rate hike if inflation persists. Meanwhile, the Bank of England’s Governor Andrew Bailey noted that the inflation debate is finely balanced, raising doubts about the prospect of a UK December rate hike. "The proximate cause of many of these inflation issues is on the supply side, and monetary policy isn't going to solve those directly". The US, China, India, Japan and South Korea agreed to a coordinated release of more than 70m barrels of oil from their strategic reserves in an attempt to calm oil prices. However, the price of Brent crude rose around 4% after the announcement as the market may have been hoping for a larger release and there were also rumours of a counteracting response from OPEC+. Oil wasn’t immune from the COVID-induced sell off on Friday, with a 6.0% price fall.

Jerome Powell was nominated for a second term as Federal Reserve Chair, with Lael Brainard as Vice Chair. The decision needs to be confirmed by the US Senate but it is not expected to face much opposition. The US economy continues to look in very good health, with retail data highlighting robust consumer demand despite accelerating inflation, and economic data broadly surprising to the upside. New applications for unemployment benefits in the US came in below expectations (199k vs 260k) and at the lowest reading since 1969. Orders placed with US factories for business equipment rose by more than forecast last month and inflation data was largely in line with expectations. Estimates for Q3 GDP were 2.1% along corporate profit growth of 4.2% quarter-on-quarter, still robust but a decline from the stellar 10.5% growth reported the prior quarter. There were additional hints this week that global supply chain bottlenecks may be easing. Some measures of cargo shipping costs have started to come down and Ford and General Motors have said that their supply of semiconductors has markedly improved, allowing them to return to more regular production levels. We have also seen a couple of large US retailers note strong inventory availability as we enter the holiday shopping season. Supply of workers could be the bigger challenge for US and UK firms going forward. Labour markets look particularly hot and forecasts suggest that unemployment rates will continue to fall over the coming months.

Turning attention to the UK, consumer spending continues to show resilience through early Christmas shopping data and enthusiasm for dining out and live entertainment despite higher prices, with retail sales reporting a healthy 0.8% growth for the month of October, versus estimates of a 0.5% increase. In emerging markets, the Turkish lira continued its rapid decent (-17.5% in the last two weeks vs. the US dollar) after President Erdogan vowed to keep interest rates low in the face of a sharp jump in inflation. China softened some property related policies: banks have been instructed to issue more loans to ease liquidity strains, while local governments have been encouraged to sell more bonds to boost investment. In a sign that some of the world’s most influential investors may be ready to allocate a larger portion of their vast fortunes in more planet-friendly ways, sovereign wealth funds have accelerated their application of ESG to the investment process. Over 70% of the 34 sovereign funds surveyed by the International Forum of Sovereign Wealth Funds and the One Planet Sovereign Wealth Funds group said they now incorporate ESG “considerations” in their investment process, up from just 24% a year earlier. Data releases next week include Euro area inflation, Euro and US unemployment and a whole host of global PMI and sentiment indicators

Outlook

We continue to look for signs of monetary policy divergence amongst the developed markets following recent central bank meetings. While there is incentive to keep real yields in negative territory, there is also a need to not let inflation “run away” from central bank control. Yields remain at low absolute levels, meaning that financial conditions remain loose. We are considering that absent a significant and fast upward move in bond yields, risk may continue to do well in such an environment, despite already high valuation levels, although shocks of new economic lockdowns may derail positive sentiment.

Dean Cook

T&IO Weekly Market Update Podcast

Dean Cook, Portfolio Analyst in the Multi Asset Portfolio Management Team at T&IO talks through this week’s latest market developments and T&IO’s current outlook.

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