(Cover Image Source: Pascal Bernardon)
Global equity markets continued to struggle, with many major bourses registering their sharpest weekly drop since February. The MSCI World Index, the Nasdaq and the Nikkei indices were down -3.21%, -4.77% and -5.94% respectively over the last 5 trading days.
The market’s attention has turned to a potential (albeit unlikely) US federal debt default on the 18th October, sooner-than-expected monetary tightening in the US, and the growing prospect of stagflation across major economies, an unpleasant combination of weaker-than-trend growth and a sustained rise in consumer prices.
This past week did little to allay these fears, with US Federal Reserve Chairman Jerome Powell and European Central Bank (ECB) president Christine Lagarde finally conceding that inflation may not be as transitory as believed at first.
In the US, the Fed’s preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose 3.6% over the 12 months to August. German inflation reached a 29-year high of 4.1%, whilst core Eurozone consumer prices jumped 3.4% in August, the highest level since 2008.
Research by Goldman Sachs has suggested that no less than 169 industries have been negatively impacted by delivery time disruptions. US retailer Dollar Tree stores best outlined the upward creep of prices with the announcement that the company will no longer be able to offer every item in the store for one dollar or less. One Dollar, a Nickel and Three Cents Tree doesn’t have quite the same ring to it…
The prospect of less accommodative monetary policy caused continued angst in bond markets (bond prices and yields move in opposite directions). 10-yr Gilt yields remained at multi-year highs of 1.0%, whilst 10-yr US Treasuries are currently yielding 1.48%.
Against this backdrop, it was not surprising to see flows gravitate to the US dollar. Sterling had a disappointing week, down -0.7% against the USD, and down -0.8% versus the CHF and JPY respectively as the UK government grapples with petrol pump queues and failing energy retailers. Brent crude is at $81.72, up +2.8% on the week.
Sentiment was given a literal ‘boost’ late last week following news that Merck and partner Ridgeback Biotherapeutics are seeking emergency authorisation for their new antiviral treatment for covid-19, which in controlled trials appears to cut hospitalisations in half for individuals that are unvaccinated. This follows what appears to be a peak in global 7-day covid infections, hospitalisations and deaths.
Finally, some eye-catching moves higher in the crypto currency space (Bitcoin +15.9%, Ethereum +17.8%), attributed to Powell's comments last week that there is no intention for the US to "ban crypto’’, along with hopes the SEC will approve a bitcoin ETF in the near future.