November started off on solid footing for global markets, with equity markets logging their best weekly return in more than four months. Between a patient Fed, accelerating jobs gains, strong corporate earnings, and a promising COVID-19 pill that reduced hospitalizations and deaths in a clinical trial, there were plenty of reasons for the market to rally
United States
Stocks posted impressive weekly gains as a relatively dovish Federal Reserve policy meeting, healthy global economic data, and a strong tail end to the earnings season all boosted sentiment toward equities. The Dow Jones Industrial Average, the S&P 500 Index, and the Nasdaq Composite all reached record highs. Technology stocks and small-caps were particularly strong, and growth shares outperformed value stocks. Oil prices dropped from their recent highs after Biden administration officials mentioned the possibility of releasing supply from the strategic petroleum reserve, hurting energy sector stocks.
The quarterly earnings season wound down with ongoing strong results as profit margins held up well despite higher commodity prices and supply chain disruptions in various industries across global markets. However, equity investors seemed to punish the companies with earnings that lagged consensus expectations more than they rewarded those that beat expectations.
At Wednesday’s conclusion of the Federal Reserve’s policy meeting, the central bank stated that it will begin to slow its monthly bond purchases by USD 15 billion later this month and in December. By not specifying the speed of the taper beyond December, the widely expected tapering announcement gives the Fed the flexibility to make adjustments as economic conditions evolve.
The policy statement released after the meeting and Fed Chairman Jerome Powell’s post-meeting press conference stressed that policymakers still expect the recent high inflation readings to moderate and will need to see further labour market improvement before raising rates, helping to alleviate fears about an abrupt monetary policy tightening. This seemed to put a dovish spin on the tapering announcement for stock investors, who drove equities higher following the Fed meeting.
U.S. Treasury yields decreased amid the Fed’s signals that it will take a patient approach toward monetary policy tightening, leading to gains. (Bond prices and yields move in opposite directions.) Municipal bonds modestly outperformed Treasuries, supported by a relatively light new issuance calendar.
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 36,327.95 | 508.39 | 18.69% |
| S&P 500 | 4,697.53 | 92.15 | 25.07% |
| Nasdaq Composite | 15,971.59 | 473.20 | 23.92% |
| S&P MidCap 400 | 2,905.11 | 111.00 | 25.95% |
| Russell 2000 | 2,437.09 | 139.90 | 23.41% |
Europe
Shares in Europe rose in line with other major global markets backed by strong corporate earnings results and signals from the European Central Bank (ECB) that interest rates would stay low for some time. In local currency terms, the pan-European STOXX Europe 600 Index ended at 1.67% higher. Germany’s Xetra DAX Index gained 2.33%, France’s CAC 40 Index rallied 3.08%, and Italy’s FTSE MIB Index climbed 3.42%. The UK’s FTSE 100 Index advanced 1.25%, as the UK pound like other global currencies weakened against the U.S. dollar after the Bank of England (BoE) unexpectedly kept interest rates unchanged. UK stocks tend to gain when the pound falls because many companies that are part of the index are multinationals with overseas revenues.
Core euro zone bond yields slipped from earlier highs after ECB President Christine Lagarde pushed back against raising interest rates in 2022, citing the bank’s expectations that inflation would remain “subdued” over the medium term. Core yields fell further after the BoE stood pat on rates. Peripheral euro zone bond yields and UK gilt yields also fell.
ECB Chair Christine Lagarde hardened her message on the central bank’s policy stance at an event in Lisbon, saying an interest rate hike is “very unlikely” next year and that financing conditions must remain favourable. “In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise,” she said. “Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year.”
French and German industrial production fell unexpectedly in September, as the supply chain affecting markets globally caused shortages. In Germany, production declined 1.1% sequentially, after dropping 3.5% in August. Output in France slipped 1.3% month over month.
Asia
- China
Unlike other global markets, Chinese markets posted losses for the week. The CSI 300 Index slipped 1.4% and the Shanghai Composite Index retreated 1.6% as headlines about the beleaguered property sector and a growing COVID-19 outbreak across the country dampened sentiment. Renewed restrictions in many places raised worries about supply chain constraints dampening the country’s growth outlook as infections spiked near a three-month high. Reflecting the flight to safety, the yield on the 10-year Chinese government bond fell 8 basis points to 2.908% from the previous week’s 2.989%, while the yuan rose 0.16% to 6.3995 against the U.S. dollar.
Kaisa Group Holdings became the latest developer in China’s USD 5 trillion property sector to reveal that it was having debt problems. The Shenzhen-based company, which has the most debt from global market investors (offshore) coming due over the next year in the sector after China Evergrande Group, reportedly put 18 property projects valued at USD 12.8 billion on the auction block.
China’s property sector is grappling with a deepening liquidity crisis reflected in a wave of offshore debt defaults, credit rating downgrades, and selling in the stocks and bonds of major developers. Seven of the top 10 China-listed developers by revenue recorded steep declines in profitability in the July-to-September quarter, which has increased pressure on Beijing to support the stressed sector.
On the economic front, China’s official manufacturing Purchasing Managers’ Index fell to a worse-than-expected 49.2 in October from 49.6 in September, below the 50-point mark separating growth from contraction. October marked the second month that the global market’s factory activity contracted and was the latest sign that the economy was losing steam after a strong recovery from the pandemic
- Japan
Japanese equities joined their global markets on a rally, buoyed over the week by the convincing election victory of Prime Minister Fumio Kishida’s ruling Liberal Democratic Party (LDP), with the Nikkei 225 rising 2.49% and the broader TOPIX Index gaining 2.01%. Investors were encouraged by the prospects of stable government and policy continuity. Against this backdrop, the yield on the 10-year Japanese government bond fell to 0.07% from 0.09% the prior week, while the yen finished the week at around JPY 113.8 against the U.S. dollar, continuing to hover near three-year lows as the Bank of Japan (BoJ) led global central bankers in reaffirming its commitment to maintaining easy monetary policies.
The BoJ will not follow the U.S. Federal Reserve which has led global markets in dialling back easing, given Japan’s different circumstances, according to the central bank’s governor, Haruhiko Kuroda. Notably, price momentum in Japan is much weaker than in other countries; the BoJ recently slashed its forecast for the consumer price index (CPI), a measure of inflation, to 0% in the fiscal year 2021. Kuroda reaffirmed the central bank’s commitment to achieving its 2% inflation target and also said that the BoJ will continue its yield curve control policy, which essentially entails keeping Japan’s 10-year government bond yield near zero—even after coronavirus infections are contained.
On the economic data front for global markets, Japan’s household spending fell in September amid consumers’ continued caution due to the coronavirus pandemic. Spending fell 1.9% year on year, following a 3.0% decrease in August. The data added to concerns that Japan’s economy contracted in the third quarter. News that Japan was set to ease its strict coronavirus-related entry rules—by letting foreigners visit the country for short business trips, study abroad, and technical training—was welcomed by investors.
Other Key Global Markets.
- Turkey – Turkish stocks, as measured by the BIST-100 Index, returned about 4.0% in line with other global markets. During the week, the Turkish Statistical Institute (Turkstat) reported that month-over-month consumer price index (CPI) inflation in October was 2.3%, while year-over-year inflation was 19.9%.
- Russia – Russian stocks, as measured by the Russian Trading System (RTS) Index, returned about -1.7%, lower than most major global markets over the five-day trading period ended Friday. The market was closed for a holiday on Thursday. On Wednesday, the government reported that inflation in October was 1.1% month over month and 8.1% year over year. The 12-month inflation rate was not only stronger than expected, but it was also higher than the 7.4% year-over-year inflation rate in September.
