highlights
- Oil closed down 2.8% for its sixth straight weekly loss. The decline came after the OPEC+ meeting in which the group agreed to increase its January output quota by 400Kbpd.
- The sell-off was the broadest since the worst of the pandemic as the Bloomberg U.S. Composite 52-week New High Lows Index slumped to its lowest levels not seen since March of 2020.
- Growth and value both closed in the red with growth being the laggard due in some part to the FANMAG stocks retreating from near all-time highs.
- Non-farm payrolls showed an addition of 210K jobs, well below the median expectation of 550K, and was the lowest monthly gains since last December.
- ISM Manufacturing touched a new all-time high of 69.1, bringing into question are consumers returning to normal spending trends, pivoting to services versus goods?
- Fed chair Powell took a more hawkish stance in his testimony to Congress, saying it may be time to retire the word “transitory” and said it may be time to discuss accelerated tapering.
- Futures markets now expect the Fed will double their pace of tapering to $30B/ month, ending in Q1 of 2022 and sees about .75% of hikes by March 2023, with the first coming in June 2022.
- The JPMorgan Global Manufacturing PMI edged down to 54.2 in November from 54.3 a month earlier.
- The World economy-weighted inflation climbed to 5.3% in November, compared to 4.5% a month earlier.
- In China, Beijing is reportedly working on a bill to ban companies from going public on foreign exchanges using the variable interest entity structure without approval.
LAST WEEK
Markets closed lower this week with the Russell 2K and NASDAQ leading declines as pessimism amongst investors gripped global markets. The sell-off was the broadest since the worst of the pandemic, at least according to one metric tracking companies whose shares hit 52-week lows. The Bloomberg U.S. Composite 52-week New High Lows Index slumped to its lowest levels not seen since March of 2020, as the Omicron variant spread globally and investors fled risk assets, taking shelter in safe haven plays such as the Yen and U.S. Treasuries.

While we await concrete data concerning Omicron virility, the Fed’s pivot to a more hawkish stance due to inflation and the reaction of global governments surrounding Omicron, there has been no lack of market moving headlines, keeping market participants on their toes as the holiday season continues.
Growth and value both closed in the red with growth being the laggard due in some part to the FANMAG stocks retreating from near all-time highs. The week had mixed performance from treasuries as the treasury curve flattened with the 5/30-year spread hitting its lowest levels since March of 2020. The 30-year bond fell below 1.70% for the first time since January of 2021, while the 10-Year dropped to 1.35% as buying pressures on COVID-19 uncertainty exacerbated the moves.
Oil closed down, with WTI crude declining 2.8%, for its sixth straight losing week. The decline came following the widely watched OPEC+ meeting in which the group went ahead with a 400Kbpd increase to its output quota for January of 2022 as originally planned.

OMICRON NEWS CONTINUES TO DOMINATE HEADLINES
Thanksgiving week’s Omicron news remained the primary overhang on sentiment, despite the lack of real data concerning severity or the increase in transmissibility. The week saw the World Health Organization (WHO) label the variant as a “variant of concern” as cases began to increase globally, well beyond South Africa where it was first detected.
While the debate continues on the efficacy of existing vaccinations, there have been no reported deaths as of now from the new Omicron variant and cases in general have been seen to be less severe than the Alpha or Delta variants of COVID-19.
ECONOMIC RELEASES
The widely watched non-farm payroll number released on Friday showed a 300K+ unexpected shortfall in additional jobs. The addition of 210K jobs, was the lowest monthly gain since last December and came in well below expectations, continuing to show the moderating of job gains over the last three months compared to earlier in the year.
With the Fed moving away from the concept of “transitory inflation,” the soft jobs report would normally be a signal that could reduce the speed of tapering. However, given the current environment, the Feds dual mandate of balancing the economic recovery and not allowing the economy to not “overheat” has become much more complex, limiting their options moving forward.

As inflation hit its hottest levels in years and what appears to be a softening labor market, the CPI number, due next Friday, will provide some additional clarity on where inflation will land and in turn, may back the Fed even further into a corner. A bright spot of economic data, the ISM services index climbed to a new all-time high of 69.1, bringing to light the question, are consumers returning to normal spending trends, pivoting back to spending on services and not goods?

FED-RETIRING THE WORD TRANSITORY & POTENTIAL GOVERNMENT SHUTDOWN
Fed Chair Powell and Treasury Secretary Yellen testified before Congress this week, with Powell catching investors off guard, saying that the threat of persistently higher inflation has grown, adding that it may be time to retire the word “transitory”. The Federal Reserve President went on to say that given the current environment, it may be prudent for additional discussion for accelerated tapering at the upcoming meeting which is expected to take place on December 14th and 15th.
Despite a pivot to a more hawkish view on inflation, one that we had seen in recent weeks from other Fed officials, market participants seemed more concerned (for the time being) with Coronavirus fears, due to price action in bond markets this week.
However, looking further out futures markets are now expecting the Fed will double the pace of their tapering to $30B/ month, ultimately ending asset purchases by the end of Q1 2022, with the first-rate hike coming as soon as June 2022 and are pricing in about 0.75% of hikes by March of 2023.
RETAIL TRADER
In another year highlighted by COVID-19 headlines and Fed commentary, retail traders have remained extremely active, attempting to take advantage of the heightened fragility within markets. Despite impressive gains this year within equity markets, a basket of the 50 most-popular stocks among individual retail investors plunged 7.8% last week. The sell-off of the names trailed the most favorited stocks held within mutual funds by 5.8%, the most ever according to data compiled by Goldman Sachs, illustrating the ongoing difficulty of continually outperforming active managers.

This Week
U.S. equities rebounded from Friday’s selloff as investors took comfort in reports that various cases of the Omicron variant have been mild, all thing considered. With investor angst subsiding, the S&P 500 rose 1.2% in a broad-based rally, erasing last week’s losses, while the tech-heavy NASDAQ gained just over 0.90% and was the worst performing major index on Monday. Recently the path of least resistance has been to the downside with COVID-19 fears and a faster than planned rate hike trajectory to combat inflation. However, the narrative seemed to reverse for Monday’s session with the risk on tone underpinning strength in domestic markets.

The 10-year Treasury fell, with yields popping back up after declining 8.82% last week, falling to a low of 1.33%, its lowest levels since late September, on renewed COVID-19 worries. Value continued its recent outperformance from last week, though both growth and value performed well.
Overall, it was a quiet session with not a lot of developments to note, though the overall tone in markets felt more positive. The backdrop appeared to be calmer on Monday after reports that hospitals in South Africa have not been overwhelmed by the most recent wave of COVID-19 cases. Despite the promising news, the VIX, or so called “Fear index” fell roughly 11% on Monday, however, still remained elevated at 27, which continued to be above the year-to-date average of 19.67.
All 11 sectors closed higher with notable strength in re-opening names including airlines, hotels, department stores, and restaurants. Industrials outperformed with big gains from airlines, railroads, as well as Aerospace & Defense names. Semi-conductors weighed on the tech space after monthly sales data from the Semiconductor Industry Association pointed to weaker momentum, with memory products being singled out as a primary weak point in the report.
International
Last week, the Bloomberg World index declined 1.29% as volatility climbed across global markets. The Euro STOXX index declined 0.47% during the same period, as more mobility restrictions were announced in Europe. The JPMorgan Global Manufacturing PMI edged down to 54.2 in November from 54.3 a month earlier. Inflation remains the center of attention for policy makers and governments as the path to normalization takes longer than expected. The World economy-weighted inflation climbed to 5.3% in November, compared to 4.5% a month earlier.
Europe
In Germany, Federal and State leaders agreed on nationwide restrictions regarding the COVID-19 vaccination. Under proposed rules, shops, restaurants, museums, and movie theaters will be only open to vaccinated or recovered people. Additionally, indoor sport venues will have a maximum capacity of 5,000 spectators and private gatherings for unvaccinated will be limited to one household. The Bundestag is expected to vote on mandatory vaccines in early 2022. The announcement came following a surge in COVID-19 hospitalizations in recent weeks. Outgoing Chancellor, Angela Merkel, worked with her successor, Olaf Scholz, to take emergency measures to contain the virus. The DAX index dropped 0.57% last week.

In the United Kingdom, Bank of England (BOE) is expected to halt its Quantitative Easing (QE) program that started after the 2008 financial crisis. The Central Bank has extensively used government bond purchases to inject liquidity within the UK economy in times of crisis. Since the beginning of the Pandemic, the BOE doubled the size of bond purchases to $1.2 trillion. As inflation rises faster than anticipated, more and more BOE members are pushing to end QE as soon as possible. In November, the UK Manufacturing PMI accelerated to 58.10 from 57.10 a month ago. The latest interest rate expectations index reading revealed that households expect a rate hike within the next three months. The FTSE 100 index gained 1.11% last week.
APAC
In China, Beijing is reportedly working on a bill to ban companies from going public on foreign exchanges using the variable interest entity structure without approval. On Sunday, the China Securities Regulatory Commission said that these rumors were “a complete misreading and misinterpretation of the regulations.” Last Thursday, the SEC announced plans to tighten auditing requirements for foreign companies listing on U.S. exchanges. China has always been reticent to let its companies open their book to the U.S. Public Company Accounting Board Oversight because of national security interests. As a result, the new SEC rule would increase odds of delisting for Chinese ADRs. The Hang Seng index dropped 1.3% last week.
In Japan, the Manufacturing PMI expanded in November from 53.20 a month earlier to 54.50 as output and new orders rose at faster rates. Despite the improvement in volume orders, Japanese manufacturers continued to be affected by supply chain disruptions and inflation as input costs soared to a 13-year high. Bank of Japan (BOJ) projects inflation will rise to 1% by mid-2022. Policy maker Hitoshi Suzuki said in a speech that the BOJ “will continue to seek room to further improve monetary policy by carefully weighing the effect and cost of monetary easing.” The Japanese Yen remained stuck in a tight consolidation range as investors alternated between risk-on and risk-off sentiment. The NIKKEI 225 dropped 2.51% last week.
Emerging Markets
In Brazil, the President of the Central Bank of Brazil said that the risk premium is rising on growth and debt concerns. Bank of Brazil sees the economy growing between 2.5% and 3% a year with a benchmark interest rate at 7%. The consensus forecast is less optimistic, with 0.93% GDP growth estimate for 2022 and 11% Selic rate for the same period. In November, the Brazil manufacturing PMI decreased to 49.8, which is the lowest level since May 2020. According to IHS Markit, slowing factory orders and production were a drag for manufacturers. Brazilian stocks rose 2.78% last week.
In South Korea, National Assembly’s finance committee agreed to delay cryptocurrency tax on gains by one year to 2023. A few months earlier, South Korea introduced a new regulation on crypto exchanges that requires exchanges to be pre-approved by the Financial Intelligence Unit before opening to the public. This new rule led over 60 crypto exchanges to suspend their services as they failed to meet legal requirements. Bank of Korea plans to use its legal authority to monitor crypto trading volumes made through bank accounts, citing monetary risks. The KOSPI index gained 1.09% last week.
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