Market Commentary 20th September 2021 from Charlie Hancock

Posted by Niamh Bailey


Market Commentary 20th September 2021
Equity Indices
UK equity indices declined across the week, with investor sentiment deteriorating globally. The FTSE 100 moved 0.93% lower, whilst the mid cap FTSE 250 index suffered a relatively shallow decline of 0.31%.

UK listed mining companies were impacted by concerns around falling demand for raw metals, due to an economic slowdown in China. Rio Tinto saw their share price decline by 8.25%, whilst Anglo American suffered a fall of 15.64%. The FTSE 100 was cushioned by gains in heavyweight banking stocks, with expectations for the Bank of England (BoE) raising interest rates climbing following the release of strong inflation data. Lloyds Banking Group gained 5.85%, whilst NatWest Group rose by 2.36%.

Economic data was mixed. The number of employees on UK payrolls returned to its pre pandemic peak during August, whilst job vacancies reached a record high of 1 million, indicating that the labour market remains tight. UK consumer confidence declined during August and retail sales fell for the fourth consecutive month.

European equity indices moved lower, led by France’s CAC 40 index which posted a decline of 1.40%. Germany’s DAX index suffered a 0.77% fall, whilst the broad FTSE All World Index – Europe ex UK declined by 1.76%.

French luxury goods companies sold off amidst concerns around falling demand from Chinese consumers. Sales in China account for around 40% of total revenue for Kering and 35% for LVMH. Across the week, Kering’s share price declined by 8.50% and LVMH fell by 4.90%.

European Central Bank (ECB) officials downplayed the prospect of an interest rate rise as soon as 2023. Investors speculated on a rate rise following news reports which suggested that the central bank may raise their inflation forecasts for the coming years.

US equity indices were mixed last week. The S&P 500 declined by 0.57%, the Dow Jones Industrial Average was broadly flat with a decline of 0.07% and the technology heavy NASDAQ 100 fell by 0.69%. The small cap Russell 2000 index fared better than the large cap indices, posting a gain of 0.42%.

Debates in congress regarding president Biden’s proposed $3.5 trillion infrastructure bill continued. A senior democratic senator, Joe Manchin, appeared to rein in spending expectations, stating that he would support a bill in the region of $1.5 trillion.

Investors paid close attention to US inflation data last week. The Consumer Prices Index (CPI) rose by less than expected during August, although year-on-year inflation remained at a relatively elevated level of 5.3%. Weaker used car values and airline ticket prices suggested that pent up spending in some sectors may be slowing.

Asian equity indices saw mixed performance, with the broad FTSE All World Index – Asia Pacific declining by 1.63%. China’s Shanghai Composite Index moved 2.41% lower, whilst Japan’s Nikkei 225 gained 0.39%.

Newsflow on China contributed to weak investor sentiment globally. Economic data pointed to slowing growth, with retail sales, industrial output and business investment all coming in below expectations. The weak retail sales data pointed to a decline in consumer confidence following harsher restrictions to control coronavirus outbreaks during recent months.

One of China’s largest property developers, Evergrande, made headlines throughout the week. Concerns around the company defaulting on debt payments due to cash flow issues intensified, with investors trying to assess the likelihood of a government bailout. Over the weekend, reports suggested that Evergrande were attempting to settle liabilities by offering creditors some of their properties at heavily discounted rates.

Potential replacements for Japan’s Prime Minister Suga started their campaigns last week, with four candidates in the running. Taro Kono, the minister currently in charge of Japan’s Covid-19 vaccination programme, is the current favourite. Kono appears to be in favour of the Bank of Japan’s current monetary policy stance, whilst advocating greater fiscal stimulus.

Bond Yields
UK government bond yields moved higher last week, with stronger than expected inflation data adding to expectations for an interest rate rise. The 10-Year Gilt yield climbed from 0.76% to 0.85%, reaching a 4-month high.

UK CPI rose to 3.2% during August, with inflation running at the highest level seen since 2012 and above economist forecasts of 2.9%. The Office for National Statistics stated that higher food and restaurant prices were one of the main drivers, with prices artificially low during August 2020 due to Rishi Sunak’s ‘eat out to help out’ scheme.

The 10-Year German Bund yield moved from -0.33% to -0.28%. Stronger than expected Eurozone industrial production contributed to the rise in yields, with output expanding during July after suffering contractions during the 2 previous months. Suggestions of sooner than expected interest rate rises by the ECB also prompted yields to move north.
The 10-Year US Treasury yield moved lower on Monday and Tuesday, with weaker than expected US CPI data contributing to the decline. Yields reversed during the 2nd half of the week, with the 10-Year posting a weekly increase of 2 basis points to 1.36%.
GBP / USD – Current 1.3741 Previous 1.3839

GBP / EUR – Current 1.1709 Previous 1.1708

Sterling moved 0.71% lower against the US Dollar, with the greenback strengthening against most major currencies during the week. Against the Euro, the Pound was flat.

The Gold spot price continued to experience weakness, moving 1.86% lower to $1,787.58 per ounce across the week. A strengthening US Dollar appeared to reduce demand for the precious metal.
Oil prices strengthened across the week, with the Brent Crude spot price moving 3.32% higher to $75.34 per barrel. Expectations of weak US output grew due to a further hurricane, with producers including Royal Dutch Shell evacuating staff from an offshore platform in the Gulf of Mexico.