04th October 2021

Good morning,

The threat of rising inflation, and all its associated baggage, finally hit markets in a meaningful way over the last few weeks, after threatening to do so for months. Global equities fell just over 5% (in US dollar terms) over the last month, which is never a nice feeling. Particularly when it hasn’t happened in quite a while. The decline through to Thursday was the first 5% market pullback in over a year. It was also the first time a new bull market had not seen a 5% fall in its first 12 months. Currency movements also softened the blow for Irish investors. So, as mentioned above, never a nice feeling but perhaps not as alarmist as many a headline will claim.

Nevertheless, it has never paid to be dismissive of such market movements, and we remain vigilant to the effects of shifting monetary and fiscal policy (more on both below). Any shift or transition in the fundamentals underlying the global economy can come with bouts of volatility and can be at times a difficult road to navigate. Maintaining an active, flexible approach, with a proven investment process, will continue to provide opportunities on the road ahead.

Stocks pull back as sentiment shifts

Stocks fell for only the second month in 2021 as fears in relation to inflation and interest rates roiled equity and bond markets. A rally late on Friday reduced the losses but growth stocks underperformed, with energy the only sector to notch gains for the week. Concerns from both a monetary and fiscal perspective in the US were evident. US treasury yields rose as the policy path of the US Federal Reserve is seen as increasingly hawkish – albeit from a very loose base.

From a fiscal perspective Treasury Secretary Yellen once again warned that the debt ceiling would have to be raised for the US government to meet its obligations, and Biden’s infrastructure plan faltered once more as an approval vote was delayed. Concerns were somewhat eased on Thursday as 15 Republican Senators joined Democrats to avert a government shutdown, in a separate issue to the debt ceiling.

In US data, PCE (the Fed’s preferred measure of inflation) came in at a consensus annualised rate of 3.6% whilst durable goods orders rose 1.8% in August, well above a consensus estimate of 0.7%. Both measures suggest that an economic expansion is continuing, although newswires are littered with consistent reports of supply chain blockages affecting individual company prospects. Chinese PMI data was mixed, as the services measure rose back above 50 in September whilst the manufacturing figure dropped to 57.5 (albeit still in expansion territory). Eurozone equities and bonds took their lead from the US last week, with both major asset classes posting negative returns. Inflation rose to 3.4% in September, with the German component rising to a 29 year high. EU Finance Ministers meet this morning with the item certain to be top of the agenda.

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