Market Update – 29th September 2021.

It hasn’t been a great start to the week for equity markets as Europe’s gas and China’s electricity shortages continue to push energy prices higher (and thus denting claims that the current elevated inflation is only transitory), coupled with the continuing US political stalemate over the debt ceiling.

While a barrel of Brent is close to $80, a level last seen 3 years ago, it isn’t significantly higher than pre-coronavirus levels of $70 a barrel and we believe the current price is likely to tempt OPEC to increase supply or prompt the US shale producers to restart production – either of which should put a ceiling on the oil price.

Additionally, although it is obvious to everybody and their dog that inflation is alive and kicking, as everything from a cup of coffee to the price of petrol is rising, it appears to us to be driven by supply bottlenecks rather than increased demand (which means it reduces, rather than increases our ability to consume).

Thankfully, despite recent hawkish comments from the BoE (which resulted in the financial markets speculating that UK interest rates will rise before the end of this year), the Governor of the BoE, Andrew Bailey, appears to be waking up to the fact we are seeing restricted supply relative to the recovery of demand, as on Monday (27 September 2021) he admitted, “tightening monetary policy could make things worse in this situation by putting more downward pressure on a weakening recovery of the economy”. Not only does this gel with our views and comments in these Market Updates, but we believe it is a clear signal to the financial markets that the BoE is in no rush to increase UK interest rates.

There have also been some interesting developments at the US central bank this week which may delay any increase in US interest rates as two regional Fed Presidents announced their retirements: Eric Rosengren (the Boston Fed President); and Robert Kaplan (the Dallas Fed President).

Eric Rosengren’s retirement is the most significant as not only was he a notable hawk, but more significantly, he was due to be a Fed voter next year (Dallas/Robert Kaplan wasn’t due to be a voter until 2023) – and therefore the next Fed’s ‘dot plot’ (which is designed to show each policymaker’s interest rate forecast for each of the next three years), could look very different to the one published last week.

Investment Management Team

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