THE emergence of Omicron halted a week of positive news flow in its tracks.
Before Thanksgiving in the US, the market had been gaining confidence that the Chinese government was taking steps to underpin economic growth and stem the risk of a sharper slowdown.
News that Jay Powell would be appointed for a second term as Fed Chair — coupled with talk of faster tapering —bolstered the view that the US central bank was not falling behind the curve on inflation.
Then Friday saw a sharp risk-off trade after the WHO flagged the Omicron mutation as a variant of concern.
As a result the S&P 500 ended the week down 2.18% and the S&P/ASX 300 lost 1.64%.
Stocks related to the re-opening fell far further. Commodities were generally down (except iron ore), and US 10-year government bond yields fell 7bps.
Prior to the WHO announcement, Covid concerns remained centred on Europe.
Austria re-entered full lockdowns, though other countries resisted this move. Hospitalisations continue to remain very low.
Although the health outcomes in Europe remain encouraging, this wave is being felt in stock prices. Even prior to the Omicron news, re-opening stocks in Europe were under pressure from the latest wave and consequent mobility restrictions.
Find out about
Crispin Murray’s Pendal Focus Australian Share Fund
The risk with Omicron is that it may make vaccines less effective.
It has a spike protein dramatically different to the original variant on which the vaccines were based. The spike protein is the component of the virus that binds to cells. Because of these mutations Omicron could have increased resistance to vaccines — plus greater transmissibility and severity compared to other variants.
The WHO said it will take weeks to better understand the efficacy of current vaccines as well as Omicron’s severity in terms of health outcomes and hospitalisation.
Vaccine maker BioNTech said initial lab results on the variant could come within two weeks. Pfizer indicated a variant-tailored vaccine could be available about 100 days after genetic sequencing.
In Australia mobility rates continue to rebound at a similar rate in Victoria and New South Wales. This is despite the fact that new daily cases in Victoria have plateaued at a far higher rate than NSW.
Jerome Powell was reappointed for a second term as chair of the US Federal Reserve. Lael Brainard replaced Richard Clarida as vice chair.
The markets welcomed this news. Powell’s more hawkish bent (compared to Brainard) is seen as reducing the risk that the Fed would be too loose in the face of inflationary pressure.
This narrative was reinforced by signals from other Fed members that it could withdraw support more quickly from the economy to deal with rising inflation.
Vice Chair Clarida noted they will be watching data between now and the December meeting closely and may have a discussion about accelerated tapering if warranted.
Fed Governor Christopher Waller called for tapering to be possibly done by April, making way for a possible interest rate hike in Q2.
The key argument remains that a combination of easing supply bottlenecks, slowing wage gains on the back of rising labour participation and faster productivity growth ought to bring inflation down without the Fed having to act more aggressively.
Three to six months ago an acceleration of tapering would have been met with great concern by the markets.
But rhetoric from the Fed governors will be priming the market for just such a move. Tapering could be over by mid-March. Rate rises in 2022 are now baked in by the market — perhaps as early as June.
US data prints were generally positive. US Initial Jobless Claims came in at 199,000, well below consensus. It is expected to reverse to about 250,000 before resuming a downward trend to pre-Covid levels of about 210,000.
A re-rebound in existing homes sales continues, rising from 6.2 million to 6.34 million. Consensus expectations were 6.2 million.
The percentage of cash buyers — as opposed to mortgages — has risen from 19% to 24% year-on-year.
Low inventory means prices are still soaring, up 18% annualised in the three months to October. This ensures the rent component of the CPI will continue to rise for some time yet.
There have been some notable developments in commodity markets.
Over the weekend Peruvian Prime Minister Mirtha Vasquez announced her government planned to close four gold and silver mines that have had conflicts with local communities.
Peru is the world’s second-biggest copper producer after Chile, accounting for about 10 per cent of 2021 global production.
OPEC+ has indicated they see the release of strategic reserves by countries such as the US as unjustified in current conditions and they may respond with higher production when they meet next week.
Fund Manager of the Year
Bonds had been selling off very calmly and modestly over the course of the prior week, rallying very strongly on Friday with US 10-year government yields up 15bps.
More generally the underperformance of the non-mega cap tech stocks in the US continued last week.
There was very little in the way of stock-specific news for the Australian bourse.
Materials continued their recent strength with increasing comfort that China was addressing the growth problem they have engineered.
The iron ore miners were among the week’s best performers. Fortescue Metals (FMG) was up 11.12%, Mineral Resources (MIN) +5.20%, Rio Tinto (RIO) +4.66% and BHP (BHP) +4.33%.
AMP (AMP, -11.89%) was the weakest on the ASX 100 after management flagged impairment charges.
Tech names were generally weaker. Friday’s Omicron news saw re-opening stocks such as Qantas (QAN, -8.76%) hit hard.
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 12 years of its 16-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at November 29, 2021.
PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.
An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation.
The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.
Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance.
Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections.
For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com