The ASX200 posted its third consecutive monthly decline in November after a late sell-off led to a -0.5% decline on the month. Still, the ASX200 was a relative outperformer when compared to the -0.7% drop in the S&P500 and the larger losses seen in Europe (-2.3%) and emerging markets (-3.2%). In November, Australian Government bonds found a bid, with the yield falling by 38bps after rising by 59bps in October. The AU 10Y bond yield closed at 1.70% in November, off the highs seen in October of 2.07%.
US Federal Reserve Chairman Powell's comments during the month caught the market by surprise, suggesting it was time to retire the word 'transitory' regarding the inflation outlook. Seeming more concerned about having to adjust monetary policy to keep the inflationary pressures in check and that he thought it was important to complete the tapering process faster than previously expected.Market participants had speculated that the rising Omicron COVID cases might encourage the Fed to slow down on their tapering plans, especially after highlighting this concern specifically during the month by saying that Omicron could pose downside risks to economic activity, employment and inflation. A hasty taper plan could mean that we see rate hikes sooner than previously forecast, which could be highly impactful to markets. Fed fund interest rate futures are pricing in a 28% chance of a rate hike by March 2022 and a 58% chance for May 2022.
November 2021 Summary
- The local economy posted a -1.9% contraction in Q3 but was +3.9% higher than the same period one year prior
- Home prices in Australia are still rallying, up +1.1 % M/M across eight capital cities
- The US Fed's Powell stated, "it is probably a good time to retire the word transitory with regards to inflation."
- The COVID Omicron variant has startled markets in recent weeks
- Crude oil lost over -20% in November due to Omicron fears
- The VIX Index surged the most since February 2020
- Holiday sales have so far been robust but slightly below market expectations
Equity Markets
The major equity markets indexes all made new highs early in the month of November but failed to hold onto the gains, with only the Nasdaq 100 / Composite ending the month in the green. For the first time in over ten years, the S&P500 closed the month in the red, breaking a typically strong month for equities. The Russell 2000 small-cap index saw some notable volatility, falling over -4.2% from the highs set in the first week in November. The sell-off in small-caps was so dramatic that some key support levels were breached, including the 50-day and 200-day moving averages.
Earnings Season
US corporate earnings beat expectations handily in Q3 2021, coinciding with equity markets rallying to new highs in the first week of November. FactSet data shows that 83% beat market consensus EPS expectations. Companies are essentially reporting earnings that are 10% above the market expectations. FactSet highlighted that close to 350 of the 500 companies in the S&P500 noted the term "supply chain" on their conference calls, the highest in over ten years.
Volatility Index
Volatility measured by the VIX Index saw its most significant monthly gain since February 2020 in November, with the index jumping +68% in the month, trading at a low of 14.72 on November 4th to a high point of 28.98 on the 26th, which was the day after the Thanksgiving holiday—primarily attributed to the Omicron COVID variant spooking market participants.
US Economic Data
The Department of Labor in the US released the Employment Situation Report on November 5th, showing +531,000 new jobs were created vs market expectations of 450,000, and the unemployment rate fell to +4.6%. Hourly wages grew modestly at +4.4%, while the labour force participation rate stayed the same at 61.6%. CPI in October came in red hot, up +0.9% M/M compared to a +0.6% expectation and showing a +6.2% Y/Y, which is the fastest increase in prices since 1990.
Oil Markets
Crude oil prices lost ground to the tune of -20% in November after topping out at multi-year highs around $85/bbl but is still up +38% YTD. President Joe Biden, along with other OPEC member countries, announced the release of strategic reserves in an attempt to lower prices at the gas pump. The average price of a gallon of fuel in the US is $3.40 when 12 months ago, a gallon cost $2.13 (+60% Y/Y), according to AAA data.
US Dollar
The US Fed seems more hawkish by the day, and rising inflation levels have given the US dollar a tailwind of late, accelerating the recent rally in the currency. The Greenback posted a 16-month high at $96.940 on November 24th before consolidating into month-end. The US Dollar Index (DXY) gained +1.86% for the month of November.
Bitcoin Volatility
Bitcoin lifted above $68,000 at the start of November, which is a new all-time high in the digital currency, before coming under the same selling pressures seen in other risk assets, seemingly on the back of the inflationary fears and Omicron COVID variant at the end of the month. Bitcoin closed the month down -6.9%.
Looking Ahead
Hotter than expected inflation numbers, a more hawkish Fed and the new Omicron COVID variant were enough to drive markets lower in November. The market will now look to the following US Fed policy meeting on December 15th for clarification on the speed of tapering and what the interest rate expectations look like into 2022. Equity markets tend to wind down in the latter stages of December with a bias to the topside.