Markets were on the backfoot in November as investors sought safer assets following a hawkish tilt from the Federal Reserve and the discovery of the new omicron variant. This led the MSCI All Country World Index to fall 2.51% for the month. As expected, emerging markets took the biggest knock with the MSCI Emerging Markets Index losing 4.14% as compared with -2.30% from the MSCI World Index.
In the US, Fed Chair Jerome Powell stated that they may need to start seeing inflation as stickier as opposed to transitory due to ever-rising CPI figures. At the same time, he has opened the door to potentially speeding up the withdrawal of asset purchases should inflation remain elevated. This statement was seen by most investors as opening the door to earlier than expected rate hikes.
The US only added 210 000 jobs in November, well below market forecasts of 550 000, marking the weakest growth seen since January this year. The Fed has been firm in stating that an improvement and recovery in the labour market is needed before hiking rates, however, with inflation proving to be stickier than expected they may not have much choice.
The overall hawkish shift by the Fed caused US stocks to pull back in November and the yield curve to flatten slightly. The pullback in equities was further exacerbated by the discovery of the new omicron variant, which has caused investors to shift into safe-haven assets as the variant’s effect on economic growth is still unknown.
The Dow Jones Industrial Average was the hardest hit coming in at -3.73% for November due to fears of fresh restrictions, following suit was the S&P 500 Index which also lost 0.83%. The tech-heavy Nasdaq Composite was the outlier which had a rather muted month gaining a meagre 0.25% (all returns are in USD). US markets have since had a relief rally with all indexes in the green month to date as news surrounding the omicron variant is pointing towards the symptoms being milder than expected, however, with the variant still not fully understood we can expect choppy trading ahead.
In other news, the US Senate passed and sent President Joe Biden the first of two bills that are needed to raise the government’s debt limit and avoid default. Once signed, it will allow the Democrats to increase the US borrowing limit on their own. This comes just in time as it was predicted by Treasury Secretary Janet Yellen that the US would fail to pay its bills by December 15 if the limit wasn’t raised.
Chinese equities were hardest hit in November, partly due to disappointing earnings from many of the high-flying tech stocks dragging down the local index. This is evidence of the negative impact the regulatory crackdown has had on the technology sector. Further exacerbating the decline was the fear of renewed tension between the US and China and the fact that Chinese regulators requested DiDi Global to delist from the New York Stock Exchange citing data security concerns. As such the MSCI China Index lost 5.79% in November. Evergrande’s share price hit fresh lows after they missed a deadline for another debt payment on Monday, however, it seemed to have a limited effect on broader markets which have likely already priced in the downside risks.
Over in the UK, the Bank of England kept interest rates unchanged at a low of 0.1% despite market participants anticipating a rate hike. They have, however, hinted that a rate hike is likely in the near future as inflation remains elevated – CPI increased by 4.2% in October marking the highest reading since 2011 and well above the 2% target. The UK stock market followed global stocks lower, with the FTSE 100 Index ending November down 2.46%.
Commodities pulled back in November after a sharp rally year to date with the Bloomberg Commodities Index falling 7.3%, this marks the biggest monthly decline since March 2020. The big driver was Brent Crude oil which dropped 16.4% because of the new omicron variant dampening expected demand. Metals also ended the month lower with gold returning -0.5%, platinum -8.7%, palladium -12.7%, and copper -2.1%. The uranium price continues to gain momentum returning 7.6% for November.
Locally, inflation remained at 5% for the second consecutive month and marked the sixth straight reading above the South African Reserve Bank’s 4.5% target. As such, Sarb raised the repo rate by 25bps for the first time in three years at their November meeting bring it to 3.75%. Sarb Governor Lesetja Kganyago stated that the Monetary Policy Committee is forecasting gradual hikes through 2022, 2023 and 2024 due to the expected trajectory for inflation.
The Omicron virus being detected within South Africa as well as the hawkish tone from Central Banks hurt demand for the rand. The rand depreciated against all three majors, losing 4.4% against the greenback, 1.4% against the pound, and 2.4% against the euro.
South African equities, however, had a strong month with the JSE All Share Index ending November up 4.5%. The two drivers were the resource and industrial sectors which gained 6.8% and 6.4% respectively. Listed property also gained 2.1% while financials lost ground for the second consecutive month ending down 2.6%. SA bonds also ended November up 0.7%.