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WeekWatch -‘The past week has seen energy wholesale prices rocket, causing difficulty for the UK economy’ September 2021

WeekWatch -‘The past week has seen energy wholesale prices rocket, causing difficulty for the UK economy’ September 2021

Fears around wider fallout from the crisis engulfing Chinese property developer Evergrande brought global shares down last Monday.

The S&P 500, for example, experienced its worst fall since May, as investors weighed up the chances of another Lehman Brothers-style crash, this time focused on the large Chinese real estate sector.

So far, however, these fears have not been realised, and most major Western markets recovered these losses by the end of the week.

The FTSE 100, for example, ended the week up over 2%, although this admittedly came after two consecutive weeks of falls.

UK equities were helped by the Bank of England (BoE) continuing to keep interest at its low rate of 0.1%, as well as continuing its programme of UK government bond purchases.

The past week has seen energy wholesale prices rocket, causing difficulty for the UK economy. A number of energy providers have gone under, and the government has been forced to step in to bail out a CO2 provider in order to ensure the UK food industry had enough of the gas to continue operating. Ironically the government’s bailout of a US firm providing CO2 came the same day it launched its successful Green Gilt issuance.

This combined with the ongoing HGV driver shortage and increasing commodity prices elsewhere has led many to speculate inflation is going to increase as winter approaches. Over the weekend, long queues at petrol stations made headlines – which some reports attributed to the shortage of HGV drivers. The BoE said it expected inflation to rise above 4% in the winter, before falling back to 2% in the medium term.

If inflation was to hit 4% while interest rates remain so low, this could cause issues for cash savers, who will see their spending power eroded.

All this left analysts looking to the Monetary Policy Committee (MPC) meeting in November to see the future direction the Bank will take. For example, Head of Macro Research at AXA Investment Managers David Page noted: “In terms of the monetary policy outlook, it was no surprise to see policy unchanged today, but Dave Ramsden’s vote to tighten policy adds to market expectations that the MPC could raise interest rates in H1 2022. However, November’s MPC meeting will be interesting in assessing to what extent the BoE’s persistent growth optimism is fading.

“Moreover, the evolution of the labour market over the coming quarters will be critical. We do envisage some increase in unemployment as furlough ceases and some alleviation of labour supply shortages as ‘normal’ life resumes into autumn, despite the ongoing risks from COVID. That being the case, we fully expect inflation to fall back materially in H2 2022 and the BoE to largely look through the current inflation spike.”

In the US, both the Nasdaq and the S&P 500 had recovered from their early week fall by Friday, as fears of a global contagion from Evergrande faded.

What’s more, on Wednesday, the Federal Open Market Committee (FOMC) kept interest rates low in the US and voted to continue its asset-purchase programme. However, Chair Jay Powell suggested that the situation may change soon; indeed, half of the FOMC participants forecast a rate rise next year. When it came to tapering federal economic COVID-19 support, Powell said in his view the conditions to begin doing so had been met. The committee could have a tapering announcement as soon as its next meeting – in November – he noted.

While the US and UK central banks continued to push a potential interest rate rise further down the road, Norway’s Norges Bank broke ranks by becoming the first major Western central bank to lift its rates since the pandemic. On Wednesday , the bank lifted its rate from 0% to 0.25%, and indicated that it expected rates to rise again by the end of the year.

The STOXX Europe 600, which had been steadily rising since Tuesday, fell on the back of the news, but still finished the week in the green. The question on many investors’ minds will be whether the move by Norges Bank could act as a catalyst for other central banks to follow suit sooner rather than later.

Elsewhere in Europe, markets waited in anticipation to see the results of Sunday’s general election in Germany. The election marked the end of Angela Merkel’s 16-year reign as chancellor of Europe’s largest economy. With an altered political backdrop, investors will want to keep an eye on any potential policy shifts as a result.

AXA is a fund manager for St. James’s Place.

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