Market Commentary 27th September 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 27th September 2021
Equity Indices
UK indices saw mixed performance last week, with the large cap FTSE 100 moving 1.26% higher and the mid cap FTSE 250 index declining by 0.21%. Most global indices declined on Monday, with concerns around Chinese property developer Evergrande and central bank policy weighing on sentiment, but risk appetite improved as the week progressed.

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.

European equity indices declined on Monday, followed by a recovery during the remainder of the week. The broad FTSE All World Index – Europe ex UK gained 0.05% across the week, with Germany’s DAX index rising by 0.27%. French and Italian equities outperformed, with the CAC 40 and FTSE MIB indices gaining 1.04% and 1.41% respectively.

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.

Major US equity indices were mixed last week. The S&P 500 rose by 0.51%, the Dow Jones Industrial Average gained 0.62% and the NASDAQ 100 was flat (-0.02%). The small cap Russell 2000 index moved 0.50% higher.

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.

Asian equity indices underperformed last week, with the broad FTSE All World Index – Asia Pacific moving 1.16% lower. China’s Shanghai Composite index was broadly flat (-0.02%), with the Shanghai stock exchange closed for the mid-autumn festival holiday on Monday and Tuesday. Japan’s Nikkei 225 declined by 0.82%.

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 29th 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.

Bond Yields
The 10-Year Gilt rose from 0.85% to 0.92%. UK government bond yields experienced upward pressure last week, with inflation expectations contributing to the possibility of the Bank of England raising interest rates later this year or during the first quarter of 2022.
The 10-Year German Bund yield rose from -0.28% to -0.23% last week.

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

The 10-Year US Treasury yield rose from 1.36% to 1.45%, with yields for shorter and longer dated treasuries also moving north.

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 / USD – Current 1.3679 Previous 1.3741

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.

The Gold spot price declined by 2.08% last week, reaching $1,750.42 per ounce. Strength in the US Dollar and expectations for higher interest rates appeared to reduce demand for the precious metal.
Oil prices strengthened, with demand rising and US inventories declining amidst continued disruption in the Gulf of Mexico. The Brent Crude spot price moved 2.54% higher to reach $77.25 per barrel.