The key market themes have remained consistent over the past few weeks. Inflation, monetary policy and growth, continue to steal the limelight as we head into the final three months of 2021.
Key themes for the week include:
- The United States (US) debt ceiling gets a reprieve
- Fears around China’s Evergrande subsides
- A bumpy week for equities
- The dollar continues its reign
THE GLOBE AT A GLANCE
As the markets continue to focus on monetary policy and growth, the words “stagflation”, “tapering” and “power crunch” have formed part of global financial news of late. However, it is worth looking at some of the less-covered events across the world.
We have finally seen a truce around the debt ceiling debacle in the US. Senate Democrats and Republicans agreed to temporarily extend the country’s debt ceiling, staving off the short-term risk of the US government defaulting on its debts. This agreement offers a reprieve in a high-stakes battle that threatened to plunge the US into a new economic recession.
In the United Kingdom (UK), Prime Minister, Boris Johnson, shared his aspirations to launch the UK into an era of new economic highs, during the Conservative Party Conference held in Manchester. Some of the key take-aways from his address included:
- Creating a “high wage, high skill, low tax” economy, starting with a premium payable to science and maths teachers.
- A commitment to “get social care done”.
- Private sector investment and capitalism being “vital” to delivering the vaccine roll-out and for the country to achieve net zero carbon by 2050.
- His expectation that the current supply chain disruption will “sort itself out rapidly”.
Meanwhile, some European Union (EU) states are, yet again, at loggerheads with Brussels. This time around the conflict relating to the gas crisis response. Several European leaders have criticised the European Commission for not responding quickly enough, warning that soaring prices could jeopardise the continent’s economic recovery and risk potential social unrest.
The rise in European gas prices, which hit another all-time high on Wednesday, has fueled criticism of the EU’s flagship Green Deal, a package of upcoming policies designed to make the continent climate neutral by 2050. Critics of the policy say it will drive up energy costs for citizens, as the zone phases out fossil fuels. However, not all countries were open to a knee-jerk response, with countries such as Germany and other northern states, warning against rushing into changes to the EU’s energy strategy, noting that the current price surge is being driven largely by rising demand and once-off factors.
Sticking with Europe, minutes from the European Central Bank’s (ECB’s) September monetary policy meeting indicated that ECB policymakers discussed a larger cut in asset purchases, and some even argued that markets were already expecting the end of stimulus by March 2022. Still, the ECB concluded that a moderately lower pace of net asset purchases under the Pandemic Emergency Purchasing Programme (PEPP) for the rest of the year would be appropriate, amid favourable financing conditions along with an improved medium-term outlook for inflation. The ECB has also lifted its growth and inflation forecasts for this year.
China’s embattled property developer, Evergrande, seems to have yet another buyer for its shares, which might see the property giant escape default. Media reports on Monday suggested that Hopson Development Holdings Limited, a Hong Kong-listed real estate firm controlled by the billionaire Chu family, has agreed to buy 51% in Evergrande’s property services business. Evergrande Property Services Group Limited said in a statement that its shares were halted on Monday, as an announcement was pending over a possible offer for a share purchase. However, Hopson declined to comment.
Meanwhile, after high-level talks aimed at improving communication between the two countries, the US and China have agreed, in principle, for their presidents to hold a virtual meeting before the end of the year. US officials suggested that the meeting was a follow-on from President Joe Biden’s 9 September 2021 call with Chinese President, Xi Jinping. Since the Trump years, the world’s top two economies have been locked in a stalemate. However, when asked for further information around the situation, White House spokeswoman, Jen Psaki, noted that the governments are still working through the details, and that there are no additional insights at this stage.
DATA IN A NUTSHELL
The number of Americans filing new claims for unemployment benefits fell to 326,000 in the week ending 2 October 2021, from a seven-week high of 364,000 in the previous period, and below market expectations of 348,000. The number of claims moved towards a pandemic low of 312,000 reached in early September, as the job market continued to show signs of recovery. Looking at US ADP employment changes, private businesses in the US hired 568,000 workers in September, the most in three months, beating market expectations of a 428,000 rise. Most jobs were created in the leisure and hospitality sector.
The Eurozone IHS Markit Composite PMI was revised slightly higher to 56.2 in September from a preliminary of 56.1 – pointing to the slowest growth in private sector activity in five months and marking a further retreat from the 15-year peak recorded in July – as shortages of inputs impeded both manufacturing and service sector output. There were also softer rates of expansion in both new orders and employment, while businesses’ output expectations were the least optimistic since February. Meanwhile, eurozone retail sales were unchanged from a year earlier in August, following a 3.1 % rise in the previous month, undershooting market expectations of 0.4% growth.
The UK IHS Markit/CIPS Composite PMI was revised higher to 54.9 in September from a preliminary of 54.1, still pointing to a much weaker growth in private sector activity than the peak seen earlier this summer. Slower manufacturing growth was a key factor, largely due to severe supply chain difficulties at home and abroad. Service sector growth has now outpaced the manufacturing recovery for four months in a row.
The South African IHS Markit PMI increased to 50.7 in September from 49.9 in August, when lockdown measures were eased to Level 2. Output expanded for the first time since May, as improving economic conditions drove increased activity and customer demand. At the same time, new orders expanded slightly, also benefiting from the easing of lockdown restrictions. Conversely, employment levels were reduced slightly as businesses looked to lower their payroll costs after the lockdown-induced downturn.
WILD SWINGS DRIVE MARKETS
US equities contended with a steepening US yield curve, amid fears of rising inflation from high oil and natural gas prices. Furthermore, political brinkmanship over the US debt ceiling contributed to a volatile week for equities. The Nasdaq led the way, gaining 2.2% by Thursday, followed by the S&P500 and Dow Jones which climbed 1.84% and 1.07%, respectively. The higher yield environment spurred the financial sector by 2.7% according to the S&P500 Financials Index, while the dip in IT-growth stocks early in the week attracted significant buying from Wednesday onward, with Alphabet up 3.8%, and Amazon up 2.1% by Thursday.
European and UK markets were also led by banking stocks, complemented by momentum in the energy sector on rising yields and higher energy prices, respectively. The European STOXX 600 Index rose 1.6% during the week behind BNP Paribas and Royal Dutch Shell which gained 4.5% and 2%, respectively. Similarly, in the UK, HSBC and BP rose by 8.7% and 1.7%, respectively which is ahead of the 1% improvement in the FTSE 100 overall. In Europe, TeamViewer had a torrid week losing over 30% in value after cutting its full year guidance.
The Nikkei hit a six-week low on Wednesday and closed on Thursday down 4.7%, while the broader TOPIX shed 3.3% during the week. According to Reuters, Asian equities have experienced significant outflows over concerns about China’s property sector and rising inflation. Japan’s newly elected Prime Minister, Fumio Kishida, got off to a rocky start with local polls showing a 45% approval rating after only a few days into the job.
The FTSE/JSE All Share had realised a 2.5% surge in value by Thursday, slightly below the JSE Top40 which climbed 2.7%. Naspers gained 6% during the week, buoyed by the 5.6% growth in Tencent’s share price on Thursday. Plenty of upside also came from precious metals as Impala Platinum and Anglo American saw an increase of 9% and 6%, respectively. In the banking space, however, we saw Standard Bank and FirstRand lose 1.8% and 2.2% in value, respectively, following on last week’s bearish momentum.
PUTIN EASES ENERGY CONCERNS
West Texas Intermediate (WTI) crude futures traded slightly above $77.80 a barrel on Thursday, after falling as much as 3.2% earlier in the session, as the US Energy Department said it has no plans to tap the nation’s oil reserves at the moment, following a report on Wednesday suggesting it may have been considering the option to curb rising prices. WTI has touched a seven-year high of $79.78 a barrel earlier in the week due to supply concerns and as the extended Organisation for the Petroleum Exporting Countries, OPEC+, decided to stick with its planned 400,000 barrel-per-day increase in crude output quota for November. At the same time, an unexpected increase in US crude inventories raised concerns about weaker fuel demand.
Gold prices were little changed, and hung around the $1,760 an ounce level on Thursday, as the dollar hovered at one-year highs, amid prospects the US Federal Reserve (Fed) will start tapering its asset purchases as soon as next month. Traders await the non-farm payrolls report, due out this afternoon, for an update on the economic recovery. A strong reading will bring the case for interest rate hikes nearer. At the same time, a global energy crisis continues to pose risks to inflation.
Coal futures fell to $242 per metric ton, from their record of $269.5, which was hit on 5 October 2021, as the energy crisis eased after Russian President Putin said Gazprom will send more gas to Europe via Ukraine, and as domestic production and inventories of oil and gasoline in the US increased. Still, coal is up around 200% so far on the year, as both China and Europe are facing energy shortages. In China, demand from manufacturers, industry and households remains strong, while supply remains tight on imports constraints due to Coronavirus restrictions and as coal production was reduced to cut emissions. Meanwhile, natural gas and electricity prices hit record highs in Europe as energy supplies run low in the run-up to winter.
DOLLAR STEALS THE SHOW
Investors continue to keep an eye on the dollar which opened the week soft under pressure from the debt ceiling concerns and anxiety around jobs numbers. This bout of weakness proved temporary as encouraging employment figures and signals of a debt ceiling resolution buoyed the greenback from a weekly low of 93.69 to a high of 94.4 on the US Dollar Index.
On Thursday, the Euro traded at $1.157, its lowest level since July 2020. In addition to regional energy concerns, which were priced in last week, dollar strength pinned the Euro down further. The ECB is said to be studying a new bond-buying program to hedge against a possible ‘taper tantrum’ in March 2022 when the Bank plans to end its PEPP.
The British pound exchanged hands at $1.36 on Thursday, which is on par with the level it closed at last week. Despite this, mid-week volatility saw the pound Sterling close above $1.36 for the first two sessions of the week, before retreating on the dollar’s rally on Wednesday. In a speech on Wednesday, Boris Johnson conceded that restructuring the UK economy will take time, while also defending his plan to fund the National Health Scheme through higher taxes, rather than government borrowing.
After spending much of the week above R15.00 to the dollar, the rand clawed back most of its value on Thursday closing at R14.95/$, a depreciation of only 0.6% over the week. The improvement in the Bloomberg Industrial Metals Index could explain some of the mid-week recovery. The South African Reserve Bank (SARB) this week reiterated its concerns around inflation, citing price pressures from SA’s solid recovery in the first half. The SARB prefers to use interest rates proactively to control price increases.
We start the day at R14.98/$ R17.30/€ and R20.39/£