Stock Markets

The large-cap benchmarks recorded gains for the week on the back of a late-week rally, and only after the major indexes corrected by more than 10% from the recent peaks. Lagging behind the large caps is the small-cap Russell 2000 Index which closed the week down by almost 20% from its November high, barely avoiding a bear-market scenario. Volatility was at its highest since the introduction of the pandemic, as measured by the Cboe Volatility Index (VIX). There was a strong upward surge among energy stocks due to international oil prices rallying above $90 per barrel. Oil supply worries are impacted in part by the amassing of Russian troops at the border with Ukraine.

Also driving volatility are investor worries that the Federal Reserve may be compelled to raise short-term interest rates expeditiously to try to control a fast-rising inflation rate. Wall Street analysts are apparently focused on plans by the Fed to trim its balance sheet by selling off its holdings of Treasuries and agency mortgage-backed securities, more details of which Powell promised to disclose after the March meeting of the Federal Open Market Committee (FOMC). Currently, the Fed’s balance sheet amounts to $8.9 trillion which is larger than necessary, and therefore must be substantially reduced.

U.S. Economy

In March, the Fed is likely to raise rates for the first time since 2018 together with putting a halt to its balance sheet expansion. Overall, the economy shows signs of robustness with no recession foreseen. In the economic cycle, we are still in the midst of the current economic expansion. Economic growth will continue to remain above trend levels and corporate balance sheets are well-positioned to support an earnings growth rate in the range of 9% for the year. Credit markets, the traditional indicators of economic distress, are calm and credit spreads remain at low pre-pandemic levels. There is no sign of any likely corporate defaults, signaling a sound economic foundation despite the expected restrictive monetary policies and Fed balance-sheet tightening in the future. The underlying economic foundation is not likely to be derailed by any credit crunch, and the economic cycle may be expected to proceed through 2023, barring unforeseen systemic shocks.

Metals and Mining

If the past week were any indication, a volatile metals market lies in the future for investors. As the Federal Reserve adopted a hawkish stance on Wednesday, gold reacted to a possible rate hike in March. It should be remembered that a rise in interest casts a shadow over metals due to the expected opportunity cost of holding an asset that produces no yields. This early, the markets are pricing in a five-rate-hike for the year and a possible 50-basis point increase in March alone. On these speculations, gold fell roughly 3% since the Fed announcement. But analysts are wary of ruling off precious metals, because gold is traditionally a hedge against inflation, and presently the inflation rate is running at its highest in 40 years. This may provide a reason for profitable positioning in metals, as attested to by the World Gold Council which reported on Thursday that although investor demand for gold appeared dismal, demand still grew by 10% over the past year.

Last week, gold fell week-on-week by 2.39%, from the earlier week’s close at $1,835.38 to last Friday’s $1,791.53 per troy ounce. Silver also lost ground for the week, starting at $24.30 and ending at $22.47 for a decline of 7.53%.  Platinum began at $1,033.49 and closed the week at $1,013.50 per troy ounce, down by 1.93%. Palladium bucked the trend for precious metals, ending this week at $2,378.88 and the previous week at $2,111.19 per troy ounce for a gain of 12.68%. Among the base metals, copper lost 4.36% of its value, from the previous week’s close at $9,941.00 to this week’s close at $9,507.50 per metric tonne. Zinc ended the previous week at $3,635.00 and this week at $3,609.50 per metric tonne for a -0.70% dip. Aluminum began the week at $3,040.50 and ended at $3,082.50 per metric tonne for a gain of 1.38%.  Lastly, tin ended the week previous at $43,955.00 and this past week at $41,684.00 per metric tonne for a drop of 5.17%.

Energy and Oil

This week, Brent prices surged above $90 per barrel for the first time in the past seven years. The rally was pushed by several bullish factors, foremost among which is the low level of inventories. The low product reserve levels are the primary reason most banks forecast a target of $100 per barrel in the near term. This sentiment is spurred by the fact that US commercial stocks descended for the third time in a row. Next to inventories, a secondary reason is the possible escalation of the Russia-Ukraine confrontation which holds the attention of much of Europe. The scenario fuels speculation of the possible embargo of Russian oil from the market, thus hiking oil prices with another geopolitical premium. Additionally, the simultaneous scarcity of supply remains a concern in the global market, a concern that is confirmed by steep backwardation (this week, the Brent six-month market structure neared $7 per barrel). There is hardly any sign that the OPEC+ will be amenable to raising its production to more than it has committed to under the terms of the agreement. All in all, the outlook for the oil markets is bullish.

Natural Gas

Spot prices of natural gas fell at most locations for the report week from January 19 to January 26. The Henry Hub spot prices dropped to $4.37 per million British (mmBtu) thermal units at the beginning of the report week, to $4.74/mmBtu by the week’s end. International natural gas prices were mixed through the report week. The prices along the Gulf Coast plunged as liquefied natural gas (LNG) set a new weekly record for accounting for more than half of the total natural gas disposition in South Louisiana. Despite colder weather, prices in the Midwest also dipped, with the Chicago Citygate price sliding $0.39 from $4.65/mmBtu a week ago to $4.26 in the report week just concluded. The total supply of natural gas in the U.S. rose during the week due to increased imports. Total U.S. natural gas consumption increased across all sectors compared to one week earlier. US LNG exports are greater by five vessels this week compared to the week before.

World Markets

Share prices in European stock exchanges fell for the fourth consecutive week due to mounting concerns about interest rate hikes as well as the growing geopolitical tensions between Russia and the West. The pan-European STOXX Europe 600 lost 1.87% over the past week, while major indexes in Italy and Germany suffered similar declines. France’s CAC 40 Index also dropped 1.45%, while the UK’s FTSE 100 Index slid 0.37%. The yields on core eurozone, peripheral eurozone, and UK bonds rose on investor speculation that inflation will continue to rise and the monetary policy will continue to tighten. Regarding coronavirus restrictions, Denmark follows the lead of the UK, Ireland, and the Netherlands in lifting all COVID measures despite infections remaining at near record-high levels across the European continent. Sweden, Norway, and Finland have announced a similar easing of restrictions in the coming weeks.

Japan’s stock markets plummeted over the week as the Nikkei 225 Index lost 2.92% of its value and the broad TOPIX Index gave up 2.61%. Driving the correction was the announcement of the U.S. Federal Reserve to continue tightening its monetary policy. High-growth technology stocks led in the decline. Further weighing on investor sentiments in the decision by Japanese authorities to extend the quasi-states of emergency to more prefectures to address the record-high spread of COVID-19 cases and the omicron variant. The yield on the 10-year Japanese government bond ascended to 0.17% from the previous week’s 0.13%, mirroring U.S. Treasury yields which rose in response to the Fed’s hawkish outlook on interest rates. The exchange rate of the yen to the U.S. dollar weakened to JPY 115.55 from the earlier week’s JPY 113.68.

In China, stocks declined ahead of the weeklong Lunar New Year holiday. Also influencing sentiment was the hawkish tone of the Fed announcement by Jerome Powell, raising anticipation for a faster monetary tightening. The Shanghai Composite Index lost 4.6% during the week’s trading, while the CSI 300 slipped 4.5% as traders factored in as many as five trade hikes in the U.S. for the year. Such a development would impact many Chinese companies’ offshore borrowing plans. The CSI 300 plunged to a 16-month low during the week and has now entered bear market territory. It has descended by more than 20% from its peak in February 2021. Also triggering the market sell-off was a slew of profit warnings by mostly property sector companies. Many China-listed companies are set to release annual results next month, and the earnings announcements have further dampened investor sentiments. Reports on economic indicators showed profits of China’s industrial firms have grown at their slowest rate in more than 18 months due to a drop in demand.

The Week Ahead

In the coming week, among the important economic data to be released are the unit labor costs, hourly earnings, job openings, and job quits.

Key Topics to Watch

• Chicago PMI
• San Francisco Fed President Mary Daly speaks
• Kansas City Fed President Esther George speaks
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Job openings
• Job quits
• Construction spending
• ADP employment report
• Home ownership rate
• Initial jobless claims
• Continuing jobless claims
• Markit services PMI (final)
• ISM services index
• Factory orders
• Core capital equipment orders (revision)
• Nonfarm payrolls (month-to-month)
• Unemployment rate
• Average hourly earnings (month-to-month)
• Labor force participation rate 25-54

Markets Index Wrap Up

Stock Markets

The S&P 500 suffered its biggest decline in more than 14 months due to fears of rising interest rates and worries of economic growth challenges. Market closures on Monday in observance of the Martin Luther King, Jr. holiday truncated the trading week to four days. The Nasdaq Composite Index lost 7.5% by Friday, which is its deepest weekly plunge since the pandemic began. Technology stocks were weighed down by weakness in semiconductor shares. Similarly, the consumer discretionary sector was impacted by losses in the automakers and home improvement retailer stocks. Financial services shares were also dragged down by declines in financial heavyweights JPMorgan Chase and Goldman Sachs. Netflix shares plunged by more than 20% subsequent to its fourth-quarter earnings report.

Technical factors, rather than fundamentals, contributed to much of the week’s volatility in the exchanges. Many investors were trading equities as an overall asset class rather than trading on their earnings reports, as evident in the heavy flows in and out of index-focused exchange-traded funds or ETFs. Investors feared that more aggressive action might be taken by the Federal Reserve. Wall Street speculates that the Fed may announce at its March meeting that the federal fund’s target rate will be increased by 50-basis point (0.50%) instead of the incremental 25-basis point adjustments that have been the usual Fed action in the past. The increasing interest rate expectations have also tended to weaken growth forecasts.  

U.S. Economy

The broader path in 2022 appears to still be a positive one as the profit cycle does not seem to be at an exhaustion point. Corporate earnings will eventually become the main driver of stock market activity as the new interest rate regime will be discounted by investors, enabling equities to chalk moderate gains later in the year. The prospects of the 10-year Treasury rate rising to 2% is not seen to be a choke point for economic growth, since there has been no bear market in stocks that began with a 10-year Treasury rate below 4%, excluding the 2020 pandemic downturn. While eventually, a tighter monetary policy may precipitate the next economic and stock-market downturn, this is far from likely to occur in the short term. While sentiment may occasionally drive market activity, historically, earnings growth is a more powerful driver and reliable guide in the long term.   

Possibly the most likely adverse impact of higher interest rates will be a reduced expansion on valuations for equities, in the form of the price-to-equities (P/R) ratio. The prospects are not necessarily disastrous, however. A flat to slightly lower P/R ratio coupled with a tempered earnings growth rate could still yield modest dividends will be the likely scenario for 2022. Presently, corporate profit margins are treading record highs. Moving forward, profit margins may move slightly lower as a result of rising wage costs, but profit growth will continue to remain robust. It is critical, however, to pay attention to an unexpected slowdown in revenue gains or an accelerated pressure on expense growth resulting from continued inflation. These may pose threats to the current positive earnings-growth scenario.   

Metals and Mining

Oil prices are a key driver of inflation, which also in turn has an inverse relationship to metals. Therefore, as we monitor the price direction of metals, we must also keep a close eye on oil and energy. Oil prices have already increased by 10% this year, following a 55% surge in 2021. This is largely influenced by a downtrend in production and rising political uncertainty. While inflation, currently at its highest level in 40 years, is not a new development, investors are beginning to take it more seriously and factor it in as more than a temporary situation. This makes gold’s rise to above $1,830 per ounce as significant. In the past year, gold prices fell precipitously as real rates fell to record lows. Presently, investors are beginning to realize that the U.S. monetary policies will tighten with rising inflation, causing liquidity to dry up in the marketplace and earnings expectations to be driven down.

Over the past week, all precious and base metals prices ascended. Gold rose 0.96%, from the previous week’s close at $1,817.94 to the latest close at $1,835.38 per troy ounce. Silver climbed from $22.96 to $24.30 per troy ounce, a gain of 5.84%. Platinum rose week-on-week by 6.05%, from $974.53 to $1,033.49 per troy ounce. Palladium ascended from the earlier close at $1,881.50 to last week’s close at $2,111.19 per troy ounce for a gain of 12.21%. Among the base metals, copper gained 2.28% between the intraweek closes from $9,719.50 to $9,941.00 per metric tonne. Zinc increased by 3.24%, from $3,521.00 to $3,635.00 per metric tonne. Aluminum rose from $2,976.50 to $3,040.50 per metric tonne, a gain of 2.15%. Finally, tin surged from $40,351.00 to $43,955.00 per metric tonne for an intraweek gain of 8.93%.

Energy and Oil

In their outlooks for 2022, Morgan Stanley and Goldman Sachs forecasted crude oil prices to ascend to $100 per barrel this year, on the back of falling oil inventories and OPEC+ spare capacity erosion. The reports caused Brent to increase this week past the $90 per barrel level for the first time since 2014. The oil rally lost steam on Friday, though, as the geopolitical premium that was priced-in was discounted. Although forecasts of an expected oil shortage continue to recur, more crude supply is expected in the market in the coming weeks, particularly from Libya and Ecuador (after a month-long supply disruption, Libya will aim to maximize its output for 2022 at an average annual production level of 1.2 million barrels per day). In the futures markets, with the Brent M1-M12 spread at $8 per barrel, fundamentals in the oil market point to a drop from current prices rather than the resumption of the rally. By the end of last week’s trading, the global benchmark Brent came down to $88 from its earlier high, and WTI trended at $85 per barrel.

Natural Gas

During this report week from January 12 to January 19, natural gas spot price movements were mixed. The Henry Hub spot price increased from $4.59 per million British thermal units (MMBtu) at the start of the week to $4.74/MMBtu by the week’s end. International gas prices rose during this week, while the price of the February 2022 NYMEX contract decreased. Prices held steady along the Gulf Coast and the flows out of the region were moderate. In the Midwest, prices increased ahead of the anticipated winter storms. In the California market, reduced consumption and moderate temperatures resulted in lower prices, while prices in the Northeast are rising in response to the higher demand driven by the weather and tight supply to meet the heightened demand. U.S. liquefied natural gas (LNG) is down by five vessels this past week compared to the week earlier.

World Markets

Share prices in the European bourses closed lower this past week on the back of investor expectations that the European Central Bank (ECB) would raise interest rates in 2022, and that the Bank of England (BoE) may likewise adopt tighter monetary policies. The pan-European STOXX Europe 600 Index lost 1.40% in local currency terms. The major indexes mirrored this trend, with France’s CAC 40 Index weakening by 1.04%, Italy’s FTSE MIB Index sliding 1.75%, and Germany’s Xetra DAX Index giving up 1.76%. The UK’s FTSE 100 Index dipped 0.65%. Core eurozone bond yields slid lower as ECB President Christine Lagarde quelled concerns that interest rates will be increased this year. Intensified geopolitical tensions over Ukraine also influenced yields.  Peripheral eurozone bond yields followed core markets, but in the end, only moved sideways. UK gilt yields bucked the trend and rose slightly, as markets priced in the likelihood of a February BoE rate hike. This possibility firmed up as inflation recorded a 30-year high.

Japanese stocks ended negative for the week. The Nikkei 225 fell 2.14% and the TOPIX Index lost 2.62%. Weighing down investor sentiment was the new coronavirus spike nationwide, as a result of which Tokyo and 12 other prefectures were placed under a quasi-state of emergency by the government. The yield on the 10-year Japanese government bond dipped to 0.13% from 0.15% week-on-week. The yen gained strength, ending the week at JPY 113.96 compared to the previous week’s JPY 114.22 against the U.S. dollar. Japan kept its short- and long-term interest rates unchanged as the central bank maintained its quantitative and qualitative monetary easing with yield curve control. The bank will continue to pursue supportive monetary policies and will veer away from more restrictive measures.

Chinese markets posted gains for the week in response to the government’s stepping up monetary easing measures and signaled support for the troubled property sector. The Shanghai Composite Index inched up 0.1% while the CSI 300 chalked up a gain of 1.1%. At the start of the week, the People’s Bank of China (PBOC), without any prior announcement, reduced the interest rate on one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points to 2.85%. This is the first reduction by the central bank since April 2020. Chinese banks responded by cutting their loan prime rates for one- and five-year loans. The MLF rate is set by the central bank of China, which in turn is the de facto benchmark by which domestic lenders adjust their loan prime rates for new loans. The yuan ended the week unchanged at 6.34 per U.S. dollar after it ascended to its highest level since May 2018 earlier in the week. China’s recent currency strength is due to inflows from bond investors positioning for further rate cuts.

The Week Ahead

Inflation and housing data are among the important economic reports to be released in the coming week.

Key Topics to Watch

• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• S&P Case-Shiller national home price index (year-over-year change)
• FHFA national home price index (year-over-year change)
• Consumer confidence index
• Advance report on trade in goods
• New home sales starts (SAAR)
• FOMC statement
• Fed Chair Jerome Powell news conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Gross domestic product (SAAR)
• Final sales of domestic product (SAAR)
• Durable goods orders
• Core capital equipment orders
• Pending home sales index
• Real disposable incomes
• Real consumer spending
• PCE inflation (month-to-month change)
• Core PCE inflation (month-to-month change)
• PCE inflation (year-over-year change)
• Core PCE inflation (year-over-year change)
• Personal income (nominal)
• Consumer spending (nominal)
• Employment cost index
• UMich consumer sentiment index
• UMich 5-year inflation expectations

Markets Index Wrap Up

Stock Markets

As the official start of the earnings season begins, the large-cap indexes posted their second consecutive weekly loss to start the year, and the Nasdaq Composite its third. At the close of the week, financial shares showed weakness on Friday as a result of major banking companies reporting lower fourth-quarter profits. JPMorgan Chase and Citigroup released their financial results on Friday as they are typically among the first companies to do so in the earnings reporting season. Also coming under pressure were utilities, health care shares within the S&P 500, while the energy sector outperformed the rest due real estate, and to the renewed rise in oil prices back to their peaks in October.

While the initial earnings reports from banks appear to put financial shares under pressure, the outcomes remain solid. The pessimism seems to be due to the bar for this and other sectors being set high. Over the past three consecutive years, above-average returns were reported by the listed companies, setting their recent valuations relatively high compared to their own history. Some retracement is not only possible but likely, particularly after the post-pandemic catch-up. The S&P 500 earnings forecast is at 21% growth over the fourth quarter, which marks the fourth quarter that growth exceeded 20%. The consensus expectation for 2022 is for a deceleration in earnings growth while still retaining a robust 9%. Valuations may decline slightly which is in line with the historical performance after Fed-tightening cycles. Overall, the current earnings estimates are within reasonable expectation and may even surprise investors with upside potential if the economy continues in its above-trend growth.

U.S. Economy

The bull market is still expected to continue despite slowing economic growth, high inflation, and anticipated Fed rate hikes. These developments may slow returns and increase volatility, but economic growth will remain robust. The principal economic concern is still the rising inflation and concerns surrounding rising interest rates, with more Wall Street analysts opining that the Federal Reserve may increase interest rates four times within the year. Fed Chair Jerome Powell, during his Congressional renomination hearing last Tuesday, conveyed his intention that the central bank will commit to contain inflation without hesitation.

Other data that were released during the week were largely in line with expectations. The Labor Department reported on Wednesday that overall consumer prices rose 7% year-on-year, which is the most significant gain since June 1982 based on a 12-month cycle. The core inflation, excluding food and energy, climbed 5.5% which is the highest increase since February 1991. On Thursday, the core producer prices were reported to rise 8.3%, also a record figure since 2011. Analysts and policymakers are mostly convinced that the current inflationary trend is still temporary, but there has been speculation of a possible wage-price spiral (i.e., when higher prices trigger workers’ demand for higher wages that in turn prompts companies to raise prices). This remains mainly guesswork, however, as retail sales have dropped by 1.9% in December, which some analysts attributed to the Omicron variant. The coronavirus does not seem to be the reason, however, since online sales have also receded sharply and retail inventories rose 1.3% in November, a possible indication of easing supply problems.

Metals and Mining

The gold market continues to be impacted by the inflationary trend, much like a double-edged sword. While inflation is expected to keep real interest rates low, increasing consumer prices are triggering increased speculation that the Federal Reserve will soon adopt aggressive measures to slow the economy. As the Fed aims to conclude its monthly bond purchases in March, this is also the month when markets anticipate seeing its first rate hike. While this may present some challenges for the precious metals market, there is currently still much bullish sentiment in gold and silver this early in 2022.

Over the past week, gold spot prices rose by 1.19%, from the previous week’s close at $1,796.55 to Friday’s $1,817.94 per troy ounce. Silver climbed 2.64% from $22.37 to $22.96 per troy ounce, and platinum also realized a 1.28% gain when it closed at $974.53 from $962.20 per troy ounce. Palladium bucked the trend of precious metals, ending lower by 2.77% when it began the week at $1.935.20 and ended it at $1,881.50 per troy ounce. Base metals were also mixed as copper ended the week 0.75% higher at $9.719.50 from $9,647.00 per metric tonne. Aluminum rose 2.13% from $2,914.50 to $2,976.50 per metric tonne. Tin gained 1.32%, closing the week at $40,351.00 from its start at $39.826.00 per metric tonne. Unlike the other base metals, Zinc closed lower by 0.34% to end the week at $3,521.00 from the earlier week’s $3.533.00 per metric tonne.

Energy and Oil

China announced that it would release crude from its Strategic Petroleum Reserve at about the Lunar New Year as part of the US-led initiative to bring runaway oil prices under control. Despite this news, there was little reaction in the oil market over the past week which largely ignored its implications. There is still a significant bullish sentiment in line with a weakening dollar, supply issues from Libya, and lower than expected output from OPEC+. Aside from these reasons, the oil price rally appears to have gained impetus in reaction to reports of multi-year lows among product inventories. At present, refineries are still cautious about bringing their production to full capacity. Stocks are unlikely to be met with quick replenishment, making the global situation quite bullish for oil prices. On Friday, the global benchmark price for Brent hovered at about $85 per barrel and WTI approached $83 per barrel.

Natural Gas

This report week ending January 12, natural gas spot price movements ended mixed. The Henry Hub spot price increased to $4.59 per million British thermal units (MMBtu) on the week’s end from $3.79/MMBtu the previous week. The U.S. total natural gas supply rose week-over-week due to higher net imports from Canada, while the U.S. consumption of natural gas also substantially increased across all sectors for the second straight report week. U.S. liquefied natural gas (LNG) exports increased slightly by one vessel during this report week over the week earlier. Elsewhere in the world, spot LNG prices in Asia proceeded to plummet this past week due to sufficient inventories and the above-average warm weather, slowing down buying activity. Delivery prices for March 2022 have already reached $25/MMBtu.

World Markets

European stocks retreated on speculation that the U.S. Federal Reserve is close to tightening monetary policy sooner than the market previously factored in. the pan-European STOXX Europe 600 Index closed the week lower by 1% in local currency terms. France’s CAC 40 Index lost 1.06%, Germany’s Xetra DAX Index slid 0.40%, and Italy’s FTSE MIB Index gave up 0.27%. Going in the other direction was the UK’s FTSE 100 Index which advanced 0.77%. The core eurozone bond yields pulled back, mimicking the U.S. Treasury yields. Peripheral eurozone bonds and UK gilts generally tracked the core markets. The decline in gild yields appeared to have been moderated by data showing better than anticipated economic growth in November in the UK. Elsewhere in the region, the Netherlands is poised to ease its nationwide COVID-19 lockdown beginning Saturday, according to local news sources. Establishments dealing in non-essential goods and services will be allowed to open, although a cap on customer numbers will be imposed. The self-isolation period for individuals testing positive for the coronavirus will be reduced in the UK, Switzerland, and Norway. Regarding the economy, the industrial output in the eurozone expanded 2.3% sequentially in November, well exceeding a consensus forecast of 0.5%.

In Japan, the stock market returns turned south for the week as the Nikkei 225 Index fell 1.24% and the broader TOPIX followed suit, losing 0.90%. The leading cause for the underperformance appeared to be investors’ worries about the U.S. Federal Reserve’s aggressive monetary policy tightening. This concern led investors to prefer value stocks rather than high-growth stocks, particularly technology counters. Investor confidence was also dampened by the extension of the ban by the Japanese government of nonresident foreigners’ entry into the country until the month’s end. There is also a possible sixth coronavirus wave likely to hit Tokyo, the country’s capital. The yield on the 10-year Japanese government bond (JGB) advanced to 0.15% from 0.12% in the week prior. The JGB yields broadly tracked the U.S. Treasury yields upward on concerns that the Fed may increase interest rates as soon as March in response to inflationary trends. This direction generally runs counter to the dovish signals by the Bank of Japan (BoJ) which continues to commit to monetary easing. The BoJ is not expected to raise its short-term interest rate in the near term. The rising JGB yields boosted the yen, strengthening it to JPY113.8 from the previous week’s JPY 115.6 against the U.S. dollar.

Chinese markets also followed Japan downwards during the week, with the Shanghai Composite Index losing 1.6% and the CSI 300 Index retreating 2% on the back of refinancing challenges faced by the country’s property sector. The largest banks have increasingly become more selective regarding the funding of real estate projects by local government financing vehicles. Some developers rushed to acquire the consent of their creditors for maturing extensions and exchange offers. Other developers have pursued more intensive fundraising campaigns since more traditional financing routes such as presales have become unsustainable. Yields on China’s 10-year government bonds dropped to 2.809% from the previous week’s 2.837%. The yuan closed in domestic trading at RMB 6.3435 per U.S. dollar, from the earlier week’s RMB 6.376. This was the currency’s strongest close since May 2018.   

The Week Ahead

The LEI index, building permits and housing starts are among the important economic data being released this week.

Key Topics to Watch

• Empire State manufacturing index
• NAHB home builders index
• Building permits (SAAR)
• Housing starts (SAAR)
• Philadelphia Fed manufacturing survey
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Existing home sales (SAAR)
• Leading economic indicators

Markets Index Wrap Up

Stock Markets

The stock markets started off the year with an impressive rotation where growth sectors, including technology and discretionary stocks experienced a sell-off while the value sectors such as energy and financials held steady. Overall, stock prices descended from their record highs at the start of the week’s trading. Simultaneously, longer-term bond yields ascended. The growth and technology stocks, particularly the Nasdaq Composite, reacted adversely to expectations of higher interest rates. The increase in the implied discount on future earnings caused the Nasdaq Composite to plummet to its biggest weekly loss in almost a year. Within the S&P 500 Index, the technology and health care shares suffered the most, whereas the energy shares surged upward due to the rise of domestic oil priced toward the $80 per barrel level. Financial stocks also outperformed the rest of the market.

Although the S&P 500 climbed to a new high on Monday, only five of its 11 sectors realized any gains. Tesla accounted for most of the gains due to having reported more fourth-quarter deliveries than expected. Heavy-weight stocks accounted for most of the S&P’s outperformance because without the gains recorded by Tesla, Apple, and Amazon.com, all mega-caps in the index, the S&P 500 would have been unchanged for the day. The stellar performance on Monday notwithstanding, investor sentiment headed south on Wednesday after the release of the minutes of the Federal Reserve’s meeting held on mid-December. The minutes disclosed that faster and more aggressive increases in the interest rates are contemplated by the policy-makers, with the first quarter-point hike in the official rate to be announced by March.

U.S. Economy

The 10-year Treasury yields rose by 0.40 percentage points over the past week, reaching around 1.75%. The rise in yields commenced early in the week, but it was enhanced when the Federal Reserve released its minutes on Wednesday. The minutes implied that not only was the Fed contemplating speeding up its balance-sheet tapering process, but it was also allowing the balance sheet roll-over and decline earlier than previously anticipated. The market was surprised by the possible sudden liquidity drop in the system, especially in areas with higher valuations. The move reduced the margin for speculative assets in the new environment.

The recent unemployment rate appears to be improving and getting near the natural rate of unemployment set by the FOMC. There appears, however, some underlying concerns by the Fed as to whether the recovery will be broad and inclusive (to bring down the elevated levels of the Hispanic and African American unemployment rates), the participation rate will pick up, and the effects of coronavirus uncertainty on labor. Given these concerns, the Fed cannot possibly conclude that the labor market is in the clear, and therefore might not want to aggressively restrict monetary conditions unless more conclusive labor data emerges.

When the Fed meeting took place on mid-December, it is important to note that the extent of the omicron spread was not yet factored in. Due to recent developments, there are indications that consumption may have slowed, as travel and leisure activities have decreased in reaction to the spread of the variant in the U.S. It is less likely that the Federal Reserve will be included to adopt more aggressive measures in light of the slowing economy and elevated virus impacts.

Metals and Mining

On Friday, gold prices moved up from their three-week lows, in reaction to slower-than-expected U.S. jobs growth data for last month. This was despite the Federal Rate signaling faster rate hikes that initially set gold up for a weekly fall. Gold prices are highly sensitive to rising U.S. interest rates, which tends to increase the opportunity cost of holding a non-yielding asset such as bullion. The reaction of gold prices implies that the market is more concerned about the coming inflation risks prior to the FOMC meeting. Surging COVID-19 infections also appear to take its toll on investor optimism about economic recovery.

The spot price of gold dipped this week by 1.78% from $1,829.20 to $1,796.55 per troy ounce, The spot price of silver also fell this week by 4.03%, from $23.31 to $22.37 per troy ounce.  Platinum slid 0.68% from $968.75 to $962.20 per troy ounce, and palladium gained slightly by 1.59% from $1,904.84 to $1,935.20 per troy ounce. Base metals were also mixed for the week. Copper lost by 0.76%, dipping from $9,720.50 to $9,647.00 per metric tonne. Zinc pulled back 0.03% to close at $3,533.00 from the earlier week’s $3,534.00 per metric tonne. Aluminum, on the other hand, gained 3.81% from $2,807.50 to $2,914.50 per metric tonne. Finally, tin rose by 2.49%, from the previous week’s $38,860.00 to this week’s close at $39,826.00 per metric tonne.

Energy and Oil

Positioning for their largest weekly gain in three weeks is oil prices. Protests that have taken place in Kazakhstan have highlighted the fragile crude supply situation. The uncertainty of the immediate impact of the riots has pushed Brent prices significantly higher than the $80 per barrel level, even if the actual results of the unrest are difficult to estimate. Supply disruptions appear to be firmly on the table, considering that Libya is not likely to resolve its political dilemma anytime in the near future. It will most likely keep one-third of its nominal output frozen for an extended period. The rising crude prices are progressively reflecting the current oil production constraints, with Russian crude production stagnating for the last two months already.

Natural Gas

In recent days, the liquefied natural gas prices have surged in reaction to the lifting of price caps by the Kazakh government on the first of January. This sparked the initial demonstrations in a remote oil town on the coast of the Caspian Sea. The town is located in the oil-rich Mangistau region that provides roughly 25% of the country’s oil production. Uncertainties linked to this location will certainly impact natural gas prices in the region and possibly the world.

In the closing weeks of 2021, natural gas deliveries to the U.S. liquefied natural gas export terminals reached record levels. As the LNG facilities increased production to meet the surging demand in Asia and Europe, natural gas deliveries averaged 11.8 billion cubic feet per day (bcf/d) in December.

World Markets

European shares corrected downwards in light of concerns that the central banks are likely to wind down asset purchases and increase interest rates at an accelerated pace to control rising inflation. The pan-European STOXX Europe 600 Index closed the week 0.32% lower, although the main equity indexes in Germany, Italy, and France realized subtle gains. The FTSE 100 Index in the U.K. rose by 1.36% on the back of a rally by banks and energy stocks, involving industries where some of the largest capitalized stocks are included. The core eurozone bonds rose in tandem with the U.S. Treasury yields The minutes of the Federal Reserve’s meeting in mid-December indicated that a faster pace of rate hikes is needed. This resulted in a broad sell-off in developed market government bonds. Core yields surged on Friday in speculation of the rise in eurozone inflation data. UK gilt yields followed tracked core markets. The peripheral eurozone bond yields also increased as part of the global sell-off, although it faced additional upward pressure from reports of new supply in Italy. Furthermore, the coronavirus infections in Europe reached record levels, forcing countries to reimpose COVID restrictions although they fell short of instituting lockdowns.

Japan’s stock exchanges ended mixed for the week. The Nikkei 225 Index dipped 1.09% and the broader TOPIX Index advanced 0.17%. On the coronavirus front, the government placed three prefectures under quasi-states of emergency due to rising COVID-19 cases. Restrictions were returned for the first time since September 2021. Regarding monetary policy tightening by the Federal Reserve, worries about more aggressive measures announced by the Fed weighed down the prices of technology and other growth stocks. The yield on the Japanese 10-year government bond climbed to 0.14% from 0.07% at the close of the week earlier. This tracked the general rise in bond yields, holding around the high levels seen in April 2021. The yen weakened against the dollar to approximately JPY115.83 from the previous week’s close at JPY 115.11. Continuing weakness in the yen due mainly to the divergent monetary policy stance of the Bank of Japan compelled the Japanese Finance Minister to underscore the need for currency stability and the careful tracking of market movements that impact the economy.

In China, stocks ended lower for the week, with the CSI 300 Index descending 2.3% and the Shanghai Composite Index losing 1.7%. Causes may be traced mainly to the turmoil in the property sector and the more restrictive measures announced by the Federal Reserve in the middle of the week. The yield on China’s 10-year government bonds climbed to 2.837% from the 2.793% one week earlier, as investors factored in a reduced yield premium between China and the U.S. In currencies, the yuan weakened against the dollar in its largest weekly drop since the middle of September, reflecting the anticipated U.S. monetary tightening. The Chinese currency fell to a three-week low of 6.3832 against the U.S. dollar before it recovered to 6.376.

The Week Ahead

The PMI index and hourly earnings growth are among the important economic data to be released in the coming week.

Key Topics to Watch

• Wholesale inventories (revision)
• NFIB small-business index
• Consumer price index
• Core CPI
• Federal budget
• Beige book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Producer price index
• Retail sales
• Retail sales excluding autos
• Import price index
• Industrial production
• Capacity utilization
• UMich consumer sentiment index (preliminary)
• Business inventories

Markets Index Wrap Up

Stock Markets

The major stock indexes generally ended on a strong note on the back of a Santa Claus rally, suggesting that the gains for the week are technical year-end seasonal moves. The broad S&P 500 Index ended on a record high although the technology-based Nasdaq Composite moved sideways and closed the week flat. Trading activity was light as many investors remained sidelined, with S&P 500 volumes remaining at less than half their recent averages. The sectors that outperformed were the materials, utilities, and real estate sectors within the S&P 500. Those that underperformed were the larger information technology and communication services sectors, which when combined accounted for more than one-third of the S&P 500 Index. Investors appeared to shrug off the rising number of coronavirus cases, indicating that fears of a resurgence is waning. Hospitalization rates remained stable and the Centers for Disease Control and Prevention (CDC) on Wednesday shortened the recommended quarantine period for asymptomatic individuals who have tested positive for the virus, from ten days to only five days. However, flight cancellations and declines in airline stocks led to the cancellation of several flights.   

U.S. Economy

In the face of the threat of the omicron virus, consumers proved resilient and economic activity appeared only moderately affected. Weekly jobless claims were reduced close to their fifty-year low while continuing claims drew back more than was expected, touching the lowest level since the pandemic began. Also showing accelerated growth was an index of manufacturing activity in the Mid-Atlantic region. Pending home sales, however, bucked the trend and ended on the downside, apparently due to high prices and limited inventory disincentivizing buyers.

 It appears, though, that customers were motivated to spend on goods, if not on housing and durables. MasterCard’s compiled data indicated that holiday sales increased by 8.5% in December as compared to year-ago figures, recording the most impressive gains in the last 17 years. Sales exceeded pre-pandemic 2019 levels by as much as 10.7%. These data are indicative of easing supply and labor shortages for retailers and enabling them to pass the higher costs to customers. While retail stocks did well as a result of the indicators, the consumer discretionary sector was weighed down as a whole by declines in Amazon.com and casino and cruise ship operators. The latter was a result of a Thursday CDC advisory against cruise ship travel, even for those who are fully vaccinated.

Concerning U.S. Treasury yields, technical factors caused a modest rise in rates, characterized by light trading volumes during a week of few economic data released during the week. The 10-year U.S. Treasury note yield rose to 1.55% on Wednesday, an intramonth high. It retreated to approximately 1.50% by Friday morning, consistent with the trend for rates to generally correct from their increases earlier in the week.

Looking back at the year, there is reason to expect a continuation of the overall robust performance going into the new year. On many fronts, 2021 showed above-average performance for the economy. Stock market returns, economic growth, policy stimulus, and inflation performed strongly even as volatility remained well under control. The coming year will see a moderation in economic growth and market performance, however, as Federal Reserve policy settings and economic trends assume greater consistency with mid-cycle conditions. All-in-all, the gains over the past year still suggest that the coming year will be optimistic.

Metals and Mining

As of December 31, 2021, gold prices suffered their deepest annual drop in the last six years. In the face of a strengthening dollar, the investors are anticipating a year of tightening money supply in the face of the resurgent omicron coronavirus variant. Indicators point to an acceleration of the adoption of more restrictive measures by central banks. This is necessary to mop up the massive liquidity released during the pandemic to jump-start the economy. As the recovering economy whetted investors’ appetites towards riskier assets and curbed interest rates for safe-haven assets such as bullion, gold prices have eased around 4% in 2021. While bullion is regarded as a hedge against inflation that typically follows the release of stimulus money, rising interest rates will amount to growing opportunity costs of investing in gold, since precious metals bear no interest income.

Over the past week, the spot price of gold moved up 1.5%, from $1,810.26 per troy ounce to $1,829.20. Silver also rose, ending the week at $23.31 per troy ounce from the previous close at $22.87 for an increase of 1.92%. Not all precious metals fared well during the week, however. Platinum lost 1.26% when it closed at $968.75 per troy ounce from a previous $981.10. Palladium fell 2.23% from $1,948/32 to $1.904.84 per troy ounce.

Base metals also went sideways in directionless trading. The power shortage in China and Europe impacted aluminum prices, driving them up 40% for a second consecutive year of gains. For the coming year, base metals are expected to outperform based on demand-driven by energy transition in a supply-chain-bottleneck situation. Copper was up by 21% across 2021. It is expected to expand further in the coming year as a result of governments’ willingness to prioritize clean energy. For the week, copper gained 1.13% and zinc rose 0.20%, while aluminum and tin each lost ground by 1.35% and 0.10% respectively.

Energy and Oil

As the impact of the omicron variant continues to influence the global oil demand, the oil markets are positioned to see a strong end to 2021. Supply disruptions across several continents pushed oil prices to higher levels. Libya continues to withhold 300,000 barrels per day (b/d) from the market due to the resumption of political infighting. Ecuador is still in the process of repairing its pipeline system damaged in the floods. Nigeria is also dealing with unavoidable problems at the Forcados Terminal. These developments combined with news that U.S. crude inventories are facing another week-on-week decline, brought the WTI to $76.5 per barrel and the Brent complex rose to $79.5 per barrel.    

Natural Gas

 A severe power crunch swept across Europe to India and China in the past year due to record coal and natural gas prices. At the same time, Asian liquefied natural gas (LNG) rose more than 200% and the region’s benchmark coal prices grew 100%. Researchers determined that global LNG increased by 20 million tonnes per year in 2021, driven almost entirely by Asian demand. Chinese growth in LNG demand surged to 20%, making China overtake Japan as the world’s top LNG importer. This appears to be unsustainable, however, as constantly high LNG spot prices will possibly tend to dampen overall growth in demand, particularly in South and Southeast Asia as they are more price-sensitive markets.  

World Markets

In Europe, share prices rose on thin-volume trading as worries about the impact of the omicron variant abated and investor optimism regarding the continued economic recovery solidified. In terms of the local currency, the pan-European STOXX Europe 600 Index closed the week with a gain of 1.09% for an annual surge of 22.0%. The major indexes also rose as the UK, France, and Italy ended near their highest levels for the year. Germany’s Xetra DAX Index climbed by 0.82% week-on-week, France’s CAC 40 rose 0,94%, and Italy’s FTSE MIB gained 1.22%. UK’s FTSE 100 Index moved sideways with hardly any change. The surge in coronavirus cases across most of Europe approached record levels. Tighter measures were reinstated in France, the U.K., Italy, Portugal, Denmark, and Greece, to head off an anticipated increase in the spread of the virus during the New Year festivities. The omicron is now the dominant strain in Portugal, for which reason work from home will become mandatory in that country come January. In France, the work from home mandate will cover three days a week, while in the U.K. any further mandates have been held off pending an assessment of the impact on that country’s hospital care capacity before additional measures are adopted.

Japan’s stock markets were quiet over the holiday-shortened trading week, with the Nikkei 225 Index gaining a slim 0.03% and the broader TOPIX rising by 0.28%. As with the other markets, the spread of the omicron coronavirus variant through community transmission posed a disincentive to establishing a stronger presence in the market. Despite the suspension of the entry of foreigners into the country, the continued spread of the virus does not appear to be contained. Comparatively, the total number of cases does remain small when set against the fifth wave that caused the government to declare states of emergency in different territories in the country. The yield on the 10-year Japanese government bond rose to 0.07% from 0.06% during the week before. In the currencies market, the yen fell against the dollar to around JPY 115.1 from the earlier weeks’ JPY 114.4.

In China, 2021 was a year of volatility although the week ended with modest losses for the bourses. The large-cap CSI 300 Index slid 0.2% while the Shanghai Composite Index declined 0.1%. Investor sentiment was boosted somewhat by the positive manufacturing data and encouraging comments by Chinese officials regarding the country’s struggling property sector. On an annual basis, the CSI 300 Index lost by 5.2%, its worst performance over the last three years. The Shanghai Composite Index gained 4.8%, while in Hong Kong, the benchmark Hang Seng Index fell by 14%, its worst showing in ten years. The Hang Seng China Enterprise Index plunged 23% over the last year. The yield on the 10-year Chinese government bond dipped to 2.793% from the earlier week’s 2.846% and a deep descent from the 3.19% yield at the end of 2020. However, the yuan strengthened against the dollar to 6.3672 from the previous week’s 6.3709. The Chinese currency chalked up an impressive performance as the best in the region for the year, with a gain of 2% compared to the other Asian currencies which recorded losses.

The Week Ahead

Among the important data to be released in the coming week are the Consumer Credit, Unemployment rate, and Job openings reports

Key Topics to Watch

• Markit manufacturing PMI (final)
• Construction spending
• ISM manufacturing index
• Job openings
• Job quits
• ADP employment report
• Markit services PMI
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Trade deficit
• ISM services index
• Factory orders
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Consumer credit

Markets Index Wrap Up

Stock Markets

During the shortened trading week ahead of the Christmas holidays, stocks rebounded from the losses of the previous week. Investor sentiment was buoyed by prospects that the Omicron variant was not going to severely impact the economic recovery as earlier anticipated. As could be expected, trading volumes were low as many players were sidelined due to market closures on Friday ahead of the Christmas weekend. Stocks listed in the defensive utilities sector lagged the market while the consumer discretionary and energy stocks outperformed with the renewed optimism in the economic recovery moving forward. The beginning of the week started out tentatively, however, as the market sought its direction on Monday’s trading following the previous week’s downward momentum. Aside from Omicron worries, investors responded negatively to news over the weekend about Joe Manchin’s refusal to back Joe Biden’s 2 trillion dollar “Build Back Better” plan. But things turned for the better as the week wore on and evidence from South Africa’s early Omicron wave showed that the infections resulted only in mild symptoms and that cases seemed to be receding quickly. Further adding to renewed ebullience is the assurance from Joe Biden on Wednesday that there were no plans to return to lockdowns as a response to new coronavirus variants.

U.S. Economy

Moving forward into the new year, the developments surrounding the coronavirus will continue to chart the path of the economy. However, every new variant will cause a smaller negative effect on the response by policymakers as more medical solutions become available. Furthermore, governments are becoming more reluctant to impose severe restrictions on economic activity, and the public is also increasingly less receptive to such measures. Value investments are likely to benefit as the trend towards further economic expansion gains pace in 2022, and the Federal Reserve is poised to dial back its accommodative policies and the fiscal stimulus boost dissipates. A catch-up potential continues in some international markets where investments continue to be underpriced, such as international small and mid-cap assets and emerging market equities.

The Fed stimulus has aided in stabilizing the credit system through lowered borrowing costs and business and consumers. This excess liquidity, in the form of cheap money, has encouraged aggressive market moves that are typical in a bullish market. Speculative gains made in meme stocks (GameStop, BlackBerry), cryptocurrencies, and non-fungible tokens (NFTs) have whetted players’ appetites for technical plays rather than fundamental values. In 2022, real yields (after inflation) are expected to rise, and with the expected rate hikes mopping up the excess liquidity will likely come bouts of volatility in the speculative market segments. This does not necessarily pose a systemic threat to investors, but it will encourage tricky investor positioning as the year progresses. A clear-headed strategy that focuses on high-quality investments and diversification across asset classes will be the recommended approach in this bull market.

Metals and Mining

Over the past week, trading has been generally listless as there remains no strong motivation to position in the markets ahead of the holiday season up to the new year. Gold rose by 0.68% from $1,789.11 the previous week to $1,810.26 per troy ounce at this week’s close. Silver gained 4.84% when it rose from $22.37 to $22.87 per troy ounce. Platinum also edged higher beginning at $935.80 per troy ounce and closing at $981.10 for a 4.84% appreciation. Palladium closed the preceding week at $1,788.73 and this week at $1,948.32 per troy ounce for a gain of 8.92%.

Base metals also traded within narrow margins. Copper rose by 1.85% from $9,437.50 to $9,612.00 per metric tonne. Zinc gained 4.13% from the previous week’s close at $3,387.00 to the past week’s close at $3,527.00. Aluminum began from its earlier close at $2,724.50 to its close this week at $2,846.00, registering an increase of 4.46%. Tin gained 1.27% from its close in the previous week at $38,410.00 to this week’s close at $38,899.00.

Energy and Oil

Oil prices appeared to depart from their previous week’s attachment to the Omicron news updates as they reacted more closely to foreign supply developments. Prices have moved upwards as a result of the overall decline in U.S. crude stocks and the disruption in the Libyan supply. Strong demand triggered a week-on-week decline in inventories by 4.7 million barrels, despite U.S. crude supply constantly maintained at approximately 11.6-11.7 million barrels per day (b/d). Another episode of the domestic power struggle in Libya has reduced supply by about 300,000 b/d of crude almost instantly, providing a golden opportunity for those bullish in the oil sector. Brent traded around $75.50 per barrel as of Tuesday, even as the U.S. benchmark WTI hovered around $73 per barrel.

Natural Gas

Weighed down by forecasts for a milder winter ahead and reduced demand for heating than formerly expected, U.S. natural gas futures fell more than 6% on Thursday. The price drop was also no doubt further influenced by a smaller-than-usual storage withdrawal over the past week. The U.S. Energy Information Administration (EIA) reported that 55 billion cubic feet (bcf) of gas withdrawn during the week ending December 17 were accounted for by utilities, which is close to the 56-bcf decline analysts forecasted. The decline in U.S. prices came after European gas prices plunged more than 15% as warmer weather over the next few days and expectation of the arrival of several liquefied natural gas (LNG) tankers offset low exports from Russia.

World Markets

Major equity markets in Europe ended the shortened Christmas week significantly higher. The pan-European STOXX Europe 600 Index rose by 1.35% in local currency terms over the five days ending December 23. Germany’s Xetra DAX Index inched up 0.77%, Italy’s FTSE MIB climbed 0.87%, and France’s CAC 40 Index rose 1.44%. The UK’s FTSE 100 Index gained 1.55%. The week began on negative news regarding the rising cases attributed to the COVID-19 omicron variant and the tighter restrictions imposed to contain its spread. The Netherlands went into lockdown on Sunday and travel constraints were adopted in Austria, Germany, and France, further weakening investor confidence.

Also adding to the dour sentiment was the deadlock in the U.S. Congress over President Biden’s proposed $1.75 trillion Build Back Better spending plan. Despite the initial negative reaction, investor confidence picked up towards the week’s end when Moderna announced that lab tests show that its coronavirus vaccine booster dose is effective against the omicron variant. In the meantime, the European Central Bank (ECB) announced that it would keep its main policy rates at current levels. It elected instead to end its emergency asset purchase program in March but ease into a smooth transition by temporarily increasing its Asset Purchase Program. The exit from its accommodative monetary policy would be slow to calm business and consumer sentiment and threats of the variant to further economic growth.

Japan’s bourse took a tumble on the opening day of the week, further extending the deep plunge that ended the week before due to fears of the omicron spread, stagflation, and an impending economic slowdown. For the remainder of the week, however, stocks climbed on slow volume, bringing the NIKKEI 225 and the broader TOPIX to 28,798.4 and 1.989.4 points respectively when trading ended Thursday. Worries that strict restrictions may be imposed to slow the spread of the omicron variant fueled speculation that the global economic recovery may be obstructed. After the initial sell-off, the technology and pharmaceutical sectors led the rebound. The rally was a welcome development in the face of the rate hike by the Bank of England in the previous week and a possibly more aggressive rate increase in the U.S. by 2022. Volatility impacted both the currency and bond markets during the week.

China’s markets saw little change throughout the week up to the end of trading on Thursday. There was little reaction to an expected key rate cut by the central bank, the first in twenty months. The large-cap CSI 300 Index dipped by 0.1%, and the Shanghai Composite Index rose 0.3% from their previous close during the preceding Friday. The People’ Bank of China (PBOC) cut the one-year loan prime rate (LPR) on Monday, for the first time since April 2020. However, the five-year LPR remained unchanged. The LPR is not an official policy rate but it is based on the loan rates charged by 18 domestic lenders for the best customers. As such it is regarded as China’s de facto benchmark funding cost. The PBOC’s measure was expected by economists after the central bank cut its required reserve ratio in December. This easing measure diverged dramatically from policy direction in the U.S., where the Fed indicated that its monthly asset purchase plan would end sooner than expected, signaling further increases in the interest rate for the coming year.  China’s property sector remains worrisome as it was impacted by volatility for the week.

The Week Ahead

Among the important data to be released next week are the trade in goods advance report, pending home sales index, and initial and continuing jobless claims.

Key Topics to Watch

• S&P Case-Shiller U.S. home price index (year-over-year)
• Trade in goods, advance report
• Pending home sales index
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Chicago PMI

Markets Index Wrap Up

Stock Markets

Stock indexes headed south amid volatility over the past week due to investor reaction to two prevailing concerns: the possible spread of the omicron variant, and the prospect that the central bank will tighten monetary policy to counter the rising inflation.  Growth stocks and technology-loaded Nasdaq Composite Index underperformed as longer-term interest rate expectations gained traction. On Friday, Nasdaq touched an intraday low that was slightly below its recent peak, still holding above the 10% threshold for a correction. Within the broad index S&P 500, technology and consumer discretionary shares were the worst performers, while the usually resilient consumer staples, health care, and utilities charted gains.

Partly causing the volatility that ended the week was the simultaneous expiration of three types of options and futures contracts. The Cboe Volatility Index (VIX) climbed during the week although it remained significantly below its early December levels. Front and center in investors’ sights were the Federal Reserve’s monetary policy meeting last Tuesday and Wednesday. Upon release last Tuesday of the report that producer prices rose 9.6% in November year-on-year, the highest increase since 2010 when data were first collected, the major stock indexes plummeted sharply. On Wednesday, the Fed’s quarterly survey of individual policymakers’ views was released, indicating that majority of officials now expected three quarter-point hikes rather than two were likely in 2022.

U.S. Economy

Despite worries of a possible slowdown in economic recovery, data points to a return to pre-pandemic output GDP in record time. This set the stage for unique conditions on the road to the normalization of monetary policies. This will likely create the shortest time between the end of the preceding recession and the first-rate hike thereafter. If the rate hike takes place by the next summer, the duration between recession and rate increase would have been cut in half; since 1985, the average time was four years. Furthermore, the 10-year Treasury rate is the lowest it has been approaching Fed tightening at below 1.5%. By comparison, the 10-year Treasury rates averaged 5.3% at the time of the first Fed hike, during the period since 1985. Liquidity is also the most abundant, as indicated by the Fed balance-sheet assets in proportion to GDP, which is at the highest level it has been since the last world war. Acceleration of the Fed’s taper appears appropriate since there is no longer any need for the emergency-level stimulus in the economy.

Metals and Mining

Gold prices are exhibiting some resilience as the metal descended to just above $1,750 an ounce but bounced off this major support. It then pushed up above the $1,800 level, indicating that investors may be gaining some interest in light of the rising inflation. Economists polled believe that inflation may range between 3% to 6% through the first semester of 2022 before dropping in the second half.

Last week, precious metals moved listlessly and ended mixed. Gold gained 0.86%, closing at $1,798.11 per troy ounce from its week-ago close at $1.782.84. Silver also rose slightly from its week-ago price at $22.20 per troy ounce to last week’s close at $22.37, gaining 0.77%. Platinum lost some ground, closing at $935.80 per troy ounce over the earlier week’s $945.66, dipping 1.04%. Palladium did somewhat better, gaining 1.38% from the previous week’s $1,764.32 per troy ounce to close at $1,788.73.

Week-on-week, the 3-month prices of the base metals also experienced little movement. Copper inched downward by 0.73%, from $9,506.50 per metric tonne to $9,437.50. Zinc gained 1.76%, rising from $3,328.50 per metric tonne to $3,387.00.  Aluminum recorded a higher gain of 4.53%, from the previous week’s $2.606.50 per metric tonne to the recent close at $2,724.50.  Tin ended the week lower by 2.51%, closing at $38.410.00 for the week compared to the earlier week’s $39,400.00.

Energy and Oil

In recent months, the oversupply of oil was the main concern in oil markets, something which may well materialize soon. This appears to be the direction in light of the softening of demand in Asia due to China’s zero-COVID measures. The continued clampdown by Beijing on independent refiners in Shandong has dampened the bullish sentiments of investors. In the meanwhile, Brent futures prices are rising above the spot price which is a signal of impending oversupply. Some factors on the upside remain, particularly the low level of global inventories which at present are approximately at their levels in March 2020. But European omicron cases are rising at a rate that threatens an oversupply situation way beyond the possible demand. The anticipated glut has caused ICE Brent price to descend to $73 per barrel. The U.S. benchmark WTI traded at about $70.5 per barrel.    

Natural Gas

Over the past 10 months of 2021, China’s imports of liquefied natural gas (LNG) were the largest in the world, surpassing Japan as shown by data from Japan’s Ministry of Finance and China’s Administration of Customs. For 51 years prior to 2021, Japan held the distinction of being the world’s top LNG importer. China’s LNG imports averaged 10.3 billion cubic feet per day (Bcf/d), and increased by 2.0 Bcf/d or 24% over the corresponding period last year. Over the same period, Japan’s LNG imports averaged 9.6 Bcf/d.

For the report week, December 8 to December 15, 2021, natural gas spot prices fell at most locations. The Henry Hub spot price fell to $3.75 per million British thermal units (MMBtu) at the week’s end from the previous week’s $3.79/MMBtu. The January 2022 New York Mercantile Exchange (NYMEX) contract price descended $0.013 from the earlier week’s $3.815/MMBtu to the recent Wednesday’s $3.802/MMBtu. Natural gas futures prices for delivery through the end of the current heating season dropped $0.50 to $3.744/MMBtu, but futures for delivery during the coming summer months rose by $0.03 to $3.671/MMBtu, in effect flattening the futures curve. For delivery during the winter months, the premium for natural gas futures is presently $0.072/MMBtu above contract prices for summer delivery, a reduction from last week’s $0.108/MMBtu.

World Markets

European stock prices dipped over the past week as the governments moved to intensify pandemic restrictions in response to the spread of the omicron coronavirus variant. Simultaneously, central banks grew more hawkish in reaction to the continued rise in inflation, raising investors’ concerns about investing in risky markets. The pan-European STOXX Europe 600 Index concluded trading for the week with a 0.35% loss. Principal indexes followed suit, with Germany’s Xetra DAX Index sliding 0.59%, Italy’s FTSE MIB Index dropping 0.41%, and France’s CAC 40 Index losing 0.93%. The UK’s FTSE 100 Index slumped 0.30%. The core eurozone bond yields exhibited volatility this week, ending lower in the end. Initially, yields sharply dropped on fears that the omicron surge will seriously slow down the economic recovery. Thereafter, hawkish pronouncements by major central banks and the decision by the European Central Bank (ECB) to scale back its emergency bond-buying program caused yields to rebound from its deep dive. A subsequent announcement by ECB President Christine Lagarde that an interest rate increase was “very unlikely” next year brought pressure on bond yields. Overall, peripheral eurozone bond yields rose. UK gilt yields rose after the Bank of England, (BOE) unexpectedly increased short-term interest rates.

Over the week, Japanese stock prices advanced. The Nikkei 225 Index rose 0.38% and the broader TOPIX Index gained 0.46%. the U.S. Federal Reserve’s tapering decision accounted for investor sentiment being lifted and bringing the indexes to positive territory. It appears many feel that the Fed decision signals confidence in the directions of the post-COVID global economy to which the Japanese open market is highly leveraged. The yield on the 10-year Japanese government bond adjusted downward to 0.04% from 0.05% at the end of the preceding week. As to currencies, the yen moderately weakened from JPY 113.39 to JPY 113.56 against the U.S. dollar.

The resurgence in global coronavirus cases has caused the Chinese markets to fall for the week, even as tensions between the U.S. and China intensified. Washington imposed investment and export restrictions on dozens of Chinese companies allegedly due to repressing China’s Muslim minorities and supporting the Beijing military. The CSI 300 Index pulled back 1.9% while the Shanghai Composite Index gave up 0.9% on listless trading. The yields on the country’s 10-year government bonds climbed to 2.873% from 2.861% the week earlier. The yuan fell to CNY 6.3714 against the U.S. dollar, compared to the earlier week’s exchange rate of CNY 6.3672.

The Week Ahead

Leading economic indicators, personal income, and the PCE index are among the important economic data scheduled for release this coming week.

Key Topics to Watch

• Leading economic indicators
• Current account deficit
• GDP revision (SAAR)
• Consumer confidence index
• Existing home sales (SAAR)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Nominal personal income
• Nominal consumer spending
• Core inflation (monthly)
• Core inflation (year-over-year)
• Real disposable income
• Real consumer spending
• Durable goods orders
• Core capital goods orders
• New home sales (SAAR)
• UMich consumer sentiment index (final)
• Five-year inflation expectations (final)

Stock Markets

Fears concerning the possible fallout from the omicron variant of the SARS Cov-2 virus appear to have calmed down during the week as markets rebounded decisively, reversing two weeks of losses. The S&P 500 charted its best weekly gain since early this year, as most of the benchmark indices trod close to their record highs. The S&P MidCap 400 Index touched a new peak on Friday, hinting at a possible surge in the coming week. Driving much of the rally were information technology stocks, with Apple recording solid gains to push its market capitalization close to $3 trillion. This cements Apple’s reputation as the world’s most highly valued public company. The financial sector and utilities underperformed the rest of the market but still posted solid gains. The market was taking its cue from the announcement last week by Dr. Anthony Fauci, the U.S. president’s chief medical advisor, that the omicron variant does not appear to have “a great deal of severity,” even as the Centers for Disease Control and Prevention (CDC) commented that U.S omicron cases have been mild.  

U.S. Economy

The week’s economic news also helped to significantly bolster investor sentiment. The Labor Department reported on Thursday that 184,000 Americans applied for unemployment benefits the week before. This is the lowest number of people to have done so since 1969. The number of open jobs in the U.S. rose to 11 million, much more than anticipated, mostly accounted for by accommodation and food services. A decades-high inflation rate was also noted. On Friday, the year-over-year November consumer price index was reported at 6.8%, the highest since 1982. Part of the reason lies in the rising energy costs, although overall the increase in inflation rate was broad-based. Excluding food and energy, the core rate rose 4.9%, suggesting that principal causes could also be traced to supply chain issues and wage pressures. The tally, however, shows that both these components were generally consistent with expectations.

The Fed Chair, Jerome Powell, provided some indication that the coming monetary policies may assume greater restriction. Powell suggested that the word “transitory,” which was consistently used to describe the current inflationary push, be omitted, acknowledging by implication that inflation will become more persistent and should no longer be perceived as temporary. He also implied that the anticipated tapering of asset purchases may be advanced a few months sooner than previously planned. Such a move was perceived to make sense to allow some flexibility for when the FOMC could begin raising rates. This is a move that would be inevitable should inflation continue to remain stubbornly high. The same idea was expressed by other Fed governors during the week, suggesting the likelihood of its impending announcement.

Metals and Mining

According to some of the biggest international banks, gold is soon to experience renewed investor demand as inflation becomes increasingly regarded as more than transitory. Inflation is shaping up to be the most important economic challenge as 2022 approaches. On Friday, the announcement of a jump in the Consumer Price Index to an annualized 6.8% drew attention as the highest inflation reading in 39 years, signaling an even higher trajectory to possibly peak in the first semester before moving gradually down. Some analysts and economists see that there remains some headroom for further movement. What all of this means is that gold will continue to attract investors seeking to protect their wealth and purchasing power in an environment of growing uncertainty and risk.

Gold hardly moved over the past week as investors sought cues from a market of conflicting signals – the encouraging news of a mild omicron virus versus the persistent increase in the inflation rate. Gold lost 0.03% while silver slid by 1.42%. Palladium sank deeper 2.92%, although platinum bucked the trend to rise by 1.01%. The base metals were also mixed. Copper gained 0.94% and zinc went up 5.28%. Tin inched up 0.17%, but aluminum dipped by 0.63%.  

Energy and Oil

The oil markets gained some breathing space last week with the welcome news that the Omicron variant of COVID-19 is a mild infection that will not likely cause any major disruption in the global economic recovery currently underway. Demand remains largely stagnant at present while global crude inventories are still lower than the five-year average, keeping Brent marginally above the $75 per barrel price, and WTI at $72 per barrel. Covid aside, there are still some concerns that may keep global demand down, such as the lackluster air traffic activity in China and elsewhere in the world where travel restrictions are still effective. There is also the possibility of bankruptcies of large-scale Chinese property companies such as Evergrande and Kansa that may pull the market southward if they materialize. At the other extreme is what appears to be the start of a bullish situation in the U.S. resulting from soaring inflation, which is balancing off the negative sentiment. Although the anticipated Strategic Petroleum Reserve (SPR) release is still assumed to materialize by January to April 2022, the U.S. strategic crude inventories have already descended to 600 million barrels in the past week, the lowest level since May 2003. Even now, there is widespread speculation that the U.S. may enact an oil export ban because of the dwindling domestic reserves and the increased export outflows, but the Biden administration has stated that a ban is not considered as an option for the time being.

Natural Gas

During the report week December 1 to December 8, the Henry Hub spot price dropped from $4.23 per million British thermal units (MMBtu) to $3.79/MMBtu. The international gas prices remain close to their record highs, with swap prices for liquefied natural gas (LNG) cargos in East Asia for the rest of December averaging $35.06/MMBtu for the week, down by $1.41/MMBtu, lower than last week’s average of $36.57/MMBtu but still the second-highest weekly average since January 2020. The prices along the Gulf Coast fell due to lower heating demand expectations, while Midwest prices also fell, then rose, responding to lower-than-normal temperatures across the region. Prices in the West also rose due to colder-than-normal weather, but also because of the impaired capacity on the pipelines delivering natural gas to Southern California. In the Northeast, prices rose due to a winter storm traversing the region. The U.S. supply of natural gas decreased slightly while consumption remained unchanged for the week and U.S. LNG exports increased week-on-week,   

World Markets

Mirroring the U.S. European shares rebounded from their previous slump as concerns about the impact of the Omicron variant on the world economy abated. The pan-European STOXX Europe 600 Index closed the week higher by 2.76%, with France’s CAC 40 Index up 3.34%, Italy’s FTSE MIB Index up by 3.02%, and Germany’s Xetra DAX index also up by 2.99%. The UK’s FTSE 100 Index ascended 2.38%. Core eurozone bond yields also climbed in response to indications from Pfizer and BioNTech that their booster shot may be effective against the Omicron variant. This calmed fears about the likely economic repercussions of another covid spike, thereby contributing to the surging yields. There was a subsequent pullback on the yields, however, when speculations spread that the European Central Bank may raise asset purchases through its standard Asset Purchase Program when its emergency purchases are concluded in March 2022. UK gilt yields ended higher when the UK government announced the resumption of a new round of coronavirus restrictions. In response, the market moderated its expectations for potential interest rate increases.

The bourses in Japan made headway during the week as the Nikkei 225 Index gained 1.46% and the broader TOPIX Index advanced 0.90%. As in other global markets, concerns about the impact of another covid variant were brushed aside. So, too, did Japan appear to discount the downgrade to its third-quarter economic growth. In his policy speech to parliament, Prime Minister Fumio Kishida outlined his administration’s vision to usher in a new era in Japan, focusing on areas such as digitalization opportunities, climate change mitigation, and strengthening the start=up ecosystem. The yield on the 10-year Japanese government bond remained unchanged at 0.05%, while the yen weakened against the U.S. dollar to about 113.6 from 112.8 week-on-week as it remained vulnerable to expectations of further policy tightening by the U.S. Federal Reserve.

In China, the stock markets recorded weekly gains after the central bank reduced the reserve requirement ratio for banks. Inflation concerns also eased with the calming of the November factory gate inflation. The CSI 300 Index ascended 3.1% and the Shanghai Composite Index rose 1.6%. Nevertheless, concerns about the likelihood of defaults in the property sector and the withdrawal of additional U.S.-listed Chinese companies reined back sentiment after Didi Global, the ride-hailing app, indicated that it would delist from the New York Stock Exchange earlier this month. Yields on the country’s 10-year government bonds dipped to 2.861% from 2.926% the week earlier. Regarding currencies, the renminbi tested a five-year high of 6.3649 against the U.S. dollar on Friday after a weaker-than-expected midpoint was set by the People Bank of China (PBOC). The value of the renminbi is permitted by the central bank to rise or fall 2% against the U.S. dollar from an official midpoint rate it sets daily.

The Week Ahead

The PMI composite, Retail Sales growth, And the Fed Funds rate are among the important economic data to be released in the coming week.

Key Topics to Watch

• NFIB small business index
• Producer price index
• Retail sales
• Retail sales excluding autos
• Import price index
• Import price index excluding fuels
• Empire State manufacturing index
• NAHB home builders’ index
• Business inventories
• Federal Reserve FOMC announcement
• Jerome Powell press conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Building permits (SAAR)
• Housing starts (SAAR)
• Philadelphia Fed manufacturing index
• Industrial production index
• Capacity utilization
• Markit manufacturing PMI
• Markit services PMI

Markets Index Wrap Up

Stock Markets

Volatility characterized the past week’s trading with the major equity indexes pulling back on the announcement by Fed Chair Jerome Powell that the Federal Reserve may begin tapering on its monthly asset purchases and do so at a faster rate than expected. Also factoring in on investor sentiment are concerns that the emerging omicron variant of the coronavirus, which the World Health Organization (WHO) labeled as a variant of concern, may slow down the economic recovery and growth by further prolonging supply chain disruptions. The smaller and mid-cap benchmarks were outperformed by large-capitalized stocks. The communications services sector lost the most ground while the utilities sector was the only sector that realized any gains within the S&P 500. Among bonds and other fixed-income markets, worries that the omicron variant may wreak havoc once more in the global economy, together with uncertainties surrounding the upcoming move by the Feds. The Treasury yield curve flattened during the trading week as long-term rates decreased and short-maturity yields rose. Generating positive returns through most of the week were tax-free municipal bonds, which also performed consistently with the broad-sector U.S. Treasuries.

U.S. Economy

The principal concern about the sustainability of the ongoing economic recovery is the discovery of the omicron variant and how transmissible and severe it could be amid fears of the drop in the effectiveness of the current vaccines. Travel restrictions were tightened by many countries to stave off the possible spread of the variant, and hopes linger that the vaccines can continue to provide some protection against severe illness and hospitalization due to the unknown mutation.

The larger economic picture, however, looks stable, with strong household finances resulting from extensive fiscal support and government-income transfers emerging as the key factors behind the robust economic rebound post-pandemic. There is a reported $2.3 trillion estimated additional savings relative to the comparative average levels before the pandemic. This provides a safety buffer for uncertain times on the horizon for strong consumer spending should uncertainties materialize. There is also strong positive economic momentum with the most recent data indicating strength in the U.S. economy. Real GDP is growing at nearly 10% in the fourth quarter based on the forecast by the Atlanta Fed.

• Consumer spending is showing no signs of slowing, which is reassuring since it is the main driver of the U.S. economy. Last month, spending was reported as rising strongly even in real terms (i.e., without the effect of inflation).
• The leading indicator of factory activity, the ISM manufacturing PMI, moved higher in November and remains at close to its highest readings since 2004, although it is still off its peak. The comparative indicator for the services sector also rose to its record high, based on Friday’s report.
• The labor market remains robust. Although job growth in November registered its smallest gain for the year at 235,000 payroll jobs, the unemployment rate nevertheless fell by 4.2%, a larger than expected number. Labor force participation also rose steadily. The four-week claims have now descended to new pandemic lows, having fallen below the lowest point recorded in five of the last six expansions.

Metals and Mining

The gold market continues to struggle to find its strategic place among the financial markets as investors’ concerns increase over the more hawkish pronouncements of Federal Reserve Chair Jerome Powell. This is a reversal from three weeks ago when gold was on a bullish uptrend as investors flew to risk havens from inflationary pressures. At that time, the Fed regarded inflation as transitory and soon to descend to normal levels. More recently, however, the policy setters appear to dismiss the notion that the trending inflation was merely temporary and take the threat of inflation more seriously. The Fed announcement showed that it is prepared to adopt more aggressive in adopting monetary tightening measures, which the market took to mean that the tapering off of monthly bond purchases will be conducted at a faster pace in December. For 2022, the market is starting to price in four rate hikes. Gold remains stuck in this neutral territory for the meantime as investors try to discount the recent Fed proclamations.

There still remains long-term potential in precious metals as some investors shift to an accumulation strategy. It was announced in the just-concluded week that both the central banks of Singapore and Ireland began to purchase gold for the first time in decades. Singapore bought 27.35 metric tons of gold between May and June. For its part, the Irish central bank bought two tonnes of gold, marking its first gold purchase since 2009. For the week, gold lost 1.07% to end at $1,783.29 per troy ounce from $1,802.59 the previous week. Silver went from $23.16 to $22.52 week-on-week for a loss of 2.76%. Platinum also slid 2.31% from $958.28 to $936.19 per troy ounce for the week. Palladium buck the trend and closed at $1,817.43 per troy ounce from the earlier week’s close at $1,768.28, for a 2.95% gain.

For base metals, prices generally succumbed to the downward spiral. 3Mo copper descended 3.91% from $9,801.50 to $9.418.00 per metric tonne. Zinc fell 4.21% to $3.161.50 per metric tonne from $3,300.50 the week earlier. Aluminum began at $2,717.50 to slide down by 3.48% to  $2,623.00 per metric tonne week-on-week. Tin, meanwhile, inched down 0.94% from $39,709.00 to $39,335.00 per metric tonne for the week.

Energy and Oil

The much-anticipated decision from OPEC+ about reducing or ceasing its monthly 400,000 barrels per day (b/d) oil increase did not materialize, and the week’s expected stellar event fizzled out when the country-members decided to remain committed to the original plan. The oil consortium nevertheless committed to maintain its option to reverse that decision if the situation calls for it. Oil prices corrected on the news, the market subsequently calmed when players saw that the OPEC+ did not disregard the threat of the new Omicron virus strain. The member states committed to reconvene quickly if a sudden shift in market conditions came about. Also, the countries that have overproduced their quotas so far will see a cap on their upcoming production targets in order to balance their annual production volumes. These announcements helped to support oil prices and push them slightly upwards towards the end of the week.    

Natural Gas

For the report week November 24 to December 1, natural gas spot prices fell at most locations. The Henry Hub spot price cam down from $4.90 per million British thermal units (MMBtu) to $4.23/MMBtu during the week. International natural gas prices remained close to all-time-highs, while prices in the U.S. fell due to seasonally warm temperatures across most of the country. The Henry Hub spot price descended 14% or $0.67/MMBtu. Forecasts by the National Oceanic and Atmospheric Administration (NOAA) projects possible above-normal temperatures throughout most of the lower 48 states and an equal chance of normal temperatures across the rest of the country. U.S. natural gas consumption increased week-over-week in all sectors except the power sector. Exports of natural gas increased from the previous week, while U.S. LNG exports remained unchanged on a weekly basis.

World Markets

Trading in Europe’s stock markets was mixed as volatility returned due to Omicron variant concerns and continued signs of inflationary pressures. The pan-European STOXX Europe 600 Index ended 0.28% lower based on local currency terms. Among the major bourses, Germany’s Xetra DAX Index dipped 0.57%, France’s CAC 40 Index gained 0.38%, and Italy’s FTSE MIB Index also rose 0.33%. The UK’s FTSE 100 Index climbed 1.11%. The core eurozone bond yields fell to lower levels, affected by negative news on the further spread of the omicron variant. Comments by Federal Reserve officials indicating the adoption of tighter monetary policies created less of an impact on bond yields than the coronavirus news. Counterbalancing the Fed announcement are comments made by Bank of England Monetary Policy Committee member Michael Saunders that he may vote against a rate hike this month, in light of the uncertainties created by the omicron variant. This declaration further weighed down on yields.

The Japanese stock markets traded downward for the week also due to concerns that the omicron variant may spread throughout the country. These worries compelled Japan to close its borders to foreign nationals (except for those with special permission to enter), a move that caused investor sentiment to turn negative. The Nikkei 225 Index lost 2.51% of its value while the broader TOPIX Index also fell 1.37%. The yield on the ten-year Japanese government bond slid to 0.05% from 0.07% at the previous week’s close, mainly on safe-haven demand. The yen remained broadly unchanged from the previous week, at JPY 113.3 against the US dollar. The release of positive economic data, particularly the increase in industrial production and decrease in the unemployment rate, provided further support to investor sentiment.

Chinese stocks realized gains for the trading week despite the return of tensions between this country and the U.S. Tensions flared after the Chinese ride-hailing app Didi announced that it would delist its shares from the New York Stock Exchange. The CSI Index climbed 0.84% while the Shanghai Composite Index gained 1.2%. The announced delisting of Didi was a reaction to the directive by the U.S. Securities and Exchange Commission that Chinese companies listed on the U.S. stock exchanges must disclose whether they are owned or controlled by a government agency or instrumentality and for those companies to provide evidence of their auditing inspections. The yields on the country’s ten-year government bonds surged to 2.926% from 2.881% the week prior, in pace with the increase in U.S. Treasury yields in response to Federal Reserve news of an impending speedier tapering of the U.S. central bank’s monthly bond purchases. The yuan rose against the U.S, dollar to 6.3718 from 6.3917 the week before following the stronger midpoint rate set by the People’s Bank of China. China’s central bank allows the exchange rate to fluctuate 2% above or below the midpoint rate that it sets every morning.    

The Week Ahead

Inflation, productivity, and consumer credit are included among the important economic data expected to be released in the week to come.

Key Topics to Watch

• Trade deficit
• Productivity revision (SAAR)
• Unit labor costs revision (SAAR)
• Consumer credit (change)
• Job openings
• Job quits
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Wholesale inventories (revision)
• Real household wealth
• Real domestic nonfinancial debt
• Consumer price index
• Core inflation
• CPI (year-over-year change)
• UMich consumer sentiment index (preliminary)
• Expected inflation, five-years (preliminary)
• Federal budget

Markets Index Wrap Up

Stock Markets

Trading was shortened for the week due to the Thanksgiving holiday, but not before a sharp sell-off on news that a possibly more contagious and deadly coronavirus variant was spreading in South Africa. This new strain, dubbed the Omicron variant, has not yet been fully assessed as to whether it could effectively evade the protection provided by the current vaccines, but the market of risky assets, particularly equities, proved averse to the possibility of renewed lockdowns and pandemic restrictions on businesses and consumers. Before the suspension of trading, the information technology sector slumped as the rising Treasury yields eroded the value of future expected corporate profits in present terms. The yields fell on Friday in the midst of a flight to safe haven assets. Value stocks proved more resilient than growth stocks despite the selling pressure on leisure and travel stocks during the last trading day.

U.S. Economy

Thanksgiving marks a shift in the consumer shopping season with the Black Friday opening salvo. Consumer spending habits have evolved, however, with a larger volume of transactions being conducted online as well as holiday sales exceeding the traditional Thanksgiving-to-Christmas shopping window. Overall spending may experience a healthy jump despite possible supply-chain disruptions forcing consumers to limit their selections to in-stock brick-and-mortar store items. The National Retail Federation (NRF) foresees a hike in holiday sales for this year to the tune of 8.5% to 10.5% year-on-year.

There is much to fuel a healthier consumption appetite in the coming year, with the personal savings at 7.5% of disposable income. This is the highest personal savings rate approaching Thanksgiving in the past 25 years. Although this is a significant discount from the spike during the pandemic lockdowns when consumer spending was at a halt, the savings rate is still well above the 6.5% long-term average (or 6.1% excluding 2020). On the other hand, the wage growth rate, currently at 4.2%, is the highest it has been since this corresponding period in 2007, furthering impetus for consumer spending. Over the past quarter-century, as wage growth rises above 4% and accelerates, the growth in the gross domestic product (GDP) averages 3.2% compared with a 2.5% average for the entire period. A further improvement in the labor market is likewise expected to support a possible bull run for the next year. Labor shortages remain a problem that may be exacerbated by the likelihood of a new covid strain. The new post-pandemic low in the initial jobless claims that were reported last week, however, appears likely to support the strengthening of the labor market in 2022 with a decline in the prospective unemployment rate from the present 4.6%.

Metals and Mining

Monday and Tuesday of the past week saw a massive sell-off in precious metals after President Joe Biden’s announcement that he would nominate Jerome Powell to continue as chair of the Federal Reserve. While the connection is not clear, investors may expect that Powell may not adopt as dovish a policy as Lael Brainard, the other person considered for the position. Powell, however, is not expected to be openly hawkish in his stance. The rise in inflation has investors overly cautious of the imposition of restrictions in the monetary policy before the end of the year. \

After the initial sell-off in precious metals, however, there was a noticeably strong rebound when the news of the latest COVID-19 variant was released. The discovery of the Omicron mutation in South Africa and its likelihood of triggering another round of surges and lockdowns around the world has shifted attention back to gold as a safe haven asset during times of heightened risk. The price of gold bounced off an almost three-week low, and recovered, although to a level short of the previous week’s close.

At the close of trading for the week, the spot price of gold, which began at $1,845.74 per troy ounce, ended at $1,802.59, lower by 2.34%. Silver also lost 5.93% in value, descending from $24.62, its close of the previous week, to Friday’s close at $            23.16 per troy ounce. Platinum also slid for the week, from $1,034.16 to $958.28, or a loss of 7.34%. Palladium ended the week 14.36% lower, starting at $2,061.25 and ending at $1,765.28 per troy ounce. Base metals (3Mo) took the opposite direction of their precious counterparts. Copper rose 3.81% for the week, from its $9,441.50 of the previous week to Friday’s close at $9,801.50 per metric tonne. Zinc gained 4.48% to close at $3,300.50 on Friday from the earlier week’s close at $3.159.00 per metric tonne. Aluminum climbed 3.88% to its recent close at $2,717.50 per metric tonne from the prior week’s close at $2.616.00. Tin also gained 3.27% week-on-week to close at $39,709.00 per metric tonne from $38,453.00.

Energy and Oil

On Friday, oil prices plunged by more than 10% across the board on jitters that a new COVID strain is starting to spread from South Africa. The so-called Omicron variant has once more resurrected fears of future economic lockdowns and the likelihood of a curtailed demand on oil and gas. Earlier, the release of Strategic Petroleum Reserves announced by Joe Biden failed to bring down prices of oil and, instead, spurred them higher. What the U.S. President intended to achieve, therefore, was attained by the prospect of a new virus and fears of a reversal of the fledgling economic recovery. With the scheduled meeting of the OPEC+ on December 2 meeting, it is still possible for the consortium to influence the outcome of the SPR release and the recent price fluctuation by possibly reducing production targets for 2022. Thus far, the OPEC’s Economic Commission Board estimates that global crude surplus for the first quarter of 2022 will only be inflated by the SPR releases set in motion by the United States and its partners. It may eventually lead to a slower-than-assumed OPEC+ production rollout.

Natural Gas

The recent news release concerning the Omicron covid variant has arrested the climb of LNG spot prices in Asia. Instead, fears of a reduction in demand for liquefied natural gas due to a slowdown in the economic recovery have gas prices dipping to $36 per million British thermal units (MMBtu), although demand is still ramping up in Japan and South Korea. The price currently remains above the seasonal high. In the west, US natural gas prices continue their ascent despite the past week’s trading being shortened by the Thanksgiving holiday. The U.S. natural gas Henry Hub futures rose 5% for the week to end at $5.16/MMBtu. This is likely due to the expected increase in the demand for heating as the cold winter months approach. Week over week, U.S. natural gas consumption has increased mainly by the residential and commercial sector, rising 3.0% or 2.3 billion cubic feet per day (Bcf/d). U.S. LNG exports have also increased during the same period, amounting to 22 LNG vessels with a combined carrying capacity of 79 Bcf/d departing the U.S. between November 11 and November 17, 2021.

World Markets

Equities in Europe declined precipitously on concerns that the economic recovery of the region may be interrupted by the spread of the Omicron variant of the coronavirus. The new mutation was discovered in South Africa, and it is perceived to spark a new round of pandemic restrictions throughout Europe and possibly the world. The pan-European STOXX Europe 600 Index closed the week lower by more than 4%. The principal indexes in Italy, France, Germany, Spain, and the Netherlands also took a nosedive. The UK’s FTSE 100 Index was not as severe since the pound’s exchange rate against the dollar depreciated. Since many of the listed companies in the FTSE 100 Index are multinationals earning in US dollars, the weaker pound tends to bolster the index. The core eurozone bond yields were relatively unchanged as the news of the Omicron variant softened their ascent from the week’s highs. The peripheral eurozone bond yields have remained high due to the prevailing fears of continued inflation and the possibility that central banks may adopt more restrictive policies, following the UK gilts.

In Japan, the stock exchanges appeared to sustain their high levels halfway through the week, but to later give way on fears that the economic recovery may be derailed. The Nikkei 225 lost 3.3% when it descended below 29,000 points to close at 28,752. The Topix performed only slightly better, falling 2.91% to finish below the 2,000-point support and ending at 1,985. Selling pressure was evident in the airlines and automotive sectors as sentiments were negatively affected by the slower than expected pace of economic recovery. Later in the week, the reappointment of Federal Reserve Chair Jerome Powell exacerbated concerns that interest rates in the U.S. may be raised sooner than expected, creating a wider divergence from Japan’s policies. At this point, growth-oriented stocks and highly valued technology companies absorbed the selling pressure of the speculated monetary tightening. The yen also slid to new multi-year lows, while the benchmark 10-year Japanese government bond yields rose to 0.085%, its highest level for the month of November before it corrected to 0.07%.

The Chinese bourses also weakened although not as sharply as the Western and Japanese markets. The CSI index dipped 0.6% while the Shanghai Composite Index remained unchanged, even as U.S.-Chinese tensions (i.e. regarding Taiwan’s status and trade issues) prevailed and economic pressures continued to rise, further fueling expectations for supportive government measures. The yields on China’s 10-year government bonds descended from the previous week’s 2.946% to 2.881% as a result of investors’ flight to safe haven assets. The yuan strengthened slightly to 6.3917 against the U.S. dollar, compared to last week’s exchange rate of 6.4009 per USD.

The Week Ahead

The employment rate, the consumer confidence index, and the PMI index are among the important economic data due for release in the coming week.

Key Topics to Watch

• Pending home sales
• S&P Case-Shiller home price index (year-over-year-change)
• Chicago PMI
• Consumer confidence index
• ADP employment report
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Beige Book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Markit services PMI (final)
• ISM services index
• Factory orders
• Core capital goods orders (revision)

Markets Index Wrap Up