A Week in the Markets: 6th Dec

Dow Jones Industrial Average

5D: -0.91%, 1M: -4.81%, 3M: -2.23%, 1Y: +14.4%


US equities started the week relatively strongly as they rebounded from last Friday’s sell-off, seeing the Dow Jones finish up 0.7% on Monday. Biden’s reassurance that new lockdown measures were “off the table” in wake of the new Omicron variant helped markets settle down from Friday’s panic, although Jay Powell’s comments that the new variant could pose a threat to the Fed’s mandate dampened the mood slightly. US indexes then got dragged down on Tuesday by cyclical stocks due to further Omicron concerns. This was exacerbated by Powell’s retirement (finally!) of the phrase ‘transitory’ when describing the current inflationary environment, as well as suggesting that the Fed could accelerate its tapering of bond purchases. Further concerns about Omicron cases and inflation spooked the markets on Wednesday, although the Dow Jones ticked up on Thursday after unemployment fell more than expected. However, Friday saw a weaker than expected November jobs report and the Dow finished down 0.91%% for the week.


Next week will likely see another volatile week for US equities as markets keep a close watch on Omicron developments and the intention of the Federal Reserve. If the new variant plagues US recovery and enforces new lockdowns, investors will sell off equities and move towards safer assets such as gold. However, recent data has suggested that it is less deadly than the Delta variant. The big news for the week ahead will be Friday’s release of the November CPI data. Economists expect a 0.6% rise for the month and a 6.7% increase year over year. If inflation is higher than predicted, concerns will be reignited that the Fed could hike rates earlier than expected. Jay Powell’s comments earlier this week about a potential acceleration of bond purchase tapering demonstrates a more hawkish outlook from the Fed. If they do act to quell inflationary concerns, higher yields will weigh on tech and growth stocks with greater valuations, although cyclical stocks would benefit.



FTSE 100

5D: +1.11% 1M: -1.75% 3M: -0.22% 1Y: +8.73%


The Index mildly bounced back on Monday as investors had time over the weekend to digest the news of Omicron, and BT Group jumped following a report of a takeover interest.

Oil majors also added to gains as investors speculated OPEC+ may pause an output increase. EasyJet slid on Tuesday after reporting softening in demand as the latest outbreak of Covid-19 forced customers to cancel near-term breaks. Broader travel and leisure stocks also sank. The Index rebounded mid-week as Omicron fears eased supporting oil and leisure stocks. However, the rebound did not last after several countries reported cases of Omicron and central bankers warning inflation may not be transitory after all, adding to the downbeat mood. Banking stocks slid amid uncertainty about whether the Bank of England will hike rates this month amid the impact of Omicron on the economic activity. Despite the Index falling further on Friday, it posted an overall weekly gain of 1.11%.



Looking ahead into next week, we have several economic data releases. Starting the week off with UK construction PMI data. It is expected to fall from 54.6 to 52. The figure could possibly come out in line with expectations as supply imbalances and Brexit trade frictions continue to ensue. To end the week, we have UK GDP (y-o-y) and (m-o-m) figures coming out; both figures are expected to be 0.2% below previous figures. The figures may not come out in line with expectations and we could see a mild increase in GDP as last week’s composite, services and manufacturing PMI came out well above expectations, expansion in those sectors will translate to higher GDP. However, it is also important in the coming week to keep a close eye on the developments of Omicron and how effective the current vaccinations are against the new variant. If fears about the variant are realised, we could see the Index slump further.



USD/TRY

5D: +10.4%, 1M: +41.4%, 3M: +64.7%, 1Y: +75.6%


This week marked lira’s another historical record low at 13.86 against the dollar, closing at 13.62. The sharp decline was attributed to another speech by President Erdogan during his interview with the state broadcaster TRT on Tuesday. He once again defenses the cut of interest rate to fight inflation and support exports, ending November with lira losing its value of around 28% in November alone. In addition, Turkey’s finance minister has asked to resign this week and been replaced by President Erdogan’s loyalist. The resignation came right after the central bank intervened in the foreign exchange market, hoping to stabilise the currency.


Lower inflation is what President Erdogan expected from his unconventional monetary policy; however, Turkish inflation accelerated for a sixth month in November to its 3 years high, 21.3%. The high inflation continued while the lira kept falling, which triggered central bank intervention this week when USD/TRY was approaching 13.9. If the central bank was trying to defend the line at 14, it is expected to see more central bank intervention next week as another rate cut is expected in the coming weeks. The data released this week showed Turkey’s economy grew 7.4% year-on-year in the third quarter of 2021, which Erdogan believed he was on the right track to ease inflation and break the exchange rate trap soon.


Looking ahead next week, the strong demand in US economy and the drop in the unemployment rate in US continue to strengthen the dollar. In contrast, the Turkish lira is expected to keep on weakening after Fitch downgrades the country’s outlook.



Gold

5D: -0.47%, 1M: -1.98%, 3M: -2.51%, 1Y: -3.15%


It was a strong start to the week for gold, with prices breaking back up above $1800/oz on Tuesday. The price rise came amidst Omicron worries and increasing concerns regarding inflation levels as Fed chair Jay Powell retired the use of the phrase ‘transitory’ when describing the current inflationary environment. However, gold crashed hard on Tuesday evening down below $1770/oz. Powell issued a hawkish statement that the Fed will likely discuss speeding up its taper plans, suggesting also earlier interest rate hikes which would raise the opportunity cost of holding gold. Meanwhile, some analysts suggested that the resultant stock market drop off from the Fed’s statements led to investors selling off gold to cover their margin calls. By the end of the week, gold did recoup some of its losses thanks to weak US jobs data, although it still finished down 0.47% for the week.


As demonstrated last week, gold prices remain in a volatile period. The main trends determining price outlook will be the impact of the new Omicron variant and the actions of the Fed. If the market sentiment on intensifying Omicron concerns worsens, gold could find some support as a hedge against risk as investors move away from risky assets. Meanwhile, the actions of the Fed will remain highly integral to the price of gold. As inflation and speculation continues to rise, gold prices will rise because it moves in-line with inflation and inversely to the strength of the dollar. This was seen early on Tuesday as gold prices increased when Jay Powell retired the phrase ’transitory’ when referring to inflation. However, if the Fed acts on this and implements Hawkish policy initiatives such as hiking interest rates, gold prices will tumble because rising bond yields increase the opportunity cost of holding gold.



Thanks to Benjamin Turner, Sadia Saeed, Sam Perrett & Thomas Lee for your in-depth analysis!


All images are sourced from TradingView.com.

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