Market Commentary – September 2021

Stress-testing UK optimism

From bouncing recovery to realism around rising inflation and global trade dips, the optimism around the recovery in the UK comes under pressure, with ‘wait and see’ uncertainty around furlough, growth and trade.

Despite CPI (Consumer Price Index) rising to 3.1% in September, the Bank of England (BoE), continuing its expectation of consumer prices to rise above 4% in the remainder of this year, saw the Monetary Policy Committee in unanimous agreement to hold interest rates at 0.1%. 

BoE focused on the ‘medium term’

While inflation is this high, the highest it has been in in 12 years and 2% target above target, there is some anxiety around the BoE’s maintained focus on the medium-term picture, with their predictions that inflation will fall back close to the target in the middle of 2022. The BoE cite the current increase as due to “developments in energy and goods prices” and said it would wait to see what happened to unemployment after the furlough scheme is withdrawn at the end of the month, with regard to any adjustment in interest rates.

Vacancy boom in leisure sector

While some of the increase in inflation is laid at the door of the restaurant, hotel and transport industries, it will be interesting to see how market-affecting events unfurl; not only the end of furlough, but the surge of job vacancies in the leisure sector, reopening for the first time since March 2020. It’s important to remember however, this surge is due to lost or furloughed workers, rather than any sector growth or expansion. 

And with this in mind, we are journeying into winter, when Covid figures and labour shortages could again rise, and therefore potentially affect inflation figures for some time to come yet.

A slowing recovery

With the demand for retail slowing significantly, we have seen disappointing UK growth figures, in comparison to the high growth seen earlier this year. The Brexit and Covid-related trade disruptions continue, with EU exports down, mainly due to medicinal and pharmaceutical sales. Import figures are also dipped. 

UK trade figures down

Compared to three years ago, the UK is doing significantly less trade with the EU, with experts claiming the “figures remain concerning” amid, also, further recent disruptions of labour shortages in HGV drivers. We didn’t have to look further than our own local petrol station forecourts to gain our first insights into how shortages, caused by stressed supply chains, affected consumer confidence and buying behaviour. While disagreement reigns on whether Brexit is the sole cause, or possibly even the primary cause, events such as the pandemic and drop in lorry driver numbers have certainly contributed.

ECB bond-buying slows in concession to inflation growth   

The European Central Bank (ECB) maintains its hold on interest rates at 0.5%, despite inflationary pressure, and the fastest rising rates in the eurozone since November 2011. However, the ECB have moderately slowed their pandemic emergency bond buying programme from its current pace of €80 billion a month, stating it will be reduced towards the end of 2021, which is of some reassurance to investors.

US first major central bank to wind down support

US Fed chair, Jay Powell, has set up the announcement, to come at the next meeting in November, that tapering down of support will begin, with “stimulus to be wound down entirely by 2022”. This means the US fed is the first of the central banks to begin tightening monetary policy, specifically to taper its bond purchasing scheme. 

Economic recovery in the US has been ahead of Europe and Japan, with inflation considerably higher than target for the last six months, with committee members’ expectations raised now over a potential increase in interest rates too for 2022. 

Worries over Chinese developers’ unsustainable debt

September saw fears that one of China’s biggest property developers is about to default on its substantial debt. China Evergrande, one of the world’s most indebted developers, with outstanding debts $305 billion, failed to make its interest payment of $84 million. Only a small portion of the debt is held by overseas investors, but overseas markets were, nevertheless, spooked by the potential impact of a collapse.

Investors have been concerned that debt levels among Chinese property developers are unsustainable and last year the Chinese government introduced much tighter restrictions on borrowing to try and curb rapid house-price growth.

Chinese president bans boy bands, but there’s hope for the tech sector still

Chinese president, Xi Jinping, continued the crackdown on consumer and culture businesses, by banning boy bandsand celebrity fan clubs, in measures designed to sweep away some of the western decadence that he sees as threatening China’s rise to global hegemony. At the same time, Beijing announced that it would increase stimulus support, with an estimated $45 billion to be pumped into the economy by the People’s Bank of China, which will be music to the ears of the recently beleaguered tech sector. 

Japanese markets buoyed by hope in new PM

In Japan, prime minister, Suga, resigned following criticism of his handling of the coronavirus outbreak, which buoyed the markets in the run up to a forthcoming election, and the notion that a new prime minister may be more disposed to spending.

Oil demand and price increases

Demand for oil has risen since the decision, in July, by OPEC, to supply 400,000 barrels a day every month until late 2022, as economies recover from the pandemic. The international oil benchmark Brent Crude rose to $73.5 a barrel for the first time since July, with investors remaining positive that demand will continue to rise. 

Asset ClassProxy1-Month3-Month6-Month1-Year
CashUT Cash/Money Market00.00%00.01%00.01%00.03%
Gilts FTSE Gilts All Stocks-04.00%-01.78%-00.67%-06.58%
UK Corporate BondsUT UK Fixed Interest-03.47%00.81%02.79%-03.01%
UK EquityUT UK Equities-02.43%02.57%09.70%37.20%
European EquitiesMSCI Europe ex UK-04.41%-00.33%07.69%19.90%
US EquitiesS&P 500-02.65%01.91%09.84%21.59%
Japanese EquitiesMSCI Japan04.06%07.61%06.67%16.61%
Emerging Markets EquitiesMSCI Emerging Markets-02.11%-05.64%-02.44%12.50%
PropertyUT Property-03.29%02.94%10.68%20.27%

Data Sourced from FE Analytics, and Bloomberg Finance LP.

*The value of your investment can go up as well as down, you may get back less than you originally invested. Circumstances are subject to change. Performance from the past or yields quoted should not be considered as reliable indicators of returns. This communication is for general information only and is not intended to be individual advice