Market Commentary: Week to 26 October 2021

26 October 2021

Market News

Investors continued to look on the bright side last week but, with persistent inflation becoming an inconvenient truth, it’s more the case that every silver lining is now accompanied by a cloud. A new all-time high for the US stock market was only momentarily punctured after the US central bank’s Chairman Powell admitted he had been wrong about inflation. “The risks are clearly now to longer and more persistent bottlenecks, and thus to higher inflation” he said and, though he declined to change policy guidance, the change in tone is clear. Bond markets had already arrived at this conclusion, and have been bidding up the prospects for early rate rises for several weeks. 

The latest global round of business activity surveys was slightly better than expected but not without inconsistencies. The bright spots were in the service sectors in the US, UK and France. However, the rebound in manufacturing activity everywhere continued to erode, and even slipped to a seven-month low in the US. The surveys for Germany were especially weak compared with expectations, and another worry is that many of the recent inflationary trends, as well as a renewed slowdown in Chinese manufacturing, have yet to fully enter the data. 

Business activity in the UK was particularly perky and may have been assisted by the full removal of Covid-related restrictions. However, the UK is now paying the price for this in rising Covid cases at a time when the effectiveness of vaccinations is waning and colder weather is coming. Moreover, the impact of the recent fuel shortages in the UK became apparent in September’s retail sales data, which marked the fifth consecutive month of declining sales, the longest unbroken run since the data began in 1988. 

Attention is focused on whether the Bank of England will raise base rates at its meeting next week to combat rising inflation, at a time when the majority of UK data suggests that the economy is softening. Incomes and spending are expected to decline in response to the end of the furlough scheme, as well as the £20 per week reduction in Universal Credit payments and rising inflation. Having been buoyed by prospects for a rate rise, Sterling is at risk of renewed weakness if the Bank of England does not follow-through with a rate increase. Moreover, the spectre of a No-Deal Brexit is back, with the UK threatening to suspend parts of the existing trade deal and the EU threatening to cancel the whole thing. 

President Biden’s Build Back Better agenda has struggled to make its way through the US legislative process, and looks set to shrink from the $3.5 trillion originally sought to about $1.5 trillion. Nevertheless, markets still crave stimulus and the bill is a positive for growth, albeit growth that is funded by more government spending. Last week, the French stock market jumped by a percent after the French government promised to alleviate inflation in energy prices by making EUR100 payments to private individuals. That would cover 38 million people. The worry, on the other hand, is that renewed government stimulus packages will exacerbate inflationary pressures in the short-term, especially the idea of compensating voters against inflation itself, something that the British government has also hinted at as part of its Budget tomorrow.

Stock focus

The first exchange traded fund (ETF) to track the price of Bitcoin, launched last week, attracted capital so quickly that it already risks exceeding the Chicago Mercantile Exchange’s limits on ownership of underlying Bitcoin futures contracts. The ETF added over $1 billion in assets in its first few days, despite the price of Bitcoin rising by 50% in the run-up to its launch.

Nothing captures the current zeitgeist better than Trump Media & Technology Group, the former president’s new business enterprise. An announcement that the company would go public using a Special Purpose Acquisition Vehicle (SPAC) sent retail investors into a frenzy, bidding up the value of the SPAC by over 1,000% in just a few days. Trump fans on social media pumped the stock, and orders dominated American retail share trading platforms. It’s as yet unclear how any of the company’s plans to build a social media platform and streaming service will be achieved.

The chorus of warnings about the shortage of magnesium is getting louder: last week a trade group of European magnesium users warned that a shortfall in deliveries of the metal from China risks “an international supply crisis of unprecedented magnitude”. This followed similar comments by US producers, including Alcoa, the previous week. China mines and controls most of the world’s supplies of magnesium, which is a crucial element in the fabrication of construction materials. 

Facebook is suffering from Apple’s decision to give users rights over their own data, and warned that revenues for the fourth calendar quarter will disappoint expectations. The company also missed analysts’ estimates for the third quarter and is embroiled in a damaging disclosure of emails by a former employee. Nevertheless, the announcement of a $50 billion stock repurchase programme looks likely to boost its share price. 

Intel Corp, a stock market darling from the last tech bubble, dropped 8% in a day after warning that profitability will suffer for a number of years due to increased spending on manufacturing processes. The decline wiped out gains for the year-to-date, and comes only a few months after the shares had managed to exceed their June 2000 price for the first time. 

Highlights

• The rate of inflation in the UK fell to 3.1% in September from 3.2% the previous month, slightly lower than expected. Rapid increases in the prices of used cars and energy were offset by slower inflation in the prices of catering services and clothing. UK inflation is now expected to peak at over 4% next year, propelled mainly by rising energy costs.
• Business activity surveys for the UK for early October bucked a declining trend and surprised investors to the upside. Activity in both the service and manufacturing sectors improved. The service sector may have been helped by the removal of all Covid-related restrictions. 
• Eurozone business surveys, on the other hand, not only confirmed that growth is slowing but fell more than expected in October. The German service sector was the main culprit, whereas activity in France and in Eurozone manufacturing generally held up better than expected.

Calendar

• The UK government budget will walk a fine line between the fiscal largesse that has become the norm since Covid arrived, and the Chancellor’s personal commitment to financial rectitude. With consumer confidence slumping in the face of supply shortages and rampant energy inflation, a winter of discontent lies ahead and the pressure will really be on to maintain the government’s popularity. On the other hand, rising gilt yields and the costs of index-linked bonds will squeeze the ability of the government to fund new spending. 
• Eurozone inflation for October is expected to have risen to 3.7% from 3.4% last month, capturing some of the recent rise in energy prices. The data is released a day after the European Central Bank’s October meeting, at which it is expected to raise its inflation forecast and reduce the pace of asset purchases.

Important information

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