Market Commentary - October 2021
Posted: 27th October 2021 | Share
By Sarah Ryman
Supply chain bottlenecks are slowing the global recovery as inflationary pressures mount
As we start to think about the festive season, the shortage of truck drivers and fuel at petrol stations poses a threat to the UK economy and suggests it may be even more pricey to keep homes toasty as the weather turns cooler. Is the Chancellor right to claim the country is entering “a new age of optimism”? The UK is not the only one facing these challenges, with Biden securing pledges from Walmart, UPS and FedEx to extend their working hours in a bid to ease supply chain problems in the US. European natural gas also shot to record highs whilst bond markets dropped, highlighting that investors are expecting energy shortages to cause wider economic damage. UK government bonds also traded at their highest price since 2019.
Meanwhile, inflationary pressures have not gone away and central banks are being watched keenly by investors.
The Bank of England reported this month that whilst companies overall have only increased borrowing moderately over the pandemic, small and medium sized businesses have been most severely impacted, noting a rise in debt of a quarter, particularly in sectors hardest hit by Covid. The IMF has meanwhile warned (in the latest of its twice-yearly reports) that the UK will suffer longer-lasting economic damage when compared to other G7 countries, as the deep scars left from the pandemic will take a long time to heal. Such news will likely put pressure on the Chancellor to address the challenge, and central banks to proactively tighten monetary policy if necessary – which has further supported Rishi Sunak’s plan to hold down public spending for fear of escalating rate rises. The Chancellor ensured he mentioned within this month’s budget statement that the UK’s economic growth for 2021 has been revised upwards from 4% to 6.5% alongside the Office for Budget Responsibility (OBR) forecast that unemployment will peak at 5.2%, which is lower than previous estimates.
UK inflation softened slightly with the annual rate dipping to 3.1% in September from 3.2% in August, according to data released this month, although the dip is likely temporary given rising food and fuel costs. Expectation remains for the annual rate to exceed 4% by the year’s end and stay above the target of 2% for most of 2022.
The 2021 Budget Statement has also confirmed that Sunak will raise the national living wage and end the public sector pay freeze, as he declares success at navigating the economy through the Covid-19 crisis. Fiscal discipline was the key messaging, with a carve out for spending on essential public services.
Recent figures have shown that inflation in the Eurozone has risen to 3.4% - the highest level for 13 years.
According to bank executives, lawyers and supervisors speaking to the Financial Times, the European Central Bank is becoming increasingly forceful in its demands that lenders move more resources to the continent to run their European businesses instead of the City of London. The push is partly due to the pandemic-era reprieves for banks to move staff coming to an end.
The European Central bank meets today, and traders are anticipating announcements around the need to tighten monetary policy and taper the pandemic bond-buying programmes. Note that the US Fed and Bank of England meet next week.
The US Drug regulator has authorised booster jabs from Moderna and Johnson & Johnson and will support mixing and matching. Advisors have also recommended allowing children aged 5-11 to receive BioNTech or Pfizer’s vaccine.
Wall Street had an all-time high close this month thanks to strong corporate updates, particularly for energy companies. Tesla became the first carmaker to be valued at $1tn, and oil prices continued to rise. Inflation, meanwhile, is up at 5.4%.
Prices of oil continue to move beyond seven-year highs after Opec and allies decided not to increase production, despite the growing global energy crunch. The group compromised to stick with an earlier agreed plan to increase oil production by 400,000 barrels a day according to reports in the FT at the beginning of the month. European gas prices surged 18% over supply concerns for the continent.
In other news
New Zealand has raised interest rates for the first time in 7 years. The country has faced comparatively limited impact from coronavirus but the impact of rising property prices and inflation are being felt.
A shortage of aluminium is holding back the global car industry as China struggles to address a shortage of magnesium which is a key component in making the lightweight metal.
The meeting of minds at COP26 in Glasgow will request engagement and commitment from all to cut emissions more swiftly and act towards meeting “net zero” targets. The outcomes are likely to be centred around tighter regulation, incentives, transparency and encouragement of the need for change whilst also supporting emerging countries to leverage alternatives to coal-fuelled power stations.
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