Market Commentary 27th September 2021 from Charlie Hancock

Economic data for the UK pointed to slowing economic growth and higher inflation in the near future. A composite Purchasing Managers Index (PMI) declined from August to September, with a notable slowdown in the manufacturing sector offsetting faster growth in the services sector. Minutes from the Bank of England’s most recent policy meeting were released last week, confirming the bank expects inflation to peak at 4% this winter.

Rising oil prices helped boost the FTSE 100, with heavyweight oil stocks Royal Dutch Shell and BP rising by 5.71% and 5.10% respectively. Stocks in the travel sector rallied following news that the UK government will relax Covid-19 travel requirements, scrapping the traffic light system. The owner of British Airways, International Consolidated Airlines Group (IAG), saw their share price rise by 17.46% across the week.

The Eurozone saw similar economic data to the UK, with a PMI survey indicating business momentum slowed during September, whilst input costs rose to the highest level for 21 years. Both the services and manufacturing sectors experienced slowing growth this month, with HIS Markit, the company behind the PMI data, citing supply chain issues and peaking consumer demand as two key factors.

Investors in Europe appeared to be in a cautious mood ahead of Germany’s general election, with voters heading to the polls on Sunday. A left-leaning coalition may result in the German government favouring higher fiscal spending in the coming years.

Investors paid close attention to the Federal Reserve’s policy meeting which took place on Tuesday and Wednesday. The central bank announced they would begin tapering their bond purchase programme later this year, with the programme being gradually wound up by mid-2022. Fed policymakers were split on when the bank should raise interest rates, with some members calling for a rate rise as early as late 2022 and others in favour of waiting until 2023.

A composite PMI survey indicated only a modest slowdown in business activity in the US, with both manufacturing and services remaining strongly in expansionary territory. New weekly jobless claims were higher than expected at 351,000.

Investors remained nervous about contagion risks from the potential collapse of Chinese property developer, Evergrande. It was reported on Thursday that some international bondholders did not receive scheduled interest payments from Evergrande, leading to speculation of bankruptcy. Evergrande subsequently entered a grace period and will officially be in default if interest payments are not made within the next 30 days. The Chinese government are reportedly considering plans for a restructuring of the real estate giant.

Investors in Japan paid close attention to polls ahead of the Liberal Democratic Party’s presidential election on the 29^th September. The current vaccination minister, Taro Kono, remains the favourite to replace Prime Minister Suga. The Bank of Japan made no changes to their monetary policy stance at their September policy meeting. The central bank stated that current loose measures, including their asset purchase scheme, are likely to remain in place until inflation reaches their 2% target.

Expectations for tightening monetary policy from central banks around the globe pushed Eurozone bond yields higher.

A somewhat hawkish projection for interest rate rises from the Federal Reserve and the announcement of tapering for their asset purchase scheme pushed yields higher. The Fed did not commit to a specific month to start winding down their $120 billion per month quantitative easing programme, but said it could commence before the end of the year.

GBP / EUR – Current 1.1664 Previous 1.1709

The Pound moved lower against both the US Dollar and the Euro, declining by 0.45% and 0.38% respectively.