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November Monthly Review: Jerome Powell 2.0. Stocks Fall on Omicron & Inflation

   

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout December and beyond.

Most of the action, along with the price action, occurred during the last few days of the month with some very clever South African doctors sadly discovering a new variant of COVID — Omicron.  This instantly caused havoc in the markets, tanking almost all global indices, crude oil and the comdolls.

Jerome Powell was reappointed as the chair of the US Federal Reserve and Dr Lael Brainard as vice-chair.  Markets and politicians were equally pleased with the new dream team with Powell to carry on the status quo and Brainard being pro-regulation of banks.

Central banks were still struggling with inflation and the debate still rages over the definition of the word “transitory”.  Supply chain issues are now the scourge of the entire planet and raising interest rates may be a double-edged sword as central banks need to balance inflation with fragile economies.  Omicron has, and will, cause even more confusion in the decision-making process.

Crude Oil

At the beginning of the COVID pandemic, the price of WTI and Brent Crude crashed due to a severe oversupply based on a severe lack of demand.  Once we figured out where to store all this excess oil, the price of Crude stayed low for many months as the demand was very slow to return to normal.

For months we almost ignored the supply and focussed on the demand.  However, the tables turned as we exited the summer as demand was returning but supplies were short.

In October we saw prices of Brent and WTI increasing dramatically based on the fact that a severe shortage of natural gas would have economies using oil-based systems for heating instead of natural gas.

Later in November, many economies released crude from their Strategic Petroleum Reserve.  This was basically a political move, to make the public think that their leaders were trying to do something to alleviate the prices at the petrol pumps.  In reality, the simple balances of supply and demand have lowered the prices of WTI and Brent.

As we mentioned in the overview, the discovery of COVID Omicron has cast doubts over future demand and a lower Natural Gas price has forced a big fall in the price of crude.Screenshot 2021-11-30 at 18.46.20

You can see from the US Oil chart the fall in price from the $85s to the close at the end of the month near $66.

USD

As we can see from the charts, the story of USD in November was about strength, literally from day one.Screenshot 2021-12-01 at 14.28.14

The talk of tapering, possibly raising interest rates and the passing of the US Infrastructure bill helped the Greenback.

On the last day of the month, Jerome Powell admitted to the US Congress that inflation may not be as “transitory” as they thought.  This has the US Federal Reserve looking at bond-purchase tapering sooner, which may lead to raising interest rates sooner.

We see further USD gains but one thing is still up in the air causing uncertainty — COVID Omicron.  If the new variant proves to be mild, global economies should continue opening up.  If not, central banks will have to continue with their strategies, even though the Fed may be running out of tools.

US Equities

Throughout October, all that investors noted were good to excellent and “better-than-expected” earnings reports, which spurred on a wave of renewed enthusiasm for the stock markets.

Going into November, we saw similar good news but we finished the month with three negative reports:

  1. The discovery of the Omicron variant of COVID meant uncertainty about the labour force and continued supply chain problems.
  2. The announcement by Moderna that the current batch of vaccines might not be able to handle Omicron
  3. Jerome Powell’s testimony to the US Congress where he finally admitted that inflation might not be so transitory and he may want to raise rates sooner.

Screenshot 2021-11-30 at 19.03.00

Our chart on the S&P 500 tells the story where we ended the month pretty much where we started.  Levels fell based on Omicron, recovered for a day, then fell while Jerome Powell spoke to Congress.

Comdolls

If you don't know what these are: these are the Commodity Dollars: CAD, AUD & NZD.

Screenshot 2021-12-01 at 17.06.11

Due to the global supply chain issues, and COVID affecting demand for most goods, the Comdolls are susceptible.   During the last few days of the month, the new flavour of COVID -- Omicron -- injected uncertainty into the markets and negatively affected all the Comdolls.Screenshot 2021-12-01 at 17.04.47

As we have been saying since March 2020, "any good news on vaccines and COVID will positively affect these currencies.Screenshot 2021-12-01 at 17.08.25

Turkish Lira

If you were impressed by the “record lows” of the Turkish Lira in our October report, you might find the chart on USDTRY breathtaking! 

Inexplicably, the Central Bank lowered Interest Rates in an environment of high inflation, and they have no intention of raising Interest Rates.  This is still baffling to most analysts and investors.

Usually, when a minor country purposely devalues its currency, there are two end games:

1) A vast increase in exports due to the cheap currency. 

2) A vast increase in tourism due to the cheap currency

Of course, both these concepts are hugely flawed with logistics being so expensive due to COVID and, of course, travel restrictions due to COVID.Screenshot 2021-11-30 at 19.22.54

Many FX traders are sitting on the sidelines expecting a huge short opportunity in USDTRY but nobody knows when the incompetence will diminish.

Gold

Just as we displayed with the S&P 500, Gold (XAUUSD) finished the month basically where it started, at around $1775.Screenshot 2021-11-30 at 19.24.25

Much of the gains of Gold mid-month were based on the US Bond yields and investors looking for a hedge against inflation which, as we had mentioned, was still a confusing topic for central banks.

On the last day of the month, Jerome Powell admitted to the US Congress that inflation may not be as “transitory” as they thought.  Let’s see if this drives investors to buy more Gold into December and further.  The World Gold Council is reporting that central banks have bought less in the last half of the year.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of December.

Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

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