EQUITY
Global markets retreated for the month of November 2021, finishing down 1.5% on fears about the potentially damaging economic effects posed by the heavily mutated Omicron strain and rising COVID-19 hospitalizations in parts of Europe. Markets reacted to the possibility that the new variant could delay the world economy’s return to normalcy by intensifying supply chain disruptions and fueling inflation. The sell-off was further deepened following hawkish comments by the Federal Reserve Chairman.
In the U.S., equities dipped 1.0% and volatility surged as investors scrambled to determine the possible economic repercussions of Omicron. The Fed’s pivot further exacerbated volatility as Chairman Jerome Powell indicated that he is open to accelerating the pace of tapering, plausibly entertaining earlier rises in interest rates. The catalyst for the shift was to rein in rampant inflation, which could climb higher if the fresh new coronavirus threat further intensifies supply-chain disruptions. Markets were unfazed when Biden signed his flagship $1.2 trillion bipartisan infrastructure bill into law. While this plan will unlock $550 billion in funds for transportation, broadband, and utilities, the spending plan is not expected to jolt economic activity in the short-term. European markets fell 2.4% as inflation hit record levels and many countries reinstated lockdowns to quell rising COVID-19 cases.
Asian Pacific ex Japan markets fell 3%. Japanese markets declined 2.9%. Hoping to stimulate sluggish growth, the government approved a massive spending package equivalent to about 10% of Japan’s GDP. COVID-19 volatility also returned to Australian markets, down 1%, as the risk of lockdowns on top of a slowing economic revival rattled markets. Emerging markets once again underperformed, falling 3.2%, as the region faced a series of headwinds including a strengthening U.S. dollar, sluggish growth, heightened inflation and political volatility. On a positive note, in emerging Asian countries, COVID-19 related factory closures, energy shortages, and port-capacity limits eased with China in particular benefitting. China’s Purchasing Managers’ Index (PMI) showed some promise and surveys suggested that industrial output rebounded in November 2021. However, Chinese markets continued their descent from previous months, falling 5.9%, while the government’s zero tolerance policy towards repeated COVID-19 outbreaks and continued strict regulation on many economic and market sectors raised concerns about the economic outlook.
FIXED INCOME
Yield curves flattened as recent market ructions, anticipated slowing global growth in 2022, central bank purchases, and institutional buying weighed on longer-dated yields. Volatility increased in shorter maturity yields as central banks more aggressively addressed inflation by ending pandemic stimulus programs, raising rates, or signaling a raise in short-term rates. Chinese property saw some relief in November 2021 following reports of credit-easing measures introduced by the authorities to help ease liquidity stress for property developers. The overall improvement in sentiment helped to drive High Yield (HY) recovery in the second half of November 2021. However, emerging news of the Omicron variant once again dampened the global outlook.
JP Morgan Asia Credit Index (JACI) composite saw losses of 0.04%, slowing down from the previous two months. Investment Grade (IG) saw some improvements with returns of 0.15% while HY was still down 0.79% despite better investment sentiment. IG spreads widened 4 basis points (bps) to 177bps while HY spreads widened by 42bps to 863bps. The JACI composite spreads widened by 10bps to 301bps.
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