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Market Insights – November 8, 2021

Each week, our Investment team shares its market views with you.

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Essentials

Late last week, Pfizer published trial results that show its COVID-19 antiviral is very effective against high-risk cases. The molecule could soon be added to the array of COVID-19 treatments available and thus hasten the end of the pandemic. The markets welcomed the news, with tourism-related stocks doing particularly well. 

US jobs creation figures remained extremely robust in October and once again surpassed even the most optimistic forecasts. Unemployment continued to decline and is now nearing pre-pandemic levels. This bodes well for the stock markets as we head into a period of strong consumer spending. 

In Germany, manufacturing orders were up 1.3% month on month in October, while industrial output, which is still being hampered by supply bottlenecks, declined 1.1%. The gap between these two indicators is almost at its widest ever, but it should narrow again as supply problems gradually fade.

The Bank of England holds tight for now

Major central banks tend to be extremely transparent about the direction in which their monetary policies are heading. Taking the markets by surprise to ensure maximum impact has become a thing of the past. Nowadays, central bank announcements have few knock-on effects on the markets, as investors usually know what to expect. So when Andrew Bailey, the governor of the Bank of England (BoE), hinted in mid-October that it was time for action, investors concluded that a rate hike would be announced at the bank’s November meeting. 

But to everyone’s surprise, last week the BoE said that it wouldn’t be changing its interest rates even though inflation has picked up considerably and the UK economy is recovering rapidly from the difficulties caused by the pandemic and Brexit.  It looks like the BoE – like other major central banks around the world – has decided not to raise rates until it has stopped pumping money into the economy. And for the moment, the money continues to flow – the asset purchase programme won’t end until December. The financial markets reacted strongly to the news. 

Bond yields began declining again immediately, not only in the UK, but across Europe and the USA as well, with long-term interest rates moving downwards. Investors now seem to be doubting whether the major central banks will really normalise their monetary policies in the short to medium term. But the main victim of the BoE’s decision was the pound, which lost ground against most other currencies. It fell close to 1% against the euro in the minutes after the announcement. 

We think these declines will be short-lived both on the bond market and for the pound. We still believe that lending conditions will gradually be tightened over the coming months, given the current economic outlook and inflation situation around the world. The BoE is ahead in this process and will be among the first to raise rates, and this should buoy the pound over the next few months.

Climate change – a complex transition

The COVID-19 pandemic has shown that there are limits to how much countries will collaborate in response to a global crisis. When it comes to the climate crisis, the Paris Agreement’s principle of “common but differentiated responsibilities” – the idea that countries that polluted the most in the past must do more – often clashes with national interests. 

Some events of the past few months have shown just how complex the transition to a low-carbon economy will be. The rise in oil prices, for instance, has almost certainly been caused by this transition, as oil production and exploration have been curtailed. Yet demand for oil remains elastic. High oil prices will therefore reduce demand – albeit slowly – and speed up adoption of alternative energy sources. Each trip to the petrol pump will put pressure on people’s purse strings and bring them one step closer to buying an electric car, regardless of their attitude towards the environment. 

Some investors – obsessed with the recent rise in oil prices – seem to have forgotten how well renewable energies did in 2020. And there are two other investment themes that have outperformed oil since the start of the year: carbon pricing, which is a key mech-
anism for ensuring that responsibility for emissions is shared fairly, and uranium, used to generate nuclear power, which gets a bad rap but is being ramped up again in some countries. 

Some see combating climate change simply as an investment opportunity, while others see it as a key to addressing health and pollution problems in places such as India and China. But given just how urgent the energy transition is, we need all the solutions and incentives we can get if we are to achieve anything. Nobody expects that to happen over just two weeks in Glasgow.

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