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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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Week Ended November 5th, 2021

“The basic issue is that right now everything is dumb. You can complain about that, or you can embrace it.” Matt Levine, Bloomberg Opinion “Money Stuff” (Nov 4, 2021)

This past week mainly revolved around a slew of additional earnings releases by S&P 500 companies, two monetary decisions – the first one by the Federal Reserve on Wednesday and the second by the Bank of England on Thursday – the October jobs report in the US, and ongoing attempts by the US to persuade OPEC+ to raise its supply quotas as winter approaches. There was also plenty of coverage of the ongoing COP26 meeting in Glasgow and a last minute (successful) vote in the House in the $1.1 trillion US infrastructure plan. The bottom line is that earnings generally remain supportive and central banks remain accommodative, perhaps dangerously so given ongoing inflationary pressures. Alongside this, economic data is trickling in which is relatively benign. Investors are gobbling this up, as the “Goldilocks scenario” continues.

Earnings are well-covered in the mainstream media, so let’s just summarise this past week by saying that – whilst there have been some disappointments / negative surprises (e.g. PTON, ZG, ATVI, MRNA) –the trend of surprising on the upside (vis-à-vis analysts’ consensus expectations) has carried on for yet another quarter. According to Yardeni Research(here), 80.9% of S&P 500 companies reporting through November 3rd have beat consensus earnings estimates. If this isn’t fuel enough to act as catalyst to push risk assets higher, the central banks are playing along. The Federal Reserve did exactly what it had telegraphed now for weeks – it announced the beginning of a methodical plan to taper its bond purchase (QE) programme. In the post-release interview, Chairman Powell reminded everyone that “lift off” (i.e. increases in the Fed Funds rate) would not even be considered until tapering is completed (mid-2022), and even then would remain subject to the full-employment target. Any idea what that means exactly? Oh - and what about that (non)transitory inflation, Mr Powell? Surprisingly, the Bank of England seems to have adopted a similar narrative. With the UK bond market providing the perfect backdrop for the central bank to nudge up the Bank Rate from its current 0.1%, it surprisingly did nothing. Gov Andrew Baily sounded too much for my taste like Mr Powell in slagging off inflationary concerns, a riskier approach in the more inflation-sensitive UK economy. Of course, risk investors (equities and short-dated bonds) cheered this decision like they did State-side – there will be more free money for longer! Sterling did not behave as favourably, though, as you might have expected. If you want to read the monetary policy decisions in more detail, the FOMC decision is here, and the Bank of England Monetary Policy Summary is here.

Other market-influencing news included payrolls data in the US Friday and a decision by OPEC+ to hold tight with its supply quotas in the coming months. The US added 531,000 jobs in October, beating consensus estimates, and the unemployment rate fell to 4.6% according to the US Dept of Labor, Bureau of Labor Statistics (report here). Some folks highlighted the stagnant labour participation rate (61.6%), but investors didn’t seem too bothered. August and September payrolls were also revised up. Wage inflation is running at 4.9%. On the topic of oil prices and supply, President Biden unsuccessfully tried to persuade OPEC+ to increase its supply quotas to meet demand in the global economy, which is growing faster than had been anticipated. OPEC+ said “no”, keeping pressure on oil prices. The President has said that the US might release oil from its Strategic Petroleum Reserve to address the shortfall in supply, thereby reducing pressure on prices. This sequence is so déjà vu that it is hardly worth discussing further! One final note to end the week is that the $1.1 trillion Biden-sponsored and bipartisan-supported infrastructure plan passed the House late Friday, even without the further $1.75 trillion social plan, which has not been brought to the floor. It appears that the progressives – or at least enough of them – caved as far as linking these programmes together. And it also seems that the recent Gubernatorial loss in Virginia, certainly influenced by the Democrats ineptitude on getting its massive spending agenda in place, has resonated within the leadership of the Democratic party.

Mixing this news together, and tossing in some positive COVID-19 news as far as development of a treatment (Pfizer PAXLOVID, see here, not yet approved in US or UK), global equity and bond markets in the US, Europe and Japan continued their trajectory upwards as they delivered solid gains for the week. Both the S&P 500 and the STOXX 600 closed at record highs to finish off the week, whilst the FTSE 100 closed at its highest level since pandemic lows (March 23, 2020). The Nikkei 225 (Japan) was the best performing market of the week, climbing 2.5% (albeit finishing around 4% off the highs reached mid-September when the government changed). Faring less well, Chinese and emerging markets equities finished the week with losses.

In the US equity markets, it felt like the NASDAQ was the star with stocks like TSLA and NVDA taking on meme-like increases off of no news, but in fact, it was the small caps that really rocked. The small-cap Russell 2000 closed up 6.1% W-o-W, nearly twice the return on the tech-heavy NASDAQ Composite (+3.1% W-o-W). The more concentrated and cyclical DJI was the laggard for the week. Nonetheless, all four of the US indices I track closed the week at record highs, showing the robustness and broad strength of US equities under what is a perfect economic and earnings backdrop.

Refinitiv provides an excellent summary of the prior week’s earnings for the S&P 500 index, and you can access the latest report here. As we near the end of this round of earnings (nearly 90% of S&P 500 companies have reported), it has – needless to say – been another epic quarter for earnings, which remain supportive of equities.

As far as the government bond markets, the Fed did just what it said it was going to do for weeks, and the BoE did something different than what was expected but favourable to bond investors. Investors

concluded that both the Fed and BoE will remain accommodative for a long time, inflationary pressures-be-damned. The ECB was quiet this past week, but its comments from the week before seemed to bask in the dovish glow of the Fed and BoE. This realisation caused government bond prices to soar, especially at the short end of the Gilt market, as investors cheered the ongoing dovish approach of central banks.

Although the movement in yields was most pronounced at the short end of the curve, longer-term yields eventually fell in line, too. Yields on 10-year bonds declined 10bps in the US, 17bps in Germany (Eurozone proxy) and 18bps in the UK. The table below shows movement in yields over time for the 2-, 10- and 30-year maturity US Treasuries.

As far as corporate credit (corporate bonds), yields and especially spreads drifted wider this week, perhaps as much a reflection of lower underlying risk-free yields as opposed to “genuine” widening. Yields in the USD investment grade (BBB) market remain not far from the levels of six months ago, whilst USD non-investment grade yields are about 10bps wider and EUR non-investment grade yields are about 30bps wider.

Looking briefly at other assets, both gold and oil bucked recent trends.

Gold has spent very little time above $1,800/oz since mid-2Q21 but managed to hold on to gradual gains during this past week. The precious metal closed at $1,816.40/oz (+1.9% W-o-W). My advice is don’t get used to it, although one could point to increasing concerns regarding global inflation as a catalyst for gold being better bid. WTI crude was heading south more quickly until President Biden’s unsuccessful attempt to convince OPEC+ to ratchet up its production targets. The price of oil reversed course on Friday but still ended up at $81.27/bbl, down 2.4% on the week. The US Dollar was flat on the week, although Sterling got absolutely hammered thanks to the BoE non-decision, falling below its weakest levels of the year. Rather surprisingly, BTC was also weaker this past week, although such things in the cryptocurrency market seem to be short-lived.

As far as the week ahead, we will have a few more earnings releases, alongside inflation data in the US, UK and China.


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