After last week’s strong performance, European stock indices and US futures eased back a touch in the first half of today’s session. Investors were a bit cautious with earnings season ramping up, while ongoing concerns about inflation also held the markets back a touch. Meanwhile, more signs emerged that growth is weakening at the world’s second largest economy, China, with GDP expanding by 4.9% in Q3 from a year earlier, slowing down sharply from 7.9% in Q2. Not that it mattered for oil, however, as prices broke to fresh multi-year highs on rising fears over a global energy crunch ahead of winter. Rising oil and energy prices have raised concerns inflation is going to be stick and not as transitory as the ECB ad Fed officials continue to suggest. These concerns are reflected in rising bond yields, especially on the shorter end of the curve. The ECB wants to see if inflation will be reflected in wage talks and other potential second-round effects that could drive prices higher more permanently. Meanwhile, the Bank of England’s Governor Andrew Bailey said the central bank will "have to act" to ease price pressures. UK’s 2-year bond yields surged another 16bps this morning. Rising yields kept gold under pressure after it sold off on Friday.
The slight weakness at the start of this week comes on the back of a solid last week for global stocks. US indices extended their recovery on Friday as Goldman Sachs became the latest Wall Street giant to beat earnings estimates, while retail sales at the world’s largest economy also surprised to the upside with a gain of 0.7% despite concerns about inflation chippy away at consumers’ disposable incomes. Calm had actually returned to the markets in the middle of the week, when we saw global indices recover sharply – especially on Thursday. Investors decided enough was enough and bought the latest dip as they presumably figured that all the talks surrounding inflation and supply-chain issues were overblown. Judging by the bank earnings and the latest retail sales data, they may have a point. Commodity dollars rose along with oil and metal prices, while the Japanese yen continued to fall out of favour as investors moved into higher-yielding commodity dollars and the pound. Japanese bond yields remain subdued because of the ongoing intervention by the Bank of Japan and no one believes it will be tightening its monetary policy any time soon, unlike some of the other major banks such as the Bank of England and US Federal Reserve.
Judging by the sharp reversal in risk appetite last week, we might see some further follow-through in risk-taking in the early parts of this week once the markets find their feet after a sluggish start
. Overall, it looks like the reflation trade is back, with investors probably reckoning that a prolonged period of above-trend inflation, combined with weaker economic growth, is not very likely as the impact of temporary factors and supply bottlenecks are likely to subside in the not-too-distant future.
As such, the markets probably don’t expect central banks to tighten their policies meaningfully anyway – something that the Fed, BoE and others have indicated. Central banks wouldn’t want to choke off economic growth by being too aggressive when they tighten their policies
especially as there have been some signs of weakening recovery of late.
Still, the likes of the pound and US dollar should be able to rise further against the currencies where the central bank remains dovish such as the Swiss franc
, having already soared against the yen. So, concentrating on GBP/CHF and similar crosses in the week ahead makes perfect sense.
That being said, if inflation really gets out of control, then that’s when we might see some panic creep back into the markets. So, keep a close eye on energy prices and other inflation signals – we have UK CPI coming up on Wednesday.
Meanwhile, the earnings season has started quite strongly
with Wall Street banks all producing results that beat expectations last week. This has been an additional factor supporting the markets, raising hopes that we might see better-than-expected results from other sectors in the weeks ahead. See the data and earnings highlights section below, for more.
Data and earning highlights coming up
- US industrial production and NAHB Housing Market Index
- US Building Permits and Housing Starts
- Central bank speeches: BoE Governor Bailey and FOMC’s Daly and Bostic
- Earnings: Netflix, Johnson & Johnson
- UK CPI
- Crude oil inventories
- Earnings: Tesla, IBM and Berkshire Hathaway
- US Jobless Claims, Philly Fed Manufacturing Index and Existing Home Sales
- Earnings: Intel, PayPal and Snap
- Eurozone and UK flash and manufacturing PMIs
- Retail sales from UK and Canada
Chart to watch: FTSE
Keep a close eye on the FTSE
after it broke out of a 6-month consolidation pattern to the upside last week. The FTSE is a commodity-heavy index, so the big gains we have seen for crude oil and copper prices have helped energy stocks and miners. Meanwhile, banks have risen along with yields in recent times, as investors have become optimistic about a steady economic recovery and look forward to mild policy tightening from the Bank of England.
Source: ThinkMarkets and TradingView.com
If the breakout can be sustained, we might see the FTSE march higher in the week ahead and climb towards the 2020 peak at 7690 and the all-time high that was hit in 2018 at 7903. At the start of this week, the index has pulled back to re-test the breakout area around 7200.
The South African Markets in Focus
By Kearabilwe Nonyana
These are unprecedented times in the markets. The world is emerging from the coronavirus pandemic and the economic activities which are transpiring are set to change the course of how we view normative economics. With supply bottlenecks and unprecedented self-reliance on local supply chains, a lot of shortages of basic energy commodities have caused short-term price spikes and have threatened the industrial production output of the world’s most industrialized countries. On our local bourse, a few stocks have been affected by this conundrum as high energy costs are one of the biggest contributors to higher overall inflation, considered to be negative for economies. With all that said, our local bourse is set to end the week off on a higher note, along with the global markets (see above). With the resources 10 index gaining nearly 8%, led by global diversified miner and platinum miners.
The Week Ahead
The local economic calendar is light on the week but there is an important economic data point that will set the way risk assets in our local market are viewed. Inflation data will be released on Wednesday. In August, inflation had quickened past the midpoint of the target band of 4.5% to 4.9%. The inflationary pressure is on the up, not because of demand but administered prices and energy prices. The increase in the baseline price in Brent crude and the resultant weakness in the Rand will have a base line effect on the headline CPI number. Interest-rate sensitive stocks could be affected if the inflation rate continues closer to the upper band of 6%. Banks and retailers could be affected negatively if inflation keeps on going up.