Market Watch: November 2021

Global financial markets retreated on fear about the economic implications of the Omicron COVID-19 variant. Moderna CEO Stephane Bancel said that he anticipates current vaccines to be less effective against the newest variant. He also stated that developing and delivering a vaccine for that particular variant might take several months. In addition, Chair Jerome Powell suggested that the Fed consider accelerating the reduction of its bond-purchasing program as inflation fears escalated, adding to market worries. Powell’s remarks signal that the Fed’s priority is now battling inflation.

The S&P/TSX Total Return Index was down 1.62% in November despite that Canada’s GDP increased in the third quarter following a temporary downturn.

The Canadian economy surged in the third quarter, with manufacturing growth set to accelerate in October. However, economists are wary about the Omicron COVID-19 variant’s impending influence as five occurrences of that variant have been recorded in Canada. Quebec’s health minister has advised citizens to reconsider Christmas travel plans. Canada’s GDP gained 5.4% in the third quarter, exceeding forecast estimates of 3.0%.

Moreover, the Canadian loonie fell 3% after crude oil prices plunged more than 19%  in November. Because Canada is a large supplier of commodities, notably oil, the loonie is susceptible to oil prices and economic fluctuations.

On monetary policy, Governor Tiff Macklem said that the Bank of Canada is coming closer to tightening monetary policy as the economy’s wounds diminish while keeping with the forward guidance provided all along. While significant monetary assistance is still required for the economy to recover completely, Macklem said his administration remains committed to its inflation objective, despite the risks associated with higher rates.

The S&P 500 Total Return Index was down 0.69% in November as President Biden stated that the Omicron COVID-19 variant is a “cause for concern, not panic” and that no lockdown is needed.

On the economic front, the US economy expanded at an annual pace of 2.1% in the third quarter, above an initial projection of 2%. However, it was still considerably behind the robust output growth of 6.3% in the first quarter and 6.7% in the second quarter of this year.

The economy is expected to grow at its fastest pace this year in the current quarter, with some analysts projecting GDP to jump to 8% in the fourth quarter. However, inflation and a decrease in consumer confidence threaten to restrict household consumption. In addition, any increase in the ongoing logistical delays and supply chain issues might further limit development.

Furthermore, the US job market recovery accelerated after months of sluggish growth as pandemic-related worries that had kept employees on the sidelines faded, resulting in massive increases, notably in the leisure and hospitality industry. US economy added 531,000 jobs in October, exceeding the upwardly revised 312,000 jobs gained the previous month and bringing the monthly average to about 580,000 since the beginning of the year.

Regarding monetary policy, the Fed may act more rapidly to reverse its ultra-low interest rate policies to combat increased inflation, which Powell acknowledges would happen next year. The Federal Reserve is actively lowering its monthly asset purchases; the current objective is to cut monthly bond purchases from $120 billion to zero by the end of June 2022. However, Powell made it apparent that policymakers will explore reducing those purchases more rapidly when the Fed meets again in mid-December. Powell stated that the recent surge in COVID-19 cases and the development of the new variant pose downside risks to employment and economic activity, as well as increased uncertainty for inflation.

The MSCI ACWI Ex-US Total Return Index was down 4.49% in November. There was an increase in COVID-19 hospitalizations in some regions of Europe and worries regarding the new Omicron variant.

In Europe, economic figures were mixed. Several governments have already established new mobility restrictions to slow the virus’s spread. These measures have impacted consumer confidence, which has declined marginally in recent months but remains above pre-COVID levels. On the upside, the Eurozone PMI flash survey improved to 55.8 from 54.2 following three consecutive months of declines. However, some contrasting tendencies emerged between countries. This disparity can be partially explained by the fourth COVID-19 wave, which has been more severe in Germany than in France thus far.

The economy remained robust in the UK as the COVID-19 wave was less impactful, which boosted consumer confidence and retail sales. In addition, job market figures improved in October. In terms of business activity, the flash PMI for November fell slightly from 57.8 to 57.7, still higher than expected, indicating improvements in supplier delivery schedules ahead of Christmas. The Bank of England (BoE) maintained rates, as Omicron might postpone rate hikes.

The Portfolio Management Team