Market Commentary 25th October 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 25th October 2021
Equity Indices
UK equity indices lagged most major indices around the globe last week, with the FTSE 100 declining by 0.41% and the FTSE 250 moving 0.23% lower. The large cap FTSE 100 index was hampered by weakness in heavyweight mining stocks, with Anglo American declining by 5.32% and Rio Tinto falling by 7.25%.

UK retail sales declined for the 5th consecutive month during September, with spending on both the high street and online falling. The bulk of the decline was driven by lower demand for household goods. On a more positive note, a composite Purchasing Managers Index (PMI) reached a 3-month high during September, with growth in service businesses outweighing weakness in the manufacturing sector.

Official data showed that inflation unexpectedly declined from 3.2% year-on-year in August to 3.1% during September. Despite the data coming in weaker than expected, the recently appointed Bank of England (BoE) chief economist, Huw Pill, warned that inflation could rise above 5% in the coming months. Pill stated that the central bank’s monetary policy committee is “finely balanced” on a decision regarding interest rates ahead of their 4th November policy meeting.

The FTSE All World Index – Europe ex UK rose by 1.13%, with continued strength in Dutch equities providing a boost for the broad index. Germany’s DAX index was the weakest major equity index in the region, declining by 0.28% across the week.

Economic data was relatively gloomy last week. A composite PMI for the Eurozone weakened for the third month in a row during September, although both the services and manufacturing sectors remained in expansionary territory. A closely watched consumer confidence indicator for the Eurozone registered a decline during September.

Supply bottlenecks continued to be a hindrance for manufacturing businesses. French automaker Renault saw their share price decline by 6.08% across the week, after announcing that the number of vehicles produced during 2021 will be around 500,000 lower than their initial estimates. Renault stated the main reason for their production cuts was a continued shortage of microchips. The European Central Bank (ECB) president, Christine Lagarde, warned last week that the European economy is sensitive to shocks from supply chain disruptions.

US equities outperformed last week, with the S&P 500 index gaining 1.63%. The Dow Jones Industrial Average rose by 1.08% and the technology heavy NASDAQ 100 moved 1.37% higher.

Encouraging corporate earnings results added to the bullish sentiment on US equities. Electric vehicle maker, Tesla Inc, saw their share price gain 7.91% across the week, with investors encouraged by better than expected third quarter results and record vehicle deliveries despite the ongoing microchip shortage. 84% of S&P 500 companies that have reported earnings so far have beat analyst estimates, indicating that large businesses have been able to maintain margins amidst rising input costs.

Investors also appeared to be encouraged by developments in the debate regarding a multi trillion-dollar infrastructure spending bill. Reports suggested that the democrats are prepared to forego tax increases in order to win support from republican members of congress, whilst President Biden stated that they were close to striking a deal.

Equity markets in Asia were mixed, with the broad FTSE All World Index – Asia Pacific gaining 0.69%. China’s Shanghai Composite Index moved 0.29% higher, whilst Japan’s Nikkei 225 declined by 0.91%.

Japanese equities remained volatile ahead of the upcoming general election. Economic data was mixed, with a composite PMI rising during September. The services sector saw an increase in activity for the first time since January 2020, with a sharp decline in Covid-19 cases appearing to improve consumer sentiment. Export growth slowed during September, with production cuts amongst automakers prompting a decline in vehicle exports.

Data showing that the Chinese economy grew at a slower than expected rate of 4.9% during the third quarter appeared to weigh on investor sentiment. Growth in industrial output slowed, whilst retail sales rose by more than expected during September. The outlook remains relatively downbeat at present, with an ongoing slowdown in the property sector likely to weigh on economic growth in the coming months.

Bond Yields
The 10 Year-Gilt yield moved slightly higher across the week, rising from 1.10% to 1.14%. Shorter dated bond yields saw a sharp increase, with bond traders pricing in an increase in expectations for the Bank of England to raise interest rates next month. The 2-year Gilt yield climbed above pre-pandemic levels during the week.

The BoE governor, Andrew Bailey, stated last week that the bank would be forced to act on monetary policy if the current inflationary pressures persist.

The 10-Year German Bund yield rose from -0.17% to -0.11% last week, despite the ECB president, Christine Lagarde, maintaining a dovish stance. Ms Lagarde re-iterated that the current spike in inflation is unlikely to last and vowed to continue aiding the Eurozone economy.
The 10-Year Treasury yield rose from 1.57% to 1.63% across the week.

The Federal Reserve chairman, Jerome Powell, delivered mixed messages at a conference on Friday. Powell stated that the central bank’s view is that high inflation is likely to fade, but admitted the bank doesn’t know how long it will take. The Fed chairman added that there is a risk of persistent high inflation if supply bottlenecks persist, but it would be premature to raise interest rates now.

GBP / USD – Current 1.3755 Previous 1.3751

GBP / EUR – Current 1.1812 Previous 1.1853

After strengthening during the first half of the week, Sterling fell back to finish the week broadly flat against the US Dollar. The Pound gained 0.03% against the greenback, whilst declining by 0.35% against the Euro.

The Gold spot price rose by 1.42% to $1,792.65 per ounce last week, with news flow regarding inflationary pressures contributing to support for the precious metal amongst traders.
The Brent Crude spot price rose by 0.79% to $85.53 per barrel last week.

With OPEC continuing to resist calls for an increase in production, analysts expect demand for crude oil to continue outstripping supply over the coming months.