Bell weather U.S. indexes the S&P 500 and the tech-laden Nasdaq recorded gains of +2.1% and +1.9%, whilst Japan’s Nikkei Index returned +2.6% and China’s domestic Composite index returned +3.9% on the week, all in sterling terms.
Reflecting improving sentiment among market participants, the Chicago Board of Exchange Volatility Index (VIX), a globally recognized gauge of U.S. equity market volatility, fell sharply to close at a level of 20.31 from 28.70 the week prior.
While there are many other factors at work, in most cases a high VIX reflects increased investor fear, and a willingness to pay to protect portfolios against further declines, and a low VIX suggests aggregate investor complacency, and little desire to hedge against the prospect of potential portfolio declines.
Notable economic highlights included the highest US annual inflation (Consumer Price Index) reading since 1982 at 6.8% on a year-over-year basis, marking the sixth straight month in a row in which the broad-based inflation measure has topped 5%.
Surging prices for energy, food and shelter accounted for the lion’s share of the rise. Notable commentator Mohamed El-Erian suggested that the Federal Reserve’s characterisation of inflation as ‘transitory’ throughout 2021 is ‘probably the worst inflation call its (Fed’s) history’. Ouch.
Initial claims for US unemployment benefits continued to fall to the lowest weekly levels in decades, while job openings remained historically high, providing further evidence of the nation’s tight labour market.
The government reported on Wednesday that there were 11 million openings at the end of October, with nearly 5 million more open positions than people seeking work.
This is likely to underpin further, sustained strength in aggregate wage growth (and feed through to inflation) as unions and their employees find themselves in very strong negotiating positions.
Perhaps unsurprisingly, prices of government bonds fell, sending yields higher in a mirror-image reversal of the previous week’s sizeable yield decline.
Markets have taken the view that Omicron hospitalisation and fatality rates will be far less severe than previous Covid-19 variants, and that, as it stands, there is little political appetite for renewed lockdowns.
The yield of the 10-year U.S. Treasury Bond climbed to 1.484%, up from 1.434% the previous week. Action in the UK Gilt market was more muted, with yields closing the week a touch higher at 0.741%.
Moving to commodities, U.S crude oil prices rose modestly to snap a five-week string of weekly declines. On Monday, the price of crude rose to $74.99 per barrel, though well below the recent October peak of $85.
Gold gained a modest +0.6%, with the yellow metal continuing to confound long-suffering ‘gold bugs’ over why the price is not significantly higher at this juncture against the backdrop of high and sustained inflation and record low real yields.
Finally in our run-down, the crypto currency space did not disappoint in terms of volatility (Bitcoin -0.3%, Ethereum -12.4%).
A host of factors, ranging from a forced leverage unwind to technical support levels being breached have been suggested as reasons for the sustained pressure on the sector.
