Analysis of today's markets

Álvaro Manteca, Director of Investment Strategy at BBVA Private Banking

The Covid once again conditions the evolution of the markets

22/11/2021

Austria's decision spoiled a week that pointed to new stock rises in Europe and in Friday's session the sectors related to the economic reopening suffered a severe blow, amid fears that the restrictions announced in Austria would be extended to the rest of European countries, hampering the economic growth of the entire region. However, despite Friday's weakness, weekly calculations were fairly flat for global stock exchanges. The global MSCI index has been marginally reversed and remains very close to the historical highs.

From an economic point of view, the global recovery is facing its first significant endurance test. Supply pressures continue to intensify as higher energy prices combine with persistent bottlenecks to depress production and erode demand. Global industrial production fell sharply for the second month in a row in September, while the CPI readings for November are very likely to exceed the already historic levels of October. These obstacles are compounded by a new wave of COVID that will depress European mobility, although it poses risks for the entire Northern Hemisphere throughout the winter.

Although the central banks of developed countries have shown significant patience with inflationary spikes related to the economic reopening, in stark contrast to their emerging counterparts, who are not as tolerant of high inflation rates (with the notable exception of Turkey), if our forecast of strong growth in 2022 and accelerated normalization of the labor market is fulfilled, the monetary authorities will be forced to gradually change their pace. We emphasize that the stimulus withdrawal process will be gradual, since inflationary pressures are likely to ease in 2022. In any case, it is highly probable that the Federal Reserve will start its rate hike cycle in the second half of the year and the Bank of England will do so in December. Given their historical dependence on external financing, the central banks of emerging markets are closely monitoring interest spreads with the United States and it is likely that pressure will increase as we approach the Fed's first rate hike. As a consequence, it is also very possible that the rate hike process will intensify in emerging countries in 2022.

Meanwhile, emerging data suggests that we are moving towards the expected re-acceleration in global growth in the fourth quarter of 2021. Thus, retail sales surprised on the upside in both the United States and China this week. The data also suggest a recovery in capital investments in Japan. Leading indicators have also strengthened in Japan, and the November regional US manufacturing surveys rose sharply over the past week.

In Asia, the economic rebound derived from the control of the delta wave and the advancement of the vaccination process is clearly materializing and high-frequency activity indicators already support strong economic growth in the fourth quarter. Unfortunately, recent data point to the opposite throughout Europe. Despite high vaccination rates, new infections have skyrocketed, surpassing previous peaks in Western Europe. In this regard, the news of the week was that Austria announced the confinement of its entire population and took the controversial step of making vaccines mandatory in 2022. The German situation is more nuanced, but a new law will prohibit the unvaccinated from participating in many activities if hospitalization rates rise. It remains difficult to predict how the new wave will play out this winter, but it appears that the impact on German GDP could be greater than previously assumed, although the good news is that most of this drag is likely to recover by the middle of next year.

In China, the Politburo meeting revealed that efforts are being made to limit tensions in the real estate market, while maintaining the current housing policy. In addition, the government proposed a $30 billion loan facility to promote sustainable energy generation. Furthermore, the virtual meeting between President Biden and President Xi seems to have focused on managing geopolitical risks. Much to the disappointment of some investors, the United States did not reduce tariffs. In fact, some tariffs could be lowered, especially following statements by Treasury Secretary Janet Yellen, who agreed that reciprocal tariff reduction could help ease inflationary pressures in both economies. However, the failure of China to meet its Phase 1 commitments will likely remain a major hurdle. 

In short, much of Europe is being hit by a new wave of COVID, and over the course of the week ahead, PMIs could provide some early clues about the economic impact of rising infection rates. The survey is likely to show that the recovery in Germany is waning as we approach the end of the year. In this regard, the IFO survey will complete the expectation of the German economy and analyze the impact that both the increase in energy costs and the severe disruption of supply chains are having on the confidence of producers. In the United States, before Thanksgiving, we will know who wins the race to succession at the head of the Federal Reserve between Jerome Powell and Lael Brainard. Although Brainard is a bit more lax than Powell, the election of President Biden is not expected to materially change the institution's monetary policy. Meanwhile, concerns about economic growth in the coming months are justified, as the recent increase in cases of coronavirus in the United States and the new restrictions in Europe show that the economy is not yet beyond the reach of the pandemic. Despite the increased health risks, we continue to see global growth likely to accelerate this quarter and the solid fundamentals that suggest above-potential growth in 2022 remain. While European growth slows down, we anticipate that Asia will recover as mobility increases at the rate of vaccination. Therefore, and given the structural strength of global equity markets, we believe that the balance of risks and opportunities remains favorable for risk assets.