Week Ended November 19th, 2021
Updated: Nov 20, 2021
“But while the bubble lasted, it was the people who were the least informed who were the ones making the most money. As the New York Times described it, “The old-timers, who usually play the market by note, are behind the times and wrong,” while the “new crop of speculators who play entirely by ear are right.” [extract referring to period just before Oct 1929 stock market crash, from Lords of Finance: The Bankers that Broke the World, by Liaquat Ahamed (2009)]
There was a lot of macroeconomic news this week but net-net it didn’t seem to matter all that much to equity markets by the end of the week. Markets feel slightly more fragile to me, but why fight momentum, much less the Fed? Even though returns for equities were mixed this past week, it’s hard to say that this is disappointing since we are coming off a very nice increase in equity prices for seven weeks running. The S&P 500 and Euro STOXX 600 are up 9.2% and 7.2%, respectively, since September 30th. Even though equities continue to be one-directional, “heading to the moon” (or so it feels), markets do need to occasionally take a rest and consolidate. Elsewhere, WTI crude had its worst week in many, down a sharp 5.7% W-o-W closing Friday at $76.11/bbl, whilst Bitcoin and other cryptocurrencies remain under severe pressure with the benchmark crypto now down around 16% since its intraday high only nine days ago. It looks like Bitcoin was not helped by the announcement that the infamous Staples Center, home of the Los Angeles Lakers and Kings, would soon be rebranded the crypto.com arena.
The focus this past week as far as macroeconomic data was on inflation in the U.K. and Eurozone, and retail sales in the US. U.K. CPI came in well above consensus at 4.2% (here), whilst Eurozone inflation similarly surprised on the upside, coming in at 4.1% (here). US retail sales for October came in at 1.7% (here), also higher than consensus expectations (1.4%). Stronger-than-expected retail sales in the US are yet another indication of a potentially over-heated U.S. economy, causing intermediate and longer maturity Treasuries to initially sell off. Inflation concerns continue to rattle investors, as economic data keeps coming in “hot”. However, concerns about the pandemic moved back to the front page as the week wore on. Increasing cases of COVID-19 are once again leading to hospital beds nearing capacity in some European countries, and this in turn is forcing governments to take more drastic steps to stop the spread of the virus. Austria grabbed headlines this week, as the government imposed a severe lockdown. However, Austria is not alone in seeing rising cases of COVID-19, with other countries in Europe and several US states vulnerable because of low-vaccination rates as winter approaches. This potential drag on economic growth is suddenly making the dovish central banks look slightly smarter, dampening (at least temporarily) concerns about overheated economies and rampant inflation. These counterbalancing economic influences, alongside a generally strong round of earnings (see Refinitiv Week ended Nov 19th) and dovish central banks, are keeping the dream alive for risk assets. So maybe you’re wondering, “what is there to worry about?” I don’t want to sound like just another middle-aged grumpy investor but what concerns me is a combination of valuations – which remain elevated – a potential tilt towards more hawkish monetary policy (one of these days), a step backwards as far as the pandemic, or some sort of “black swan event” that we don’t know about at the moment. And there is one more thing to keep in mind – Congress will need to increase the debt ceiling by mid-December. Remember that old chestnut back in October, when Congress finally (albeit narrowly) agreed to kick the can down the road, although not very far, averting a debt ceiling crisis? The new deadline is now mid-December, and already there are mumblings in Congress between the bratty factions on both sides of the aisle as Congress settles in for what is likely to be another cliff-hanger. The pending debt ceiling unsettled markets in September, and it might do so again – time will tell and we won’t have to wait long. Alongside this concern, we have the Biden social plan – the Build Back Better Act – which was finally approved by the House yesterday and now makes its way to the Senate for discussion and debate. I would guess that the debt ceiling and new $1.75 trillion social plan will ultimately come together for consideration before all is said and done. That’s partisan politics, and there is no reason to expect anyone in Congress to be a grown-up about this now. Let’s take a look at financial markets for the week.
The FTSE 100 returned to the bottom of the pile as far as returns this past week, which largely characterised its performance for many months following the depths of the pandemic when U.K. equities were laggards. The indices that were the leaders – all marginally positive for the week – included the SSE Composite (China), the S&P 500 (US) and the Nikkei 225 (Japan). European equities were more or less flat W-o-W.
As far as US equities, returns this week were mixed across indices. The economically-sensitive indices (DJIA and Russell 2000) underperformed, whilst the NASDAQ Composite was positive for the week. The weekly update is not the forum to drill into individual stocks, but let’s just say that some of the key drivers for the NASDAQ (and the S&P 500, also positive W-o-W) were large cap tech names like AMZN, AAPL and NVDA, all sharply higher on the week. I think overall performance was less positive than prior weeks though as gains did not seem particularly broad, and some sectors – such as energy and financial institutions – came under severe pressure.
US Treasuries had a topsy-turvy week, first selling off into strong US economic data (retail sales) and ongoing inflation concerns, but then backtracking from mid-week on as COVID-19 concerns pushed back to the front page. This reflected both concerns about more mixed economic growth going forward and perhaps a slight flight-to-quality because of growing concerns about the resurgent pandemic. As a result, US Treasuries yields actually ended the week lower across the curve, most pronounced in intermediate and longer-term maturities.
At the shorter end of the curve, the yield on the more Fed-policy-influenced 2-year UST was less affected although it backed off its mid-week high, ending the week 1bps lower W-o-W as Fed Vice-Chair Richard Clarida suggested Friday that the taper might need to accelerate due to ongoing inflationary pressures.
In safe haven and risk assets, the US Dollar continued its steady rise and the price of gold fell modestly after two weeks of solid gains.
The price of WTI crude oil fell sharply, down 5.7% W-o-W, after being anchored largely in the $82-$84/bbl context for five weeks. WTI crude closed at $76.11/bbl on Friday. With winter approaching and no sign of OPEC+ buckling on supply, I suspect this is a reflection mainly of pandemic-concerns and the potential effect of slowing global economic growth (and related energy consumption). The biggest casualty of the week though was Bitcoin, which as I mentioned at the onset, is now off its highs of less than two weeks ago by around 16%. Whether this is a buying opportunity or investors starting to sour on cryptocurrencies is anyone’s guess, but recent history has shown that it is more likely the former than the latter.
Lastly, corporate bond spreads and yields widened this week across the credit spectrum, including both investment grade bonds and corporate high yield. This cannot be attributable to changes in underlying Treasury (or Bund) yields this week, so the wider spreads reflect some skittishness amongst credit investors in the outlook, again possibly influenced by new concerns regarding the pandemic.
This coming week will be a shortened trading week in the US due to the Thanksgiving holiday on Thursday, with both equity and bond markets closed that day and shorter hours also for both markets on Friday (equities closing at 1pm EST and bonds at 2pm EST).