Closing Report 10.12.2021

emergence of omicron, inflation, markets under severe threat

AMERICAN MARKETS MID-DAY

While e-commerce retailers have more than doubled their business during the Covid-19 pandemic, US hedge fund Engine Capital LP said on Monday that Kohl’s Corps, in which it holds a nearly 1% stake, has underperformed the S&P 500 index in recent years on e-commerce. Engine Capital is pushing Kohl’s Corps to sell the company or spin off its e-commerce business in order to improve its share value. Kohl’s (KSS.N) shares were up nearly 4% on Monday following the hedge fund’s release. The company says it is also looking at options to satisfy its shareholders. The US indices closed Monday’s session upwards, with the Nasdaq Composite Index up 0.27%, the S&P 500 up 0.96%, and the Dow Jones Industrial average up 1.78%. At the start of the week, in its semi-annual report, the Office of the Comptroller of the Currency (OCC) warned banks of the increased risk of cyber-attacks and called on them to strengthen their security systems and policies to protect themselves. The easing of concerns about the spread of the Omicron variant contributed to a recovery in US stock prices. On Tuesday, the optimism from a senior US official’s comments about the variant spread through the markets, with the Nasdaq gaining 2% on Intel’s announcement that its self-driving car unit would be made available to the public. In addition, technology stocks also rose, with Alphabet and Amazon shares up between 1.9% and 2.1%, helping the Nasdaq outperform its peers with a 2.96% rise for the index. The S&P 500 gained nearly 2.18%, led by gains in ten of its major sectors; while the Dow Jones industrial average was up 1.55%.On Wednesday, the major US stock indices are down slightly, with the Dow Jones industrial average falling 0.17%, the S&P 500 losing 0.02% in mid-session, while the Nasdaq 100 is up 0.091% despite slightly more reassuring news about the danger of the Omicron variant. The spokesman for the Department of Ohio said on Wednesday that the senator would wait until January before deciding on the appointment of Jerome Powell as head of the Fed and Lael Brainard for the post of vice president. In 2012 and 2014, these two nominations did not receive unanimous votes, the current context favors a similar situation. However, the approval of these two nominations would be approved with a simple majority vote by the Senate and the Committee. On Thursday, analysts at UBS bank focused investors’ attention on the Metaverse market, including user interface devices such as VR/AR headsets and goggles. According to UBS, VR shipments, estimated at 10.7 million this year, are up nearly 98% from last year and are expected to grow sixfold by 2025. The dominant companies in this sector are Meta Occulus, which has a 75% market share this year and could be followed by Sony and Apple by 2022. The technology stock index, the Nasdaq, is down in mid-session, falling 0.63%. The S&P 500 is also down 0.37% at mid-day, while the Dow Jones is down 0.13%. With inflation figures due on Friday, wage levels continue to rise. The Michigan Consumer Sentiment Index rose by 3 points to 70.4 with the main cause being rising wages. For Richard Curtin, chief economist of UMich’s Surveys of Consumers, the forecast for income growth is estimated at 2.9% for 2022, the highest level since 1981. However, economists expect the Fed to tighten monetary policy due to the inflationary situation, with core CPI more than exceeding the 2% annual target. With US household confidence on the rise, the major stock indices are moving in mid-day. The Nasdaq is up 0.64%, the Dow Jones is up 0.18% and the S&P 500 is up 0.53%.

EUROPEAN MARKETS CLOSING

Despite continued questions about the danger of the Omicron variant, the CAC40 ended at nearly 6,900 points on Monday, up 1.48%, the DAX increased by 1.39%, and the FTSE 100 rose 1.54%. For JP Morgan strategists, we should remain attentive because the markets are open to any reversal until we have a more precise indication of the new variant. As we await the release of the US consumer price index on Friday, concerns over the future reaction of central banks remain as forecasts anticipate a rise in annual inflation to 6.7%. In France, some stocks stood out on Monday. Safran shares rose 5.9% following the $4 billion deal between Flynas, the Saudi Arabian airline, and CFM, a joint venture between Safran and General Electric. Airbus gained 4.35% at the close on Monday following the announcement of a forthcoming agreement between Saudi Arabian Military Industries and the French company on the creation of a joint venture specializing in the maintenance of military aircraft, reports the newspaper Les Echos. As uncertainty over inflation and the spread of the new Omicron variant continues to grow, ECB member Peter Kazimir told Reuters in an interview on Tuesday that the central bank « should focus on the asset purchase program but also maintain its short-term commitment given the uncertainty over inflation ». For Peter Kazimir, the ECB should not take « too long commitments on asset purchases » as the level of inflation could once again exceed the ECB’s expectations, last month inflation was at 4.9%, more than double the ECB’s 2% target. As we await the ECB meeting on December 16th and the release of US producer price figures on Friday, European stocks close higher. The FTSE 100 ended Tuesday’s session up 1.38%, the DAX gained 2.70% while the CAC40 continued its advance from the previous day with a rise of 2.91%, its biggest gain of the year. On Wednesday, the CAC 40 ended its progression of the beginning of the week and ends the session down by 0.72%. Research conducted by South Africa, Sweden, and Germany concluded that the Omicron variant causes a partial loss of immune protection, which is rather reassuring news. Amongst the stocks that stood out today, Valneva shares rose 5.58% following the announcement that it had signed an advance purchase agreement with the Kingdom of Bahrain for the supply of one million doses of vaccine in early 2022, rising to 63 million doses in 2023 according to an Invest Securities analyst. The FTSE 100 ended Wednesday’s session down 0.03% while the DAX lost 0.80%. On Thursday, the good news about the effectiveness of the vaccine against the new Omicron variant had a positive impact on European stocks. The Euro Volatility Indicator was down and fell below 23 points. The main European indices still ended the session lower, with the DAX down 0.30%, the FTSE down 0.22%, and the CAC 40 down 0.09%. European stocks fell slightly in value following the announcement of the US inflation figures on Friday. The CAC 40 closed down 0.26%, the DAX lost 0.02% while the FTSE 100 suffered a loss of 0.32%. In France, Eurofins shares gained 0.65% following the announcement of a deal to buy Genetic Lab, a Japanese molecular biology laboratory. Sanofi shares were the biggest gainer on the CAC 40 on Friday, thanks to new results proving that its flu vaccine remains the most effective on the market, ahead of Moderna’s experimental mRNA vaccine.

ASIAN PACIFIC MARKETS CLOSING

While the Delta variant had wreaked havoc in Asia, notably with the disruption of supply chains, some countries such as Vietnam and Malaysia have learned from these events and are now better prepared for the arrival of the new Omicron variant, with more than 78% of the population being vaccinated in Malaysia. However, despite the reopening of businesses in these countries, the current obstacle to a better recovery is the shortage of labor and raw materials. For the time being, governments say they do not want to take excessive measures with the Omicron variant, as it could cause more problems for supply chains by delaying the return to work of the workforce and thus production. The major Asian stock indices ended Monday’s session lower, with the Nikkei 225 down 0.36%, the SSE down 0.50%, and the Hang Seng down 1.75%. Only the Kospi Composite ended 0.17% higher. On Tuesday, the Indonesian Financial Services Authority (OJK) released a report on the listing of technology stocks with multiple voting rights. Southeast Asia now has the fastest-growing internet market in the world, so this rule should attract even more IPOs. However, companies wishing to benefit from this new regulation will have to prove that they have been in business for three years and that their annual turnover has grown by 30% over the three years. This market is made up of several technology unicorns, including GoTo Group, the largest company in the sector, which reported raising more than $1.3 billion in its pre-IPO funding round. In Japan, the decline in household spending confirms that economic activity has not fully recovered. Household spending fell by 0.6% compared to October last year. According to Mr. Minami, chief economist at the Norinchukin Research Institute, household spending should benefit from the government’s stimulus program through a domestic tourism campaign by January 2022. In addition, the country is experiencing a second consecutive decline in inflation-adjusted real wages this month, down 0.7% on an annual basis, which is negatively impacting the recovery in consumer activity. The main stock indices still ended higher, with the Nikkei 225 up 1.89%, the Hang Seng up 2.72%, and the SSE up 0.16% at the close on Tuesday. On Wednesday, the Japanese authorities announced in the ruling party’s annual tax reform plan, the denial of tax breaks for companies that will not raise wages and a deduction of up to 30% of taxable income for companies that will. The plan has not yet been approved and is expected to be made later this week. In its fight to raise national wages, the ruling party wants to distribute wealth to households, i.e. raise private-sector wages in order to « fuel a positive cycle of broad wage increases and sustainable inflation in the long term », according to analysts Yoshimasa Maruyama. The region’s stock indices closed the day higher, with the Nikkei 225 up 1.42%, the SSE Composite index up 1.18%, and the Kospi up 0.34%.  At the Reuters Global Markets Forum on Thursday, Charles Chasty, an analyst at Affinity Shipping, said the supply chain crisis in China could last into next year, a situation that is not likely to improve with the arrival of the variant Omicron. This is reflected in the high freight rates that have seen shipping stocks rise sharply, with Maersk’s share price up 57% since the start of the year. The upcoming news on the Omicron variant should give us a clearer perspective on the recovery of the Chinese economy. The major indices ended the session higher, except for the Nikkei 225 which lost 0.47% today, and the S&P/ASX which fell 0.28%. The Kospi rose 0.93%, the Hang Seng gained 1.08%, and the SSE 0.98% in Thursday’s session. With continued supply chain bottlenecks and the release of US inflation figures, all Asian stock market indicators ended the weekend session lower. The Nikkei 225 lost 1%, the Kospi was down 0.64% while the Hang Seng recorded the biggest drop on the continent at -1.07%.

COMMODITIES & FOREX MARKETS

• This week, at the Global Halal Brazil trade conference, ongoing talks between Brazil and Indonesia, Liban, and Morocco were revealed by Flavio Bettarello, deputy secretary of the Ministry of Agriculture, marking Brazil’s desire to expand into new markets while it is already the world leader in coffee, beef, and soy. According to data from the Arab-Brazilian Chamber of Commerce, of the $190.5 billion worth of food products imported by the Organisation of Islamic Cooperation, Brazil alone will account for almost $14.1 billion by 2020.
• Bitcoin lost nearly 20% of its value after the president of El Salvador tweeted that he had bought 150 bitcoins for $48,670. According to Martha Reyes, director of research at the Bequant platform, the risk conditions linked to the Omicron variant as well as the drop in the equity markets shook up the cryptocurrencies at the end of last week, hence the sudden drop.
• The Canadian dollar weakened after the Bank of Canada said Wednesday that it would maintain its stance on raising interest rates given the uncertainty created by the Omicron variant. In addition, the price of oil, one of the country’s main exports, fell this week by 1.3% after the British Prime Minister announced stricter restrictions in England.

Inflation, anticipation in line with results

The release of the US inflation results confirms the level of the consumer price index at 6.8% year-on-year compared to the same month last year, in line with economists’ expectations. This is the fastest pace of increase since 11982 and the sixth consecutive month that inflation has exceeded the 5% mark.

This does not improve the economic recovery with the emergence of the Omicron variant, which extends the duration of the pandemic. It is, however, a result that markets were expecting before the official release. Indeed, according to a survey of 560 small businesses conducted by Vistage Worldwide Inc, 60% reported price increases over the past three months, while 80% reported higher labor costs. Two positive factors were a 0.4% drop in the unemployment rate and a 1.3% increase in consumer spending in October.