Market Commentary 1st November 2021 from Charlie Hancock

Posted by Niamh Bailey
Market Commentary 1st November 2021
Equity Indices
The UK’s FTSE 100 index gained 0.46% across the week, whilst the mid-cap FTSE 250 moved 0.76% higher. Investor sentiment was generally positive around the globe, with strong corporate earnings results appearing to override concerns regarding inflation and slowing economic growth.

The UK Chancellor, Rishi Sunak, delivered his budget speech with an upbeat message, stating that the UK economy was recovering faster than ‘major competitors’. Mr Sunak said unemployment had not hit the levels feared during the early stages of the pandemic, but warned inflation was set to rise over the coming months. The budget announcements included a cut to the rates of duty for alcohol and domestic flights, which helped airline and pub stocks to rally across the week. EasyJet gained 4.43%, whilst the British Airways parent company, IAG, rose by 4.96%. Pub chain Wetherspoon saw their share price move 7.35% higher, with competitor Marston’s PLC rising by 8.83%.

The Office for Budget Responsibility (OBR) said that the UK economy will return to its pre pandemic peak by the beginning of 2022, after revising their 2021 growth forecasts up from 4% to 6.5%. The OBR downgraded their 2022 forecast from 7.3% to 6.0%.

European equity indices moved higher last week, with Germany’s DAX index gaining 0.94% and France’s CAC 40 index climbing by 1.44%. Weaker performance for Swiss equities appeared to weigh on the broad FTSE All World Index – Europe ex UK, which was broadly flat across the week (+0.02%).

A number of better than expected corporate earnings results helped to boost sentiment on European equities last week. Multi-national companies which reported encouraging results included Spanish banking group BBVA, German sports company Puma and French electrical equipment company Schneider.

Eurostat, the official European Union statistical agency, released a stronger than expected economic growth estimate for the third quarter. The estimate suggested that Eurozone Gross Domestic Product (GDP) expanded by 2.2% compared to the 2nd quarter of the year. Eurostat also stated that headline inflation was 4.1% during October, with consumer prices increasing at their fastest rate since 2008.

Equity indices in the US were mixed last week. The S&P 500 gained 1.33%, the Dow Jones Industrial Average rose by 0.40% and the technology heavy NASDAQ 100 rallied by 3.23%. Investors shrugged off data showing that US economic growth during the third quarter was weaker than expected.

Corporate results appeared to override concerns about slowing US economic growth last week, although reports from Apple and showed that the current widespread supply chain and logistical issues are impacting corporate earnings. Apple’s revenue for the third quarter was lower than analyst estimates, with CEO Tim Cook stating that supply chain constraints had impacted sales for their devices. Amazon reported worse than expected revenue and profits, whilst warning that profits may shrink significantly in the final quarter of the year.

Progressive talks regarding the US infrastructure spending bill also appeared to boost sentiment, with the Biden administration stating that positive talks had taken place between Biden and senator Joe Manchin. Manchin has previously opposed the bill on the basis that spending should be more conservative.

Asian equity indices generally underperformed versus their global peers last week. The broad FTSE All World Index – Asia Pacific declined by 1.38%, China’s Shanghai Composite Index fell by 0.98% and Japan’s Nikkei 225 gained 0.31%.

Investors paid close attention to polling data ahead of Japan’s 31st October general election, with the Liberal Democratic Party expected to remain in power. The Bank of Japan kept interest rates unchanged and stated they will continue with asset purchases under their quantitative easing programme for the foreseeable future. The central bank’s governor, Haruhiko Kuroda, said that the risk of accelerating inflation is extremely limited in Japan. Supply chain issues were reflected in weaker than expected industrial production data, which showed that output from Japanese factories shrank for the third month in a row.

Concerns around the Chinese property sector continued to impact investor sentiment last week. Whilst Evergrande made a delayed interest payment for one of their US Dollar bonds, avoiding an official default, other smaller developers reportedly missed interest payments during the week. Chinese authorities expanded a test scheme for an annual tax on home and land owners, sparking concerns of a further slowdown in the real restate sector.

The 10-Year Gilt yield declined across the week, moving from 1.14% to 1.03%. Shorter dated bond yields moved higher across the week, with traders anticipating that the Bank of England will be forced to raise interest rates in a more aggressive fashion than previously expected. The 2-Year Gilt yield rose from 0.66% to 0.70%.
The 10-Year German Bund yield was unchanged across the week at -0.11%. The European Central Bank (EBC) left key interest rates unchanged following their policy meeting last week. Christine Lagarde, the ECB president, stated that short term inflation may be more persistent than initially expected, but explained that the central bank sees inflation declining to less than 2% by 2023.
The US 10-Year Treasury yield declined from 1.63% to 1.56% last week. In a similar move to UK Gilts, shorter dated Treasury Bonds saw their yields move higher as bond traders priced in rising expectations for the Federal Reserve to hike rates sooner than previously anticipated. The 2-Year US Treasury yield rose from 0.46% to 0.50% across the week.
GBP / USD – Current 1.3682 Previous 1.3755

GBP / EUR – Current 1.1841 Previous 1.1812

Sterling declined by 0.53% against the US Dollar, with the greenback strengthening against most major currencies across the week. Against the Euro, the Pound moved 0.25% higher.

After rising above the $1,800 per ounce mark during the early part of the week, the gold spot price declined to $1,783.38, finishing the week 0.52% lower. With the US Dollar rallying late in the week, the precious metal came under downward pressure during Friday’s trading session.
The Brent Crude spot price moved 1.34% lower across the week, reaching $84.38 per barrel. Reports of Iran agreeing to return to the negotiating table with western nations in relation to their nuclear programme appeared to prompt a decline for oil prices.