28 September 2021
The Evergrande effect
While fears surrounding a wider fallout from the crisis engulfing Chinese property developer Evergrande haven’t yet been realised, global shares were nevertheless brought down on Monday last week. The S&P 500, for example, saw its worst fall since May, as investors worried about the chances of another Lehman-Brothers-style crash.
Most major Western markets were able to recover these losses by the end of the week, such as the FTSE 100, which ended the week up over 2% – this did, admittedly, come after two consecutive weeks of falls.
The Bank of England (BoE) also helped UK equities by keeping interest rates low at 0.1%, as well as continuing its programme of UK government bond purchases.
It seems energy has dominated headlines this past week, and for good reason – wholesale energy prices skyrocketed, causing issues for the UK economy. While several energy providers have gone under, the government was forced to bail out a CO2 provider to ensure the UK food industry would have enough of the gas to continue operating. Ironically, this came the same day as the government also launched its successful Green Gilt issuance.
The ongoing HGV driver shortage, along with increasing commodity prices elsewhere, has led to much speculation about increasing inflation as winter approaches. The long queues at petrol stations made headlines over the weekend, and some attributed the shortages to the HGV driver problem.
According to the BoE, we can expect inflation to rise above 4% during the winter, before falling back to 2% in the medium term. This could cause an issue for cash savers, who will see their spending power eroded if inflation were to hit this high level while interest rates remain so low.
Analysts have now been looking towards the Monetary Policy Committee (MPC) meeting taking place in November to see the direction that the Bank will take. The Head of Macro Research at AXA Investment Managers, David Page, noted, for example:
“In terms of the monetary policy outlook, it was no surprise to see policy unchanged today, but Dave Ramsden’s vote to tighten policy adds to market expectations that the MPC could raise interest rates in H1 2022. However, November’s MPC meeting will be interesting in assessing to what extent the BoE’s persistent growth optimism is fading.
“Moreover, the evolution of the labour market over the coming quarters will be critical. We do envisage some increase in unemployment as furlough ceases and some alleviation of labour supply shortages as ‘normal’ life resumes into autumn, despite the ongoing risks from COVID. That being the case, we fully expect inflation to fall back materially in H2 2022 and the BoE to largely look through the current inflation spike.”
As the fears of a global contagion from Evergrande faded, both the Nasdaq and S&P 500 in the US had recovered from their early week fall by Friday.
Across the pond
On Wednesday, the Federal Open Market Committee (FOMC) kept interest rates low in the US and voted to continue its asset-purchase programme. Chair Jay Powell, however, suggested that the situation may change soon; indeed, half of the FOMC participants forecast a rate rise next year. Powell said that it was his view that the conditions to begin tapering federal economic COVID-19 support had been met, and that the committee could have a tapering announcement as soon as its next meeting in November.
Both the US and UK central banks have continued to push a potential interest rate rise further down the road; however, Norway’s Norges Bank became the first major Western central bank to lift its rates since the pandemic began. While it lifted its rate from 0% to 0.25% on Wednesday, it also indicated expectations that rates would rise again by the end of the year.
The STOXX Europe 600 took a fall in the wake of this news, but still managed to finish the week in the green. Many investors will now be questioning whether this move by Norges Bank will cause other central banks to follow suit sooner rather than later.
Elsewhere in Europe, markets awaited the results of Germany’s general election on Sunday in anticipation – the election marked the end of Angela Merkel’s 16-year reign as Chancellor of Europe’s largest economy. As with any altered political backdrop, investors will be keen to keep a close eye on any potential policy shifts coming as a result.