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8th October 2021
InsightsMarket CommentaryStayInTouch

Graham BentleyGraham Bentley

If monthly market commentaries were music, most would quickly find a home in the background in a lift or supermarket aisle. Stockmarkets have occasional euphoric periods, demanding a Mozart sonata or Bill Withers' 'Lovely Day'. This month's commentary unfortunately is more Requiem Mass or Leonard Cohen. That said, perhaps the coda of the final paragraph provides some uplifting relief. 

As we exited the third quarter of 2021, Autumn arrived during the UK's second-warmest September on record. Market performance was rather less than clement, however. Most of the world's major stock markets retreated a little during the month, with the notable exception of Japan, where the Tokyo Stock Exchange rose by 4% after the relatively unpopular Prime Minister Suga announced he would not lead the ruling LDP into the imminent election. His successor Fumio Kishida is seen as an establishment figure, likely to open up the economy against a background of falling COVID cases.

China continued to suffer setbacks, particularly due to the potential Lehman-like default of its largest Property developer China Evergrande Group. It is paying its (many) debtors, but only 10% of what it should. Perhaps Evergrande is 'too big to fail', to invoke a mantra from the Lehman debacle; the Chinese Government does appear willing to act to contain the crisis. For those of us with kids addicted to X-Box, the news that China has outlawed children playing in excess of 3 hours a week may beg some sympathy. Nevertheless, Asia and Emerging Markets saw the steepest price falls during the month.

Meanwhile in the West, news was dominated by politics (as ever), inflation fears, soaring energy prices, queues for petrol and wider supply chain problems. 

The era of Germany's (and indeed Europe's de facto) leader and arch-pragmatist Angela Merkel has come to an end, and her former finance minister Olaf Scholz is now attempting to form an effective coalition government. Meanwhile, Germany is seeing a significant slowdown in economic activity, sharing supply chain problems that are pervasive throughout western economies. In the US, the revision of the 'Debt ceiling' - the rather anachronistic process of setting an artificial limit on how much the United States can borrow to fund its existing obligations - threatens to seize up the Biden administration's agenda. Congress could easily dispense with the process, but if it wasn't there politicians couldn't sabotage it as a useful way to force short-term political concessions. That ceiling is currently a smidge over $28 trn, but more is needed to fund Biden's ambitious infrastructure and social spending plans. Republicans are blocking this, an act of brinkmanship that risks the US defaulting on debt payments, suffering a catastrophic interest rate hike and consequent recession. It is hard to imagine even Republican politicians' anti-Democrat spite would 'drive the country off a cliff'. Rest assured their corporate sponsors are unlikely to allow that.  

On inflation, September saw data indicate that the prices manufacturing and service companies were paying for supplies continued to rise. Firms reported shortages and bottlenecks, but remarkably many US and UK companies are also seeing significant falls in applicants despite a record number of job vacancies. As I've opined in this commentary before, many of these vacancies require generally lower-paid (though skilled) workers; in the UK we have a record number of more than one million vacancies, with payrolls (the number of people working) virtually back to pre-pandemic levels. In-demand skills such as carpentry are seeing up to 50% increases in hourly rates - great for narrowing the equality gap but rather less comforting for business owners. Unfilled vacancies in food processing plants do not help fill supermarket shelves.

Inflation fears have also been stoked by headlines highlighting rather less obvious examples, including rocketing prices of second-hand cars. This reflects the shutdown of car manufacturing during COVID, and the consequent redirection of necessary microchips (new cars today being more like wheeled computers) to consumer electronics (those X-Boxes again).

Oil prices have risen over 20% in the third quarter, and 70% this year. However, the price has simply recovered to where it was three years ago. Petrol prices are rising, but not due to a shortage of fuel. Special qualifications are required to be a tanker driver (it can take several years to gain those) given the vehicle is a potential explosive device on wheels. The average age of an HGV driver is over 50, and many of those drivers quit over recent years due to difficult working conditions and relatively low pay. Post-Brexit, temporary visas to encourage immigrant drivers to return may have little success; those drivers are sought-after to fill similar shortages in Europe, where pay and roadside facilities are frankly far better than the UK's occasional lay-bys, as anyone who has regularly driven long distances in France can attest. 

Finally, back to COVID. Vaccination rates have latterly plummeted in both the UK and the US. According to The Economist magazine, the population-adjusted death rate from COVID is eight times higher in America than in the rest of the 'rich' world. This is being linked to the 'low and slow' take up of vaccinations. The good news is US pharmaceutical company Merck has announced successful trials of an anti-viral pill - molnupiravir - that seems to be effective against the most severe outcomes of COVID. The results of clinical trials of other oral anti-viral developed by Pfizer and Roche, are expected in the next few months. As we approach the winter, an easily distributed and swiftly administered drug that minimises symptoms in those already infected is excellent news.

In closing, as AA Milne once remarked, "The end of summer isn't the end of the world. Here's to October..." 

See you next month.

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