Closing Report 26.11.2021

IT’S Also black friday for the stock market this week

AMERICAN MARKETS MID-DAY

On Monday, following the re-election of Jerome Powell to a second term as Federal Reserve Chairman, the S&P 500 ($4,741.35), Nasdaq ($16,188.17), and Dow Jones Industrial Average ($35,853) set new records in early trading. Despite the rise in producer and consumer prices observed in October following the official release of the results, home sales surprisingly increased in October and reached the highest level since the beginning of the year, up 0.8% compared to last year and 2.2% in million units more than expected, while the median price increase by 13%. However, this increase in sales prices is a question of strong demand against a limited supply. While Joe Biden announced on Tuesday the deployment of a mechanism to cool oil prices, in collaboration with China, India, South Korea, Japan, and Great Britain, the Commerce Department announced a better than expected increase in US consumer spending, +1.3% in October. Indeed, this indicates a good recovery in US economic activity, as household spending accounts for about two-thirds of US activity. Wednesday, the S&P 500 continues to rise, after closing Tuesday’s session at 4,682.94 (+0.16%), the price is at 4,695.83 (+0.1%); the Nasdaq ends at +0.27% and the Dow Jones falls slightly by 0.076%. The uncertainty of Fed officials on what actions to take affected international equities. Futures on the S&P 500 rose 0.1% and those on the Nasdaq 100 rose 0.2% Thursday. US labor market data remained strong with jobless claims falling to their lowest level in 52 years, suggesting a good recovery in economic activity. President Biden’s action earlier this week on oil reserves has begun to take effect. On Thursday, Brent crude oil fell 0.2% despite rising 2.6% on the week, while Saudi Arabia and Russia are set to suspend planned production increases. On Friday, due to the news of the new South African variant that caused some borders to close, stock indices in international markets plunged. The S&P 500 fell 2.12%, the Nasdaq Composite dropped 2.05% and the Dow Jones Industrial Average lost 2.71%.

EUROPEAN MARKETS CLOSING

In Europe, the indices did not benefit as much as in the United States from the appointment of Jerome Powell because of the health situation which is still very delicate, especially in Germany. The STOXX 600 ended the session with a rise of 0.26% while the MSCI index of European shares fell by 0.5%. Angela Merkel call for stricter infection control measures in Germany due to the dramatic fourth wave situation and warned that hospitals would be overwhelmed if tighter restrictions are not taken. The CAC 40 was down 0.10% on Monday, while the DAX fell 0.27%. In the mid-week, concerns about the health situation continue to weigh on the manufacturing sector in Germany as well as on European companies’ shares. The French services sector experienced its strongest growth for 4 years Wednesday, with the European Union services sector PMI coming in at 56.6, 5.79% higher than expected. The indices of Europe’s two largest economies closed the mid-week session down 0.03% for the CAC40, and -0.37% for the DAX. The second concern weighing on the European economies this week is the pressure on prices, with the PMI producer price index rising from 72.6 to 74.3, an increase of 2.3% which companies are now passing on to consumer prices. The end of the week is even harder for the European economy with the discovery of the new variant from South Africa. France reacted quickly by closing its borders to travelers from southern Africa, as did Italy and Germany, but the European stock market indices were also particularly shaken. The Paris stock exchange index opened Friday’s session with a sharp drop of 4.3% after closing the Thursday session at +0.3%, the DAX fell by 3.4% (after a 0.24% increase Thursday), and the STOXX 600 index by 3.2%. The closure of borders has an immediate negative impact on international trade and particularly on airlines. On Friday, in France, Airbus lost 12.4% and Safran fell 8.9%. Panic-stricken investors turned to sovereign bonds as a safe haven. Among the CAC 40 stocks that stand out in this market panic is the share of the analysis laboratory Eurofins Scientific, which gained nearly 6%.  European markets close Friday’s session with a sharper decline than in the US. The CAC 40 lost 4.75%, the DAX fell by 4.15%, and the FTSE 100 by 3.64%.

ASIAN PACIFIC MARKETS CLOSING

Malaysian airline AirAsia Group Bhd on Monday reported a net loss of $212 million for the July-September quarter due to continued travel restrictions caused by the pandemic. The airline’s passenger numbers fell 82% from a year ago, leading to a 53% drop in revenue. For the end of the year, AirAsia claims to have enough cash to sustain its business, while it has already managed to renegotiate lower rents with two of its lessors. The main stock market indices in the Asia/Pacific region ended Monday’s session in half-tone results, with a slight rise of 0.09% for the Nikkei 225, plus 0.61% for the SSE and a drop of 1.96% for the Nifty 50. The appointment of Jerome Powell as head of the Fed on Tuesday prompted investors to bet for a US rate hike in 2022. Asian market followed Wall street’s decline. The MSCI of Asia-Pacific was down 0.52% and the Hang Seng was down 1% at the close of Tuesday’s. The upward trend of the Nikkei 225 came to a halt on Wednesday, with the index closing at -1.58%. Investors’ fear of a reaction from the US Federal Reserve on the general rise in prices had a negative effect on stock prices. Investors are anticipating a tightening of the Fed’s policy. In China, on the other hand, with the improvement of the sentiment in the real estate sector, Chinese stocks closed mid-week « at their highest level in four weeks », Reuters reports. The SSE index gained +0.10% at the close of the session. On Thursday, the Kospi closed down 0.5% after the South Korean central bank raised its key interest rate for the second time in three months. The Nikkei 225 rose by 0.7% as Tokyo decided to issue new sovereign bonds to finance fiscal spending. In China, property developer Kaisa declared a risk of default on its international debt if creditors do not agree to an exchange of $400 million of bonds maturing on 7 December at the same annual coupon of 6.5%. For the promoter, this situation is due to the tightening of government policy as well as the loss of investor confidence following the Evergrande crisis. « It is becoming increasingly difficult for property developers in China to raise the funds they need to pay off upcoming debts, » the Wall Street Journal reported on Thursday. Kaisa’s risk of default is increasing; S&P Global Ratings downgraded the developer’s credit rating to CCC two weeks ago. In Asia, as in Europe, the news of a new variant did not leave the markets indifferent this Friday. The Nikkei 225 opened the session down 2.8%, and the SSE fell 0.8% after the discovery of the B.1.1.529 variant which, according to studies, has many mutations and is more contagious. Airlines are also widely affected, with Japan Airlines, ANA Holdings, and Qantas all falling by more than 5%. Investors in Asia are turning to the money market as a safe haven. As with Friday’s opening prices, Asian markets are also heavily impacted by the news about the new variant. The Nikkei closed down 2.53%, the Hang Seng fell 2.67%, and the SSE lost 0.5%.

COMMODITIES & FOREX MARKETS

• The appointment of Powell on Monday was positive for the dollar (+0.27%) and allowed it to reach its highest level since July 2020. With this appointment, analysts expect more room for US rate hikes. However, the Euro experienced the opposite scenario on Monday, reaching its lowest level since July 2020 with a drop of 0.46%, with the EUR/USD rate at 1.12. The health situation in Austria and Germany is increasing concerns.
• In order to combat the sharp rise in the price of oil, which reached a record high a month ago ($85.41 a barrel), President Biden decided to dip into US oil reserves along with China, India, South Korea, Japan, and Great Britain. This decision of the American president provokes a mixed opinion among specialists. Indeed, for Tristan Abbey, president of the consulting firm Comarus Analytics, this decision could incite future US administrations to act in the same way in order to control prices, pointing out to the market that the price of 80 dollars a barrel would be the upper limit for consumer countries. For Bob Yawger, head of energy futures at Mizuho Securities, the decision is not expected to have a huge impact as the amount extracted will only represent one less day of global consumption.
• The Japanese yen and the Swiss franc are two safe havens for investors at the expense of the dollar on Friday after the announcement of a South African variant more resistant to vaccines. Research on the South African variant is so far inconclusive for scientists, however, they say it has an « unusual combination of mutations ». The yen reached a high of 113.66 with a gain of 1% one of its bests performances since March 2020.
• In his expansions plans, Changpeng Zhao, CEO of finance, said in an interview with Reuters that France would be a natural choice for a regional or even global headquarters. For the French regulator, the AMF, Binance needs to strengthen its compliance activity to establish itself in the French capital. The CEO of the company confirms that more than 15% of its employees are in charge of compliance and relations with regulators. Binance hopes to obtain the approval of the AMF within six months to a year.

Inflation, is it really a temporary situation? 

The inflationary situation and the anticipation of the Fed’s reactions are being closely followed in the US in recent days by the markets. Supply chain issues, rising demand for goods, and temporary shortages have driven inflation to a 10-year high, with core inflation rising 4.1% in October.

This Wednesday, the report of the Fed officials’ meeting indicates new concerns about the duration of the inflationary situation. Earlier this month, at the November 2-3 meeting, the Fed decided to modify its asset purchase program by reducing the amount of purchases from $120 billion to $15 billion and to stop it by the end of June 2022 in order to raise interest rates, which had been maintained between 0 and 0.25%. However, inflation appears to be persisting to date, with energy prices, wages, and rents all rising, suggesting that the Fed may accelerate the reduction in asset purchases earlier than expected and raise short-term benchmark rates in the first quarter of 2022 to cool the economy if inflation continues to persist.

According to futures prices tracked by the CME Group, expectations of a rate hike of at least a quarter-point by the end of 2022 have risen to nearly 65%, and the probability of a rate hike by the end of May reached 50% on Wednesday.

The Fed’s response to inflation would no longer depend solely on supply chain bottlenecks but also on household and business expectations about the level of inflation, as the latter’s expectations have an immediate effect on wages and prices.

However, the situation is eased with the appointment of Jerome Powell to a second term as head of the FED, as it removes uncertainty about the direction of policy.