Inflation remains a key concern for investors, in view, inter alia, of sharp increases for energy prices and supply bottlenecks
Euro area inflation surged by +3.4% yoy in September (a 13-year high). Energy rose by +17.4% yoy with natural gas and oil prices recording sharp increases. The benchmark Dutch TTF has more than quadrupled since April to €98/mwh, whereas Brent crude prices closed above $81/brl for the first time in three years.
Supply chain bottlenecks due to Covid-19, alongside the transition away from energy sources which entail a high carbon footprint (coal), have been compounded recently with Chinese authorities’ decision to direct top state-owned energy companies to secure fuel supplies for the winter, at any cost. As a result, concerns about securing sufficient natural gas supplies for the winter, boost the demand to build up inventories in Europe, as well.
The US fiscal drama intensified in the past week. Specifically, the $1.2 trillion bipartisan bill on infrastructure, which entails roughly $550 bn or 2.6% of 2019 GDP on new spending over the next 10 years, passed the Senate and moved to the House of Representatives.
However, House Democrats linked its approval, to the $3.5 trillion bill (over the next 10 years, using partisan budget reconciliation process), which focuses on social and climate policies, for which the political landscape is more challenging. Indeed, centrist Senators (Manchin D-West Virginia, Sinema D-Arizona) refused to support the legislation unless the price tag cut at least in half. President Biden has suggested a potential scaling back to c. $2 trillion, for a compromise.
At the same time, negotiations to raise the debt ceiling continue. According to the Congressional Budget Office, if the debt limit remains unchanged (currently at $28.4 trillion), the Treasury will most likely run out of cash at end-October/early-November, leading to delays of payments for some government activities and/or a default on the government’s debt obligations.
Global markets ended Q3 on a negative tone. The global growth/inflation mix deteriorated in September, fueling “stagflation” concerns due to i) the drag from the delta variant on consumer spending ii) negative global macro surprises since August, especially in the US and China and iii) persistent inflation pressures, amplified by supply chain bottlenecks.
The MSCI ACWI was down by 1.5% in Q3 (-4.3% in September), with Emerging markets (-8.8% in Q3 | -4.2% in September) underperforming their Developed peers (-0.4% in Q3 | -4.3% in September) significantly. Chinese equities contributed to the aforementioned underperformance. Indeed, the MSCI China was down by -18% in Q3:2021 (-5% in September), Evergrande’s crisis and its potential negative impact on the broader real estate market amplified risk aversion.
Regarding equity sectors, ten out of the eleven sectors finished lower, with six of them reporting declines larger than 5%. Energy was the only sector ending in positive territory, rising by +9.3% in September, due to higher oil prices. Regarding styles, Value (-4%) beat Growth (-6%) and Small Caps (-3%) beat Large Caps (-5%) in September, with the bulk of the overperformance occurring in the final seven days of the quarter, following the Fed’s hawkish meeting, and the subsequent increase in long-term bond yields.