Market Commentary 4th October 2021 from Charlie Hancock

Equity indices around the globe ended September on a weak note, with concerns around stagflation (slowing economic growth combined with high inflation) and US government funding weighing on investor sentiment. Comments from the Bank of England (BoE) governor, Andrew Bailey, added to worries about growth. Mr Bailey stated that the UK economy will not recover to its pre-pandemic size until early 2022, which is several months later than previously expected.

During a week in which UK forecourts experienced widespread fuel shortages, oil prices moved higher. This contributed to Royal Dutch Shell’s share price rising by 7.67% across the week, whilst rival BP moved 5.54% higher. Stocks in the banking sector also outperformed the wider market, with HSBC rising by 3.52% and Barclays gaining 2.25%.

With no outright winner declared in the German general elections, the two largest parties, the Social Democratic Party (SDP) and the Christian Democratic Union (CDU), entered negotiations to try and form a coalition with the Greens and the Free Democrats. Until either the SDP or the CDU successfully form a government with the smaller parties, Angela Merkel will remain as chancellor.

Eurozone Consumer Price Inflation (CPI) during August was slighter higher than expected at 3.4%, with rising energy costs being a significant driver during the month. The European Central Bank (ECB) president, Christine Lagarde, maintained a dovish tone, stating that the central bank should not overreact to transitory supply shocks and that there are no signs of the increase in inflation becoming broad-based across the economy.

Concerns around US government funding added to the volatility in equity markets last week. With congress continuing to debate on a rise to the federal debt limit, the possibility of a partial government shutdown loomed. Investors appeared to be somewhat relieved by the signing of a short-term funding bill on Friday, however, according to Treasury Secretary Janet Yellen, the debt limit needs to be raised or suspended by the 18^th of October to avoid the US exhausting its federal borrowing capabilities.

Economic data in the US was mixed. The personal consumption expenditures index, which is the Federal Reserve’s preferred measure of inflation, was in line with expectations during August with a year-on-year increase of 3.6%. Consumer spending rose by more than expected during August, whilst the closely watched Conference Board Consumer Confidence Index declined for the third month in a row during September.

Developments surrounding Chinese property development company, Evergrande, appeared to alleviate some investor concerns last week. Evergrande announced that they will offload their shareholding in Shengjing Bank Co for $1.5 billion to reduce their debt position. This coincided with reports that the Chinese government are asking state backed property companies to buy assets from Evergrande.

Japan’s Nikkei 225, which is sensitive to global growth expectations, appeared to be impacted by concerns around slowing economic growth. Political developments in Japan appeared to have little impact on investor sentiment. Fumio Kishida won the Liberal Democratic Party (LDP) presidential election, with prime minister Yoshihide Suga expected to formally resign over the weekend. Kishida, a former foreign minister, will now lead the LDP into a general election later this month.

BoE governor, Andrew Bailey, stated during a speech that the central bank’s monetary policy committee is prepared to raise interest rates before the end of the year if inflation continues to rise.

GBP / EUR – Current 1.1683 Previous 1.1664

The Pound moved sharply lower against most major currencies on Wednesday, before recovering some ground on Thursday and Friday. Across the week, Sterling declined by 0.97% against the US Dollar, whilst gaining 0.16% against the Euro.

Expectations for tightening in US monetary policy added to rising demand for the US Dollar, whilst concerns around UK fuel supply issues and the UK-EU dispute regarding the Northern Ireland Protocol added to Sterling’s mid-week decline.