Market Commentary 18th October 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 18th October 2021
Equity Indices
Improving investor sentiment helped the FTSE 100 gain 1.95%, whilst the mid-cap FTSE 250 index rose by 1.99%. Investors shrugged off concerns around inflation and slowing economic growth, with most equity indices around the globe moving higher as a result.

Official data showed that the UK economy expanded by 0.4% during August, with strong growth for leisure and hospitality businesses following the removal of Covid-19 restrictions. The increase in Gross Domestic Product (GDP) during August was better than expected, but still leaves the UK economy around 0.8% smaller than the pre-pandemic size recorded in February 2020.

Broad strength in commodity prices helped energy and mining related stocks to continue their recent rally. Royal Dutch Shell and BP gained 4.69% and 2.84% respectively, whilst Anglo American rose by 8.21% and Glencore gained 9.92%.

The broad FTSE All World Index – Europe ex UK rose by 2.87%. Germany’s DAX index gained 2.51% and France’s CAC 40 moved 2.55% higher, but the headline Dutch equity index (AEX) was the strongest performing major index, rising by 3.67% across the week.

Investors appeared unphased by data which suggested economic growth is slowing. Eurozone industrial production declined in August, with supply chain issues continuing to hinder manufacturing businesses. Estimates for 2021 economic growth in Germany were revised lower, although several economists expect growth to improve again in 2022.

French luxury goods companies performed strongly last week, with Kering gaining 6.67% and LVMH rising by 5.91%. LVMH reported better than expected sales for the third quarter, helping to alleviate some of the concerns around falling demand due to an economic slowdown in China.

Major US equity indices moved higher, with the technology heavy NASDAQ 100 posting the strongest gain of 2.20%. The S&P 500 rose by 1.82% and the Dow Jones Industrial Average gained 1.58%. Large-cap growth stocks performed strongly, with Tesla gaining 7.32% and rising by 3.66%. Financial stocks also rallied, with Bank of America rising 4.60% and Goldman Sachs gaining 3.41%.

Speculation that inflation may have reached a peak in the US appeared to help calm investor nerves. The core US Consumer Price Index (CPI), which excludes typically volatile food and energy prices, rose by 4.0% year-on-year in September, in line with expectations. The Producer Price Index (PPI) came in lower than expected.

US retail sales during September were better than expected, although a closely watched measure of consumer sentiment unexpectedly declined. Weekly jobless claims fell below 300,000 for the first time since the pandemic commenced.

Asian equity indices were mixed and the broad FTSE All World Index – Asia Pacific climbed by 1.75%. Headline Chinese indices were relatively weak, with the Shanghai Composite Index declining by 0.55%, whilst Japan’s Nikkei 225 rose by 3.64%.

China’s Producer Price Index rose by 10.7% year-on-year in September as widespread shortages in energy supplies contributed to higher prices. With domestic coal in short supply and 60% of China’s power plants fuelled by coal, plants have struggled to keep up with energy demand. A prolonged energy crisis is likely to dampen economic growth. The real estate sector continued to make headlines following Evergrande’s debt issues, with other developers reportedly missing debt payments last week.

Investor sentiment on Japan appeared to be lifted by comments from Prime Minister Kishida, who stated that he intends to implement a large government spending package should he emerge victorious from this month’s general election.

Bond Yields
The 10 Year-Gilt yield retreated last week, moving from 1.16% to 1.10%. Somewhat dovish comments from a member of the Bank of England’s monetary policy committee (MPC) appeared to add to the downward pressure on yields. Economist and MPC member, Silvana Tenreyro, warned against raising interest rates to combat temporarily strong inflation, stating that price rises may have faded before any interest rate rise starts to impact demand levels in the economy.
The 10-Year German Bund yield declined from -0.15% to -0.17%. Weakening sentiment on the German economy seemingly contributed to yields declining across the week, with concerns around economic growth typically prompting a rise in demand for German Bunds.
The 10-Year Treasury yield moved from 1.61% to 1.57%. Speculation that inflation may have peaked in the US, together with the release of minutes from the Federal Reserve’s September policy meeting contributed to yields declining. Minutes from the Fed’s recent meeting showed that the central bank feels keeping interest rates at zero or close to zero would be justified for the next couple of years.
GBP / USD – Current 1.3751 Previous 1.3615

GBP / EUR – Current 1.1853 Previous 1.1766

The Pound gained 1.00% against the US Dollar and 0.74% against the Euro. Some of the gains appeared to be attributable to continued speculation that the Bank of England will raise interest rates next month.

The Gold spot price gained 0.62% across the week. After briefly touching the $1,800 mark on Thursday following the release of US inflation data, the precious metal sold off during Fridays session to finish the week at $1,767.62.
Oil prices continued to rise last week, with the Brent Crude spot gaining 3.00% to reach $84.86 per barrel. With natural gas prices rising again last week and China experiencing widespread coal shortages, traders moved to price in higher demand for Crude oil as an alternative source of energy.