Market Review 11/2021

The S&P 500 index rose to 4743 points in November before deciding to take some rest. Whether we will see the usual small drawdown and then resume the move to the 4900-5000 levels or will have a lasting and long-awaited correction, is difficult to say just yet. Nevertheless, the behavior of the market during the last days of autumn and the beginning of December rather speaks of the second scenario. The volatility index, previously at low levels, rose above 27 points, which indicates that the sentiment of market participants has also changed.

Who is to blame?

There were several reasons for general uneasiness. First, the reaction of the authorities to the new variant of coronavirus. Politicians were not reassured by the statements of pharmaceutical companies about their ability of quickly modifying vaccines and, in general, relative harmlessness of the omicron variant. Second, Powell’s testimony before the Senate, in which he outlined a reduction in bond purchases, which is likely to happen faster than previously expected. Moreover, Powell is (finally) worried about inflation and is now trying to find a better definition for it than his beloved “transitory.” Apparently, bond yields are pricing in 25-50 basis points rate hike(s) in the next six to twelve months thus flattening the yield curve, which, in turn, might put some pressure on the stock market. This rise in short-term yields also makes dollar more attractive.

European and US equity markets

Euro tumbles; precious metals show weakness

Eurodollar price action was pointing to a weaker euro already in October, so November’s drop did not come as a great surprise, though EUR/USD suffered rather heavy losses not seen for quite some time. Market has been tolerating 1.1600 area as a horizontal support for more than a year, but when it finally surrendered, the drop was fast. It definitely allows us to consider a very important EUR/USD 1.1000 level as a highly probable target in the near future. Should we see a quick bounce in EUR/USD towards 1.1400-1.1450 area, we would expect traders to take this opportunity to short the pair. On the other hand, a direct fall to EUR/USD 1.1000 could be a place where many might choose to go long euro.

Precious metals continue to disappoint. Last month silver turned around XAG/USD 25.50 levels and “went south”, yet again. Gold gives a lot of concern too. All the logics, all the talk about inflation and precious metals prove to have little real effect on price.

Gold has been consolidating for quite some time and all attempts to break to new highs failed. The longer it takes the more probable becomes a move to the opposite direction, so the metal needs to regain XAU/USD 1850 levels and do it soon.

Benchmark 10-year bond yields

Fixed income

For fixed income markets, the picture has become more blurred lately. A month ago, everyone and his mother believed the Fed would end QE in mid-2022 and start raising interest rates. Latest evidence of slowing economic growth and persistently high inflation for consumer prices, however, has the Fed at a conundrum. Inflation does not seem to be “transitory” as the Fed has been saying, but on the other hand, economic activity is slowing again, hurt by supply chain constrains and consumer sentiment as witnessed by the University of Michigan survey. This has muddied the waters for Central Bank action in 2022. Thus, November has turned out to be a rarely good month for sovereign bond investors, a mostly flat month for corporate bond indices and a red one for high-yield instruments.

High Yield bond Indexes

Inflation hits Europe and United States

In Eurozone, inflation soared to its record reading. Consumer price growth increased to 4.9% in November, the highest level in 25 years of recording. Energy prices led the way with 27% increase compared with a year earlier; inflation in services and non-energy industrial goods was above 2% mark as well. German consumer price inflation increased to 6.0% in November, which was the highest rate since 1997, up from 4.6% in October. French inflation increased to 3.4% in November, the highest level in 13 years. Eurozone manufacturing during November showed small increase. Demand remains strong, but supply chains continue to deteriorate. German Ifo institute’s survey showed that 74.4% of firms complain about problems procuring inputs and raw materials, a 4-percentage point increase over October. U.S. initial claims for state unemployment benefits decreased to the lowest level since November 1969. U.S. labor market is tightening with jobless rolls shrinking in mid-November to the smallest since March 2020. Inflation has put negative pressure on U.S. consumers with their confidence decreasing to a nine-month low in November amid worries about rising cost of living. Thanksgiving weekend is the biggest shopping adventure of the year, but this year U.S. shoppers headed to stores 3.5% less than last year, according to National Retail Federation data. The total number of online shoppers decreased by 12.1% to 127.8 million, while in-store foot traffic increased by 13.7% from previous year when the pandemic kept shoppers away from stores.

Goldprice, USD/oz

What if?

If correction has indeed started, then the S&P 500 index may test the 4450 levels and if it does not stop there, then we may well see the 4150 points region. Nevertheless, the main trend continues to be bullish and the decline should be considered as an opportunity for longer-term purchases at better prices.