Market Update from the Global Asset Allocation Team – December 2021
Volatility resurfaced in November, with unnerved investors weighing the impact of the omicron virus on the global economy and signs that the Federal Reserve may accelerate its efforts to curb inflation. With omicron now circulating across the globe and reliable empirical data about the transmissibility and severity of the strain not yet available, investors will likely need to brace for weeks of uncertainty and more sporadic bouts of financial market volatility as they await clarity on the threat posed by the new variant. This latest health risk adds to the wall of worry that investors are already contending with, including elevated inflation, monetary policy normalization, and slowing growth.
Global equity markets retreated in November, with all major benchmarks contributing to the monthly decline. Developed markets outperformed their emerging market peers. The S&P 500 managed to fare better than other regional indices as heavyweight sectors such as technology and discretionary delivered positive results and countered weakness elsewhere across the market. The S&P/TSX also pulled back amid a steep drop in the energy sector, while international developed stocks were dragged lower by a huge Covid outbreak in Europe and the prospect for another round of lockdowns.
Fixed income markets generated positive results as risk appetite wavered and prompted investors to flock to the safety of government bonds amid concerns that the new Covid strain may spread globally and dampen economic growth. Yield curves flattened, with the U.S. 10 year treasury yield falling 11 basis points to 1.44%, while the 2 year treasury yield rose by 7 basis points to 0.57% as investors ramped-up their wagers for an earlier start to the rate hiking cycle following the strongest U.S. inflation print in over three decades and a hawkish pivot at the Federal Reserve. Of note, Chair Powell took an uncharacteristically hawkish-leaning turn and said officials should consider removing pandemic support at a faster pace, potentially setting the stage for an earlier fed funds liftoff. Moreover, he went on to say that its time to retire the word “transitory” in describing the inflation outlook.
The US dollar strengthened against most of its major trading partners, thanks to a flurry of robust U.S. economic data that boosted expectations for an accelerated path of policy normalization. The greenback also thrived as nervous investors sought out a refuge in the safe haven currency. By contrast, the Canadian dollar depreciated by 3% alongside the steep collapse in crude oil prices and as traders reduced exposure to commodity-driven currencies in the wake of the renewed Covid threat. This marked the worst monthly drop since the depths of the pandemic in March 2020.
Finally, crude oil sunk into a bear market after major consuming nations led by the U.S. released crude from strategic reserves, while investors also contemplated risks posed by the new omicron variant and its impact on global energy demand. Gold posted a narrow decline as Federal Reserve officials hinted at a more rapid removal of pandemic-era stimulus in response to accelerating inflation, which buoyed the US dollar and blunted support for bullion.