Global Markets Commentary
The COVID-19 Accordion
“Just when I thought I was out, they pull me back in!”
Michael Corleone, The Godfather III
The final installment of The Godfather trilogy focuses on the
Corleone family’s efforts to abandon their criminal past and
move into legitimate businesses. However, escaping their
old life proved more difficult than expected.
Globally, by mid-November more than 7.8 billion doses of
COVID-19 vaccines had been administered, travel and social
restrictions were easing, and economic recovery was firmly
taking hold. Optimism was returning. Then Omicron, a new
coronavirus variant of concern, emerged from South Africa
and began to dominate headlines over the U.S. Thanksgiving
holiday. Hope that we might finally be returning to some
semblance of normal was dashed.
Stocks fell on worries that Omicron would disrupt the
economic recovery and indications that the U.S. Federal
Reserve might pull back on bond purchases sooner than
expected. Winding down this support for the economy likely
heralds an increase in the benchmark interest rate, which
has been resting near zero since early in the pandemic.
Equity markets performed very well in early November –
before investors panicked. At month’s end, most markets
fell sharply and posted a loss. Despite the Fed’s more
hawkish stance, bond yields tightened.
Even though the variant’s emergence triggered a sharp
decline in crude oil prices, the U.S. will go ahead with its
plan to release 50 million barrels of oil from its strategic
reserves. Meanwhile in Canada, the government-sponsored
cartel that controls Quebec’s maple syrup supply (and 70%
of the global supply) decided to tap 22.7 million kilograms
from its emergency stockpile. The decision comes after
lower-than-expected production last spring and surging
international demand for this liquid gold.
Canada – A growing economy
Canada’s economy grew at an annual rate of 5.4% in Q3,
helped by household spending and exports that more than
offset a contraction in business investing. Supply-chain
BMO Private Investment Counsel Inc. | December 2021
disruptions continue to hobble manufacturers. In addition
to catastrophic destruction, severe flooding in B.C. created
extra delays in delivering materials and merchandise.
Inflation has been high for an extended period, largely
due to cargo congestion. Even so, Bank of Canada (BoC)
Governor Tiff Macklem believes that inflation will decrease
and hit its target of 2% by the close of 2022. Now that
the central bank has shut down its bond-buying program,
markets expect rate hikes will come in stages next year.
Our economy added 154,000 jobs in November, well above
analysts’ predictions of 35,000 and a clear signal that the
economic rebound is gaining strength. The unemployment
rate dropped to 6.0%, beating a consensus estimate of
6.6% and pushing unemployment to pre-pandemic lows.
Total hours worked also returned to pre-pandemic levels.
Gains came after the Canada Emergency Response Benefits
program ended in October.
Omicron has already resulted in travel restrictions
globally and will potentially lead to a reintroduction of
stricter lockdown measures. This cast uncertainty on oil
demand, putting downward pressure on prices. West Texas
Intermediate (WTI) crude declined from approximately
US$84 to US$66 per barrel by the end of November.
While the stock market started strong in November, the
new variant clouded the economic recovery outlook and
prompted markets to reverse course. The S&P/TSX declined
1.6% in November, with energy a top detractor. After gold
reached US$1,860 mid-month, it closed essentially flat at
around US$1,775 per ounce. The 10-year government bond
yield contracted by 24 basis points to 157 basis points from
its high point in November.
United States – Inflation no longer “transitory”
On November 30, newly re-appointed Fed Chair Jerome
Powell testified before the Senate Banking Committee
that inflation would likely persist well into 2022. He
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Global Markets Commentary
acknowledged the downside risks that Omicron poses to
employment, economic activity and inflation uncertainty.
Mr. Powell said it’s time to stop calling higher inflation
“transitory” and indicated that interest rates could begin
to rise as early as the first half of 2022. “The economy is
very strong and inflationary pressures are high, and it is
therefore appropriate in my view to consider wrapping up
the taper of our asset purchases…perhaps a few months
sooner,” he said.
The Fed now faces a difficult task. It has long maintained
that it would not raise interest rates until inflation was
running above target and the labour market was showing
significant strength. Omicron’s emergence is likely to have
inverse effects on these two factors. Increased supply-chain
bottlenecks will push prices up and adversely impact the
labour market.
Volatility returned to the markets in November as the CBOE
Volatility Index (VIX), which is Wall Street’s fear gauge, spiked.
President Biden reacted to the arrival of Omicron by imposing
travel bans on eight southern African countries, adding that
economic lockdowns are not currently on the table.
Treasury Secretary Janet Yellen urged lawmakers to take
quick action on the U.S. debt ceiling. Congress sets a limit on
how much money government can borrow to pay expenses.
Once this limit has been met, Congress must vote to either
lift or suspend the ceiling before the Treasury can raise
more debt. After President Biden signed his US$1 trillion
infrastructure bill, Secretary Yellen estimated that the U.S.
could reach its ceiling by December 15 – giving lawmakers a
narrow window to strike a deal and avoid a default.
Equities surged to start the month, but worries about the
new variant’s potential damage shook the S&P 500. It gave
back most of its early gains and finished down 0.8%.
Europe – Gloomy mood on numbers
Eurozone annual inflation rose to 4.9% in November – the
highest level on record – up from 4.1% in October. High gas
prices and expensive imports sparked the increase. Core
inflation, which does not include energy or unprocessed
food prices, also spiked to 2.6% from 2.0%. The European
Central Bank wants inflation at 2.0% in the medium term
and believes that it will slow in 2022, although less quickly
than expected.
German GDP grew 1.7% in Q3, slightly missing estimates
of 1.8%. Ongoing manufacturing-supply bottlenecks are
December 2021
holding back growth. Companies also invested less in
machinery and construction during Q3. Rising COVID-19
cases in Europe’s largest economy dampened consumer
sentiment. The GfK institute’s consumer sentiment index
fell to -1.6 points heading into December, its lowest reading
since June. Morale is down based on anxiety that current
high inflation levels will cause companies to increase
wages, thereby creating higher consumer demand and
even greater inflationary pressures. Germany’s incoming
government intends to hike the minimum wage by about
25% to 12 euros an hour.
In November, the Euro Stoxx 50, FTSE 100 and DAX fell
5.1%, 3.1%, and 4.5%, respectively. Uncertainty about
Omicron’s impact made for a gloomy market mood.
China – Property sector delivers more stress
China’s consumer price index rose by 1.5% in October
compared to a year ago, while the producer price index
went up 13.5%. Consumer prices could rise if producers pass
on their higher costs. China’s central bank is not likely to cut
rates to kickstart growth, but could instead lower the cash
reserve requirements for banks, allowing them to increase
their lending. China’s urban unemployment rate held steady
in October at 4.9%; however, the jobless rate among those
aged 16 to 24 was much higher at 14.2%.
In October, both exports and imports grew at lower-than-
expected rates of 27.1% and 20.6%, respectively, on a year-
over-year basis. The trade surplus of US$84.54 billion was
higher than the US$65.55 billion forecast. Electricity shortages
leading to production shutdowns are expected to be resolved
since both coal production and imports have increased.
Despite a decline in some significant areas like autos and
apparel, retail sales grew by 4.9% in October thanks to
increased spending during China’s “Golden Week” holiday. The
real estate sector, which accounts for about 25% of China’s
GDP, has slumped lately. October prices for new homes
declined in more than 70% of major Chinese cities.
For November, the Hang Seng posted a 6.1% loss and the
Shanghai Composite recorded a slightly positive return of 0.6%.
Japan – A rebound expected
During Q3, the economy shrank by an annualized rate
of 3.0%, a greater slump than anticipated. Supply-chain
congestion has hobbled growth and exports. On the
bright side, improved consumer confidence and increased
spending on services point to recovery. Even though at least
76% of the country is fully vaccinated and COVID-19 case
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Global Markets Commentary December 2021

numbers are dropping, Japan reinstated a strict travel ban
on all foreign visitors after Omicron became headline news.
In Q4, the economy is expected to bounce back with
the help of a record US$490 billion economic stimulus
package. Japan has been a straggler at recovering from
the contagion’s economic impact, which has prompted
highly supportive fiscal and monetary policy even as other
countries were scaling back. The spending packages to
combat the pandemic have left Japan with long-term debt
approximately twice the size of its US$5 trillion economy.
The Nikkei fell 6.2% in November.
Our strategy
November reminded us why diversification is vital. Since the
coronavirus market crash in March 2020, equity markets have
been on a tear. Although we have an overweight allocation
to equities, their outperformance has nevertheless been
nudging the upper limit of our range. That trend continued for
most of the month, but sharply reversed course after Omicron
emerged and the Fed took a more aggressive stance.
Bonds rallied and provided support where an allocation
was appropriate in client portfolios. It is tempting to reduce
exposure to an asset class that has been lagging and has
limited potential to provide returns. However, bonds have
been a good risk mitigator for our portfolios.
The last word
While the Corleone family was unable to move into a new,
brighter future, we believe here in Canada we are much
better positioned to move past COVID-19 and learn to live
with it.
At this point scientists don’t have a full understanding
of Omicron. It seems to be more transmissible, yet there
is some evidence that it causes milder illness. If current
vaccines prove less effective against new strains, they can
be adjusted and mass produced. In fact, we may never be
fully rid of COVID-19, but we could get to a place where its
impact is much more limited.
Although equity markets declined in two of the three
previous months, so far this year the S&P/TSX and S&P 500
are up more than 21% and 23%, respectively. As supply-
chain challenges are resolved, economic recovery should
continue to strengthen and inflation should settle down.
Please contact your BMO financial professional if
you have any questions or would like to discuss your
investments.

We made no changes to our positioning. We continue to

favour U.S. equities, based on long-term trends and their
return potential relative to bonds.

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