No time to shy (away)
- Natural gas, thermal coal and oil prices spike as winter approaches.
- Oil and gas markets could be eased by OPEC and Putin action.
- Global supply chain disruption continues. UK manufacturing sector highlights supply chain issues as worst in 25 years.
- UK furlough ends, employment back to pre-pandemic level and wage growth from 3.6% to 5.1%.
- Energy crisis adds to inflation challenge for central banks. US Fed says inflationary pressures have lasted longer than expected but should fade. Bank of England warns that inflation could remain above 4% into Q2 2022.
- US Fed expected to begin tapering in Q4 2021. ECB begins tapering - from €80bn to €60bn a month.
- China’s official manufacturing PMI slipped into contraction in September. Chinese companies facing a degree of electricity rationing, forcing them to restrict output.
- Evergrande debt crisis in China - living on borrowed time? Too big to fail?
Whilst all major markets weakened, value areas proved more resilient and outperformed growth. Technology heavy markets, such as the US and especially tech centric Nasdaq index, were notably weak. The value orientated, and more established composition of the FTSE 100 helped, in particular by the oil sector, which saw it outperform on the month.
Given the growing concerns around inflation and expectations of central bank tapering, the weakness in Government bonds was a feature. The benchmark US bond yield finished the month above 1.5%, having started September at 1.3%. A surge in energy prices proved a very unwelcome development, adding further inflationary pressures, as well as dampening the growth outlook.
Through the Spring and early Summer central bankers could credibly say that the inflationary pressures were transitory. However, in addition to the ongoing global supply chain issues, strong demand, and continuing labour shortages, rising energy prices are further challenging this. Bankers are now raising their medium terms inflation expectations.
Ordinarily markets are able to react to higher prices with higher supply. However, oil and gas markets continue to be significantly influenced by OPEC and Russia, thereby adding political considerations and added uncertainty. Elsewhere, the emphasis on green energy has meant much reduced investment by large oil and gas companies. This, in combination with rising demand, has caused a significant spike in energy prices, as the Northern Hemisphere heads into winter.
It is difficult to know whether the UK would have suffered fuel shortages, were it not for the industry leak. Ultimately, the Government has failed to plan in the face of this and other issues that were known about many months ago. Questions over Government competence, in combination with an increasingly unfriendly business policy agenda, saw the Pound weaken some 5% against the US Dollar during September.
The Chinese government has become ever more interventionist this year, with a view to promoting ‘common prosperity’ and increasing the Chinese birth rate. Latterly the focus has turned to the heavily indebted property sector and property prices. Given the role of the state in the economy, the country should be well positioned to manage the impact on the wider economy.
Covid developments have continued to reassure and it looks increasingly likely that it will have a latent presence akin to flu in our day to day lives going forward, as treatments and vaccines continue to improve. This, and the diminishing effect of lockdowns, remains a positive driver of growth in the coming quarters. Whilst energy prices are a concern for consumers, still high levels of savings and rising wages should help to cushion this.
We suspect that some periods of volatility will be a feature in the final months of 2021, as markets continue to digest the uncertainties around rising inflationary pressures and central bankers turn more cautious. Whilst a slowdown in economic growth is inevitable from the very high levels due to the economic rebound after reopening from lockdown, the risk is that the rise in energy price becomes prolonged and starts to weigh on future growth.
Such a backdrop requires some careful navigation, given that is helpful for neither bonds nor shares at a headline level. Nevertheless, in the face of the inflationary challenges we would still favour equities over other asset classes, including bonds.
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