Market Commentary 4th October 2021 from Charlie Hancock

Posted by Niamh Bailey

 

Market Commentary 4th October 2021
Equity Indices
UK
The UK’s FTSE 100 declined by 0.35% across the week, whilst the mid-cap FTSE 250 moved 2.68% lower. Strong performance in the energy and banking sectors helped to limit declines for the large cap FTSE 100, with a weaker Pound also benefitting the internationally exposed index.

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%.

Europe
European equity indices lost ground across the week, with the broad FTSE All World Index – Europe ex UK declining by 3.44% and Germany’s DAX index moving 2.42% lower. The most widely quoted Italian equity index, the FTSE MIB, outperformed other major European indices with a decline of 1.50%.

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.

US
All of the major US equity indices moved lower, with the S&P 500 declining by 2.21%, the Dow Jones Industrial Average losing 2.42% and the NASDAQ 100 falling by 3.51%. Small caps outperformed across the week, with the Russell 2000 index posting a decline of 0.29%.

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 18th 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.

Asia
Equity indices in Asia declined, resulting in the broad FTSE All World Index – Asia Pacific posting a loss of 2.82%. China’s Shanghai Composite Index fell by 1.24%, whilst Japan’s Nikkei 225 declined by 4.89%.

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.

Bond Yields
UK
The 10-Year Gilt yield ended the week 8 basis points higher at 1.00%, reaching the highest level seen since May 2019.

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.

Europe
The 10-Year German Bund yield was unchanged across the week at -0.23%. Yields rose to the -0.20% level during the middle of the week, but dovish comments from ECB chief Christine Lagarde appeared to provide some downward pressure.
US
After spiking during the early part of the week, the US 10-Year Treasury yield declined again to finish the week broadly unchanged at 1.46%. Recent hawkish comments from Federal Reserve officials appeared to contribute to the rise at the beginning of the week, whilst concerns around slowing economic growth added to the increasing demand for Treasuries during the second half of the week.
Currency
GBP / USD – Current 1.3546 Previous 1.3679

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.

Commodities
Gold
Gold prices moved lower during the first half of the week, before finding some support and rallying on Thursday and Friday. Across the week, the spot price moved 0.60% higher to reach $1,760.98 per ounce.
Oil
Oil prices continued to strengthen, with depleting inventory levels adding to concerns of a global shortage this winter. Across the week, the Brent Crude spot price gained 2.63% to reach $79.28 per barrel.