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Market Update October Sunday 10th 2021

US debt ceiling crisis averted once again

Equity markets rose this week, helped by US Congress reaching an agreement to extend the US debt ceiling, albeit temporarily, allowing the US government to avoid default and continuing to fund its activities until early December. Over the years this has become a very familiar reoccurrence, which never fails to induce anxiety in markets, despite always being resolved (at least to date!). This arrested a fall in the US stock market which had taken it halfway to a correction (a 10% fall) since its peak in early September, and a fall of over 7% in the technology sector.

Stocks rise, with the financials and energy sectors outperforming

As of 12pm London time on Friday, the US stock market advanced by 1.0% over the week, whilst the technology sector rose 0.6%. European stocks increased by 1.1%, whilst the UK’s stock market climbed by a lacklustre 0.3%. However, this masked a large discrepancy in performance between large and mid-cap stocks, with the former returning 0.8% and the latter falling by 2.0%, as financials and energy stocks outperformed, which the large cap index has a much higher exposure towards. Japanese equities lost 1.2%, with the potential for tax rises following the confirmation of Fumio Kishida as the new Prime Minister.

The Australian market rose 1.9%, benefitting from a high weighting to both financial and commodity stocks. Emerging Markets rose 0.5%, with the Chinese domestic ‘A’ share market rising after a public holiday, as the latest Caixin purchasing managers index for services exceeded expectations, coming in at 53.4 versus forecasts of 46.7. Any number above 50 indicates companies continue to enjoy an expansionary business environment.

Rising energy prices add fuel to inflation worries

Inflationary pressures continued to be front and centre of investors’ minds, as energy prices continued their upward march. At the extreme, UK natural gas futures for delivery in November rose almost 70% by mid-week, before coming all the way back down as President Vladimir Putin said Russia was prepared to supply greater volumes to Europe.

Crude oil pushed higher too, as OPEC+ (Organisation for Petroleum Exporting Countries + Russia) maintained their current oil supply schedule despite pressure from Washington to increase it. Brent crude is currently trading at $82.5 a barrel, a level not seen for three years, although still significantly below the average of $103 experienced in the first half of the last decade, post the financial crisis.

Government bond yields rise to three-month highs

Against this, US Treasury yields, which move inversely to price, have been steadily climbing, with the 10-year up another twelve basis points, taking the yield to 1.58%, the highest level for three months. It was a similar picture in both the UK and Europe, with 10-year Gilts rising to a yield of 1.11% and German Bunds -0.16%. With this move, more economically sensitive companies, or so called ‘value’ stocks, have once again been outperforming, following a pause over the summer when ‘growth’ stocks, or less economically sensitive companies such as technology stocks, outperformed.

Politicians advocating wage rises complicate the picture for central bankers

Central banks, in the near term at least, have slowly been losing the argument that inflationary pressures are transitory, a result of the reopening of economies that will subsequently pass given time. It remains too early to tell whether they will ultimately be correct or not, however, increasingly they are conceding that inflationary pressures are unlikely to ebb away anytime soon. The picture is further complicated by politicians advocating for employee wage rises, as has been experienced within the truck driving community throughout Europe because of driver shortages.

All eyes once more on US jobs report due out later today

Later today, the latest US jobs report, the non-farm payrolls, is due to be released, with expectations that five hundred thousand new jobs will have been created. A number of this size or more is likely to be sufficient for the US Federal Reserve to announce a tapering of its bond purchasing programme in November, which would be one step closer to a rate rise, currently expected in late 2022.

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