VIDEO: Market Snapshot October 2021

Our Market Snapshot provides an overview of key events that influenced financial markets over the course of October 2021.  

Global equity markets were broadly positive in October as major economies continued to show signs of recovery. Stronger-than-expected corporate earnings and progress towards the passing of a US$1.75 trillion social spending package in the US helped lift investor sentiment. Inflationary concerns persisted, particularly due to very high energy price levels, keeping global bonds under pressure. However, central banks reaffirmed their readiness to use the tools at their disposal to keep inflation in check without abruptly reducing support for growth. Turning to South Africa, a stronger Resources sector, buoyed by a surge in metals prices, helped lift the local bourse even as local listed property and financial shares lost ground amid concerns over energy supply disruptions after Eskom announced the reintroduction of nation-wide load shedding. 

Looking at global equity market returns (all in US$), the MSCI All Country World Index returned 5.1% for the month. Developed markets strongly outperformed emerging markets, with the MSCI World Index returning 5.7% and the MSCI Emerging Markets Index delivering 1.0%. The Bloomberg Global Aggregate Bond Index (US$) returned -0.2%, while the EPRA/NAREIT Global Property REIT Index (US$) produced 6.3%. 

The spot price of Brent crude oil closed the month 7.5% higher at around US$83 per barrel. Metal prices surged in October on the back of supply constraints and increased demand, with gold returning 3.3%, platinum 7.2%, copper 10.1%, palladium 7.6% and nickel 7.2%. Aluminium was among the only outliers, losing 5.5% for the month. 

US

In the US, the House of Representatives approved the outline of President Biden’s social spending and climate bill, however, reduced the initial allocation amount from US$3.5 trillion to US$1.75 trillion. The bill, which will be funded over the course of a decade, is centred on initiatives to expand healthcare, childcare and overhaul tax laws. 

In other news, minutes from the September FOMC meeting showed that the Federal Reserve (the Fed) could begin tapering its emergency pandemic support as early as mid-November and conclude around the middle of 2022. Investors, however, were circumspect as they looked towards the central bank for guidance on the timing of possible interest rate hikes. Meanwhile, the Fed continued to cite inflationary pressure as a potential concern given the elevated levels of prices following the reopening of the economy. Policymakers reiterated that they would use the tools at their disposal to keep inflation in check and that current levels were most likely transitory. Meanwhile, annual inflation in September edged back up to a 13-year high of 5.4%, marginally above market expectations of 5.3%.  

Other economic indicators were mixed. The US economy expanded by an annualised 2% q/q in Q3 2021, well below market forecasts of a 2.7% expansion, as the gradual slowdown in government stimulus and global supply constraints continued to weigh on economic activity. However, the labour market continued to recover after the unemployment rate dropped to 4.8% in September, as companies began filling long-standing vacancies and more workers expected to re-enter the labour force in the coming months. 

Equities closed the month higher, with the S&P 500 returning 7.0%, the Dow Jones Industrial 30 5.9%, and the technology-heavy Nasdaq Composite 7.3% (all in US$). 

SOUTH AFRICA

Eskom recommenced nationwide load shedding in October due to a shortage of generation capacity. The energy supplier indicated that it expected rolling blackouts to feature heavily for the next 18 months, largely on the back of increased maintenance requirements at deteriorating coal-fired power stations. Investors, therefore, welcomed the news that several of the world’s wealthiest nations and multilateral organisations had committed to providing Eskom with around R131 billion in concessionary funding at this year’s Cop26, to help its transition from coal towards green energy. 

Turning to economic indicators, annual inflation accelerated for a second consecutive month to 5% in September from 4.9% in August, still above the South African Reserve Bank’s 4.5% midpoint target. Manufacturing PMI fell to 56.8 in September from 57.9 in the previous month, pointing to a marginally softer improvement in business conditions across the manufacturing sector. Meanwhile, retail sales contracted by 1.3% y/y in August, well below market estimates of a 2.6% rise and marking the second straight decrease in retail activity. 

The FTSE/JSE ALSI returned 5.2% in October. Among the largest contributors to performance was the Resources sector, which gained 8.4% largely on the back of a surge in metal prices, and Industrials, which posted 6.7%. Financials and Listed Property detracted from performance, shedding 3.2% and 1.4% respectively. The FTSE/JSE Capped SWIX All Share Index, which we use as the equity benchmark for most of our client mandates, returned 2.7%. SA bonds delivered -0.5% (as measured by the FTSE/JSE All Bond Index), SA inflation-linked bonds returned 0.6% and cash (as measured by the STeFI Composite) delivered 0.3%.  

Finally, the rand depreciated against the major currencies, losing 1.0% against the US dollar, 2.7% against the pound sterling and 0.9% against the euro. 

UK and EUROPE

In the UK, Chancellor Rishi Sunak delivered his National Budget Speech, in which he noted that that the UK’s economy was on course to grow by 6.5% in 2021, faster than the 4.0% previously forecasted, while inflation is expected to increase to 4% next year. Annual inflation edged down in September to 3.1%, from a nine-year high of 3.2% in August, while unemployment declined to 4.5% for the three months to August 2021, helped by improving labour market conditions. 

The European Central Bank (ECB) kept its monetary policy unchanged in October, pledging to keep interest rates at record-low levels until inflation returned to its 2% target. President Christine Lagarde reiterated the ECB was in no hurry to tighten its policy despite inflationary pressure, which had spiked recently due to ongoing supply disruptions and an unprecedented energy crisis. Annual inflation in the Euro Area increased to 4.1% in October, above market forecasts of 3.7% and marking the highest reading since July 2008. Meanwhile, Euro Area GDP expanded by 2.2% q/q in Q3 2021, largely supported by strong domestic demand and exports.  

For the month, the UK’s FTSE 100 returned 3.9%, Germany’s DAX 2.7% and France’s CAC 40 4.6% (in US$). 

CHINA and JAPAN

China’s latest crackdown on coal-powered energy suppliers dragged mining stocks and the overall market lower, while environmental protection-related companies continued to surge amid the government’s plans to move towards clean energy and carbon neutrality. 

US-China relations showed signs of further deterioration after the Federal Communications Commission revoked China Telecom’s licence to operate in the US, citing national security concerns. 

Turning to economic indicators, the People’s Bank of China (PBoC) kept its benchmark interest rates for corporate and household loans unchanged for the 18th straight month in October. The Chinese economy expanded by 0.2% q/q in Q3 2021, below market estimates of 0.5% as power shortages, supply chain bottlenecks, and growing concerns over the property sector weighed on the economy. Meanwhile, China's annual inflation unexpectedly edged lower to 0.7% in September, below market estimates of 0.9%.  

In Japan, the Bank of Japan (BOJ) left its key short-term interest rate unchanged at -0.1% in October, and revised its GDP forecast for 2021 lower to 3.4% (from 3.8%), citing sluggish consumption and supply disruptions as contributing factors. For 2022, policymakers maintained their view that the economy was headed for a moderate recovery, revising its growth forecast higher to 2.9% from 2.7%. In other economic news, Japan's consumer prices rose by 0.2% y/y in September, rebounding from a 0.4% decline in August and posting the first annual gain in 12 months.  

Japan’s Nikkei 225 delivered -4.0%, the MSCI China 3.2%, and Hong Kong’s Hang Seng 3.4% (in US$).