November was marked by a return of volatility in the financial markets. Stocks plummeted at the end of the month as news emerged about the emergence of Omicron.
Our expert, Alexandre Gauthy, analyses the trends in the markets in November 2021.
Equity markets: Cyclicals take a hit
Global equities fell in November. The downward movement in stock markets was seen at the end of the month. The energy sector was the worst performer, with oil suffering its biggest monthly decline since March 2020. Financial stocks also declined, and airlines suffered from the latest Covid concerns. The technology sector was the best performer thanks to gains in Apple and semiconductors, while cloud-related stocks lagged.
Major indices fell more than 2% on the Friday after Thanksgiving on fears that the emergence of a new strain of the virus could derail the economic recovery. While more details on the transmissibility, virulence, and resistance of Omicron's vaccines will have to wait at least two weeks, selling pressure picked up at the end of the month following statements by Moderna's CEO. He said current vaccines would be less effective against the variant. He also said it would be months before vaccine manufacturers could produce new Omicron-specific vaccines on a large scale. However, health officials have widely emphasized that vaccines should continue to offer some level of protection, especially against severe disease. Even before Omicron made news at the end of the month, the increase in new infections (particularly in Europe) weighed on investor sentiment.
On the fiscal policy front, the House of Representatives passed the approximately $1 trillion infrastructure plan, as well as the $1.75 billion "Build Back Better" social spending plan. However, Senate approval of the latter remains complicated. Finally, the third-quarter earnings season continued throughout the month. The results were quite positive, particularly concerning resilient profit margins and robust demand.
Bond markets: increased volatility in short rates
Government bonds posted a positive performance in November as investors fled to risk-free assets given fears about economic growth due to the new variant. The US 10-year yield fell 0.11% in November to 1.44%. The German 10-year yield fell more sharply from -0.11% to -0.34% at month-end. High-yield corporate bonds fell at the end of the month as investors' risk aversion increased. The month was marked by significant volatility in the US 2-year rate. This rate reflects investors' expectations of how US monetary policy will evolve in the short term. While it had risen significantly during the month in response to the inflation report and good macroeconomic figures, the rate fell at the end of the month when investors reassessed the outlook for monetary policy following the threat of the new variant to the economy.
Central Banks: Inflation talk is changing
The main takeaway from the Fed's early November meeting appears to be the lack of surprises in monetary policy. The pace of the $15 billion per month reduction in asset purchases was in line with expectations, and the mention that the pace could be adjusted based on the changing outlook was widely anticipated. However, there was a notable change in tone from the Fed as the month progressed. The Fed Vice Chair indicated that it might be appropriate to discuss accelerating the pace of tapering at the December meeting. Similarly, the Atlanta Fed president said he would be comfortable with the end of quantitative easing by the end of the first quarter. The Chicago Fed president said he was "more open" to raising interest rates next year than he was six months ago, noting the increased difficulty of being patient in the face of inflationary pressures. The rapid shift in the Fed's rhetoric towards the possibility of a more aggressive reduction in its purchasing program can be attributed to October's inflation report. Consumer prices rose 0.9% for the month, and 6.2% year-over-year, marking the highest inflation in over 30 years. At the end of the month, Powell - who has just been reappointed by the US President to head the Fed - conceded that the risk of persistently higher inflation had increased. He also said it was time to retire the term "transitory" to describe the current inflationary situation.
Currencies: The dollar continues to rise
The dollar index rose 2.0% in November. The dollar strengthened against the euro during the month, falling below 1.12 at one point. The currencies of oil-exporting countries (Russia, Norway, Canada, etc.) suffered in November due to the fall in oil prices. The Turkish lira plummeted to an all-time low after comments by President Tayyip Erdogan defending the central bank's recent rate cuts. The Turkish currency's depreciation against the dollar has been more than 40% since the start of the year.
Commodities: Oil weighed down by the emergence of Omicron
WTI crude oil fell 20.8% in November. The increase in the number of cases of infection worldwide and the appearance of a new variant threaten the recovery of oil demand. Gold prices initially rose before falling in the second half of the month. The yellow metal ended November at a broadly unchanged level.