Market Commentary 12th October 2021 from Charlie Hancock

Posted by Telford Mann

Market Commentary 12^th October 2021

Equity Indices

The large cap FTSE 100 index rose by 0.97% across the week. Concerns around the impact of labour shortages and inflationary pressures on the UK economy appeared to dent confidence on more domestically exposed stocks, with the FTSE 250 index declining by 1.91% across the week.

The FTSE 100 was boosted by strong performance for heavyweight stocks in the oil, mining and banking sectors. The significantly lower exposure to these sectors within the FTSE 250 hindered the mid cap index.

Concerns around inflation impacted investor sentiment last week, with comments from the recently appointed chief economist at the Bank of England, Huw Pill, adding to the inflation debate. Mr Pill stated that high inflation may be more persistent than the central bank previously expected. With increasing newsflow regarding rising commodity prices, investors were bullish on stocks such as BP (+4.62%) and Anglo American (+3.36%).

Europe

European equity indices were mixed last week. The broad FTSE All World Index – Europe ex UK gained 0.78%, boosted by strong performance in Swiss equities. Germany’s DAX index gained 0.33% across the week.

Sentiment on Germany appeared to be impacted by the week’s economic data. Figures for August showed that industrial output suffered its steepest decline since April the early stages of the pandemic in April 2020. The auto industry continued to be hampered by supply shortages, with the production of vehicles and vehicle parts declining by 17.5%.

Comments from European Central Bank (ECB) officials added to the debate regarding inflation during the week. Senior ECB member Isabel Schnabel diverged from the central bank’s official forecast, which sees inflation receding next year, warning that inflation pressures may be more persistent. Philip Lane, the ECB’s chief economist, argued that there are very solid reasons to believe a significant proportion of current inflation is transitory.

The major US equity indices all moved higher during the week, with the more cyclically exposed Dow Jones Industrial Average posting the strongest gain of 1.22%. The S&P 500 index rose by 0.79% and the NASDAQ 100 saw a marginal gain of 0.20%.

Concerns around the US debt ceiling remained, with President Biden stating he could not guarantee the US will be able to meet its financial obligations following the signing of a temporary funding bill in the previous week. These worries appeared to fade during the 2^nd half of the week, with republicans in the Senate agreeing to put forward a bill raising the borrowing limit by $480 billion.

Jobs data released on Friday showed US payrolls saw an increase of 194,000 workers in September, significantly below economist expectations for around 500,000. The data could be viewed as an indication that economic growth is slowing, but could also be interpreted as a sign that the labour market is tightening due to strong growth. Average earnings rose by more than expected during September, whilst new weekly jobless claims were lower than expected.

Asia

Asian equity indices were mixed last week, with the broad FTSE All World Index – Asia Pacific broadly flat (-0.08%). Japan’s Nikkei 225 declined by 2.51% and the Shanghai Composite Index gained 0.67% after China re-opened from a market holiday.

Sentiment on Japanese equities continued to fade during the week, with the Nikkei 225 declining further to give up all of the gains experienced during September. Newsflow during the week may have contributed to the weak sentiment, with the Bank of Japan (BoJ) downgrading their economic forecasts. The central bank cited the impact of the pandemic on the services sector and the issues which supply shortages are causing for manufacturers.

Bond Yields

The 10 Year-Gilt yield moved from 1.00% to 1.16% across the week, with investor expectations for an interest rate rise by the BoE providing upward pressure for yields. Following hawkish remarks from BoE officials in recent weeks, it is now widely anticipated that the base rate will rise from 0.10% to 0.25% by the end of the year.

Europe

The 10-Year German Bund yield climbed from -0.23% to -0.15% last week. Although the chief of the ECB, Christine Lagarde, continued to deliver dovish comments, yields moved higher to price in expectations for higher inflation. The inflation concerns were in part due to the surge in natural gas prices across the continent, which faded during the 2^nd half of the week as Russia considered increasing supply.

The 10-Year Treasury yield rose from 1.46% to 1.61%, with yields rallying following the release of Friday’s jobs report. The concerns around the Treasury’s funding position also appeared to impact different parts of the US fixed income market, with high yield bond yields rising relatively sharply.

Currency

GBP / USD – Current 1.3615 Previous 1.3546

GBP / EUR – Current 1.1766 Previous 1.1683

The Pound bounced against the US Dollar and the Euro last week, rising by 0.51% and 0.71% respectively. Concerns around the Northern Ireland protocol faded slightly, whilst expectations for an interest rate rise also supported the Pound.

Commodities

Gold

Gold was relatively stable across the week, with the spot price moving 0.22% lower to $1,757.13 per ounce.

Oil

Oil continued its recent rally, with the Brent Crude spot price moving 3.92% higher to reach $82.39 per barrel. Another closed watched price gauge, West Texas Intermediate, hit the highest level seen since 2014.