Global Markets View - Nov 26, 2021
2-min read to stay updated on global markets and become better investors
US
* U.S. markets were closed for Thanksgiving.
* Market is now pricing in an accelerated tapering and more than 2 rate hikes in 2022 leading to rising yields and a stronger dollar. There is a good chance that the Fed will indeed announce a faster pace of tapering at the December FOMC meeting – especially if the next inflation and employment reports are strong. However, Chair Powell will probably also reiterate that the tapering decision is separate from the rate hike one. Regarding the latter, the Fed is awaiting further progress on the labor market front before hiking interest rates. Unless the current elevated inflation rate poses a risk to long-term inflation expectations – i.e. the 5 year/5 year forward TIPS breakeven inflation rate surges above the Fed’s comfort zone of 2.5% – then the FOMC may favor a later rate hike than current market expectations. Inflationary pressures are expected to ease next year which will reduce fears that the economy is overheating. Thus, ultimately the decision to increase the pace of taper may not necessarily result in an earlier liftoff date.
* At 21.5x forward earnings, the S&P 500’s multiple is currently elevated. However, earnings growth is expected to become the driver of equity returns going forward. First, although US economic growth has decelerated, it will stay above trend. Even though consumer sentiment is being weighed down by higher inflation, spending is extremely robust and is supported by healthy household balance sheets. This dynamic will ultimately help corporate revenues. Furthermore, equity buybacks are on the rise which reduce the share count and thereby boost EPS.
* That said, operating margins are expected to contract. Corporate pricing power has deteriorated while both input costs and labor costs are rising. Several big box retailers have already revealed that they are reluctant to pass on higher costs to consumers which will dent profits going forward. Thus, US equity returns are likely to slow next year even though TINA, FOMO and buy-the-dip still dominate the market psychology and will therefore continue to buoy equities.
* Brent crude remained at $82.2 after a turbulent few days in which the US said it would release millions of barrels of oil from strategic reserves in coordination with China, India, South Korea, Japan and Britain to try to cool oil prices after calls to OPEC+ to pump more went unheeded. Gold rose to $1,791.
Europe
* With U.S. markets closed for Thanksgiving, focus was trained on Europe where a surge in COVID-19 cases is raising the prospect of lockdowns going into the Christmas shopping season. A tech shares bounce carried European equities higher on Thursday.
* Rising infections have prompted a handful of countries to introduce new Covid restrictions. Italy announced that it will introduce tighter Covid measures. Germany has narrowly avoided another lockdown with the incoming coalition reportedly wanting to wait and see if tighter Covid passport rules help to alleviate rising cases there.
* Germany’s third-quarter GDP grew by 1.7% qoq, fractionally below expectations. Germany’s GFK consumer sentiment barometer showed that spiking inflation and the surge in Covid-19 cases is weighing on consumer morale heading into December. The survey fell to -1.6 points from a revised 1.0 in November.
Emerging Markets (EM)
* EM saw some relative calm after a turbulent few days that has seen Turkey's lira battered again, Russia and Ukraine tensions rise, and Mexico's president stoke worries about central bank independence by installing a virtual unknown at the helm.
* The U.S. dollar is making new highs (Dollar Index at 96.8) and that is a headwind for EM equities.
India
* India markets closed higher on Thu amid volatility and weak global markets, as rising COVID-19 cases in Europe kept investor's sentiment in check. Benchmarks traded higher and rebounded on the back of consistent buying support in index heavyweights - Reliance, ITC and Infosys. Barring Autos, banks, PSU banks all the other sectors were in the green, with the energy index up 2.5%. The broader indices were in line with their gains relative to their larger peers with the MidCap index gaining 0.7% and SmallCap index too rising 0.9%.
* Rating agency Moody’s expects India Inc to show significant EBITDA growth in next 12-18 months. Growing government spending on infrastructure will support the demand for steel and cement. Also, rising consumption, push for domestic manufacturing and benign funding conditions will support new investments.
* An analysis of the 2QFY22 management commentary highlights continued margin pressure, price inflation, patchy top-line sentiment (+ve Discretionary/industrials/banks; -ve staples) and a divergence in IT, where management is increasingly cautious on margins. Increasing earnings concerns could lead to a narrower market performance going forward.
* With the earnings season out of the way, Indian markets are also likely to be focused on global markets and the Fed’s move on tapering. Even locally, inflation fears are on the rise; the RBI might have to begin tightening earlier than anticipated. In the short term, global events and local inflation is likely to decide the course of the market.
Source: ABSLAMC Research