Week Ahead Preview: 29 November 2021

 
We will be heading to the last month of the year next week – so get used to hearing more about “Santa rally,” although Santa might go missing if concerns over the new variant of Covid intensify or the Fed decides to tighten monetary policy more aggressively going forward because of inflation risks.
 
 

 
There’s no doubt what would be on investor minds over the weekend and early next week: B.1.1.529 variant of Covid. It is possible we may see gaps at the open on Sunday night or Monday morning in Asia, if more travel restrictions or lockdowns are introduced around the world. This may specially be the case as Wall Street is only trading for half the day on Friday, meaning there is even more time risk US investors will need to take into account.
 
News of the potentially more transmittable Covid variant caused a big slump in stocks and crude oil Friday morning. Just when you thought surely it can’t get any worse with inflation surging and new lockdowns and restrictions being introduced in parts of Europe, the last thing investors needed right now was this. Although there has only been very limited number of cases of the B.1.1.529 variant, it has been described as "the worst variant we've seen so far” by experts. There is concern it has the potential to evade immunity and the UK has already put several southern African countries on its travel red list. Fears that more countries will introduce fresh lockdowns and travel restrictions has hurt crude oil, sending it down over $5 lower. The major European indices were down by about 3.5% shortly after the open, with travel and tourism stocks bearing the brunt of the sell-off. Safe haven gold and yen rallied. It is certainly feeling like a Black Friday already.
 
Safe-haven flows have provided relief for gold which had sold sharply earlier this week on rising bond yields and concerns over faster withdrawal of monetary support from the Fed and other central banks due to surging inflation. Well, central banks may now decide against ending their stimulus programmes too quickly, and that’s why we have seen renewed gains for government bond prices and yields have dropped as a result.
 
 

 

 
 

 
There’s little doubt the jobs report will garner a lot of attention on Friday ahead of the Fed’s policy decision a couple of weeks later. The focus will be on wages as the markets wants to see evidence on whether inflation in prices is starting to impact wage inflation. The dollar should move higher if wages rise more than expected, as bets will increase over speeding up of tapering by the Fed.
 
But until Friday, a lot can change. There’s increased uncertainty about the direction of global markets, owing to concerns not only about inflation and the impact it will have on central bank policy, but there is the resurgent virus and now the new variant to consider as well.
 
Rising bond yields have been hurting technology stocks, although value stocks had outperformed until Friday when everything went on sale owing to concerns over the new Covid variant. Gold, which was also weighed down by rising yields, came back to life as yields dropped with investors piling back into the safety of government debt. Is the start of a major comeback by gold?
 
Chief among investors’ other worries will be inflation, which rose to a three decade high in the US last month. Meanwhile, other economic data continues to remain largely positive, as we found out earlier in the week with consumers’ incomes (0.5%) are spending (1.3%) rising more than expected in October, while jobless claims fell to a record low. Against this backdrop, investors are increasing their expectations that the Fed will have to speed up its policy normalisation. This is something the central bank’s policymakers indicated, with the minutes of the FOMC’s last meeting showing they want to taper the central bank’s bond purchases at a faster pace, even before data showed inflation accelerating. According to the minutes of the FOMC’s November meeting: “Various participants noted that the Committee should be prepared to adjust the pace of asset purchases and raise the target range for the federal funds rate sooner than participants currently anticipated if inflation continued to run higher.”
 
With inflation accelerating since that meeting, analysts have been calling for tighter policy and sooner. Economists at Goldman Sachs, for example, expect the Fed to double the monthly taper amount from January to $30 billion, completing the process by mid-March, before making the first of the year’s three rate hikes in June. Others such as analysts at Deutsche Bank, think that the Fed will not wait until next year and instead it will accelerate the pace of tapering at its December policy gathering.
 
But in light of the new Covid variant find, there might be another twist in Fed policy.
 
 

 
As mentioned, rising bond yields have increasing the opportunity cost of holding low-dividend-yield assets such as growth stocks in the technology sector, especially those of which that are non-profitable. Should yields rise further, we will likely see increased rotation into value stocks. But standing in the way of that rotation could be Covid and further lockdowns. Europe is really struggling right now. There was a sharp plunge in German consumer confidence in November, falling to its lowest level in six months. Undoubtedly, this was on the back of worries about the fourth wave of Covid, as well as surging inflation. The potential for more lockdowns measures means the outlook for the festive season is going to be a bit murky. This may discourage European investors to take on too much risk, potentially meaning equities might struggle on both growth and value fronts. In the US, work-from-home names might start looking appealing again should things get really bad.
 
 

 
Crude oil and travel stocks took the brunt of the sell-off on Friday amid concerns the new variant will prompt fresh mobility restrictions and hinder economic activity. The UK was swift to announce a temporary flight ban from a number of southern African countries. If more countries follow suit, we could see demand for air travel fall. This, in turn could weigh on crude demand, just as the US and a few other oil consuming nations are releasing crude from their strategic reserves to add output to the global supply. Until now, it looked like the OPEC+ would stick to the policy of raising output by 400,000 barrels per day at their meeting next week. However, the potential for more lockdowns means demand in Q1 could fall sharply, raising the prospect of the OPEC+ potentially holding back supply. If they do, this could keep prices elevated.
 

 
Inflation has so far not helped gold in the way you would expect, but with risk aversion rising sharply and inflation remaining high at the same time, investors might find gold more appealing going forward as they seek to protect their wealth from the impact of rising price levels. Just take a look at the Turkish lira or the Japanese yen to see what inflation and high oil prices can do to you when hoarding fiat currencies over gold. Yet, paradoxically, inflation is the exact reason why gold sold off earlier in the week. Surging inflation in the US has raised investor concerns that the Fed will pursue faster policy normalisation in the months and years ahead, with other central banks likely to follow. As a result, bond yields rose, increasing the opportunity cost of holding non-interest bearing assets like gold and low-dividend-yield assets such as growth stocks in the technology sector. On Friday, yields fell sharply alone with everything else on the back of worries over the new variant of Covid. Watch out for a potentially big comeback by gold as inflation and Covid variant both raise the appeal of the metal as a safe haven bet.


Source: ThinkMarkets.com