19 October 2021
Holding two completely incompatible ideas in your mind at the same time has become essential for investors since the pandemic began. It can’t be a good thing that 4.5 million people have died of Covid worldwide but, at the same time, it’s hard to argue that it’s not good to see global stock market valuations up by $30 trillion over the same period. And while it’s been wonderful for investors to have been bailed out by the actions of governments and central banks, it cannot be good that this expenditure - also about $30 trillion as it happens - was entirely financed by government debt and central banks’ money-printing.
This cognitive dissonance was very much in evidence last week as stock markets rallied despite waves of data indicating that global economic growth is slowing in the face of inflationary constraints. To be precise, the issue is not so much that growth is slowing - this had already become apparent - but that it is now slowing more quickly than initially expected. The most recent deceleration has been driven by supply chain problems, as well as the natural gas crisis in Europe and its impact on energy costs worldwide. Data last week showed that Eurozone industrial production shrank by 1.6% in August, and that was before energy inflation had reached crisis proportions. In the UK, a prominent UK natural gas wholesaler (backed by Glencore) suspended deliveries to eighteen utility companies. Europe, as a whole, faces the very real prospect of outright shortages of energy during the winter.
This was followed by data showing that US industrial production in September suffered its sharpest one-month decline since February, mainly due to problems with supply chains as well as the effects of Hurricane Ida. In China, which is in the midst of its own energy crisis, industrial production slowed to its lowest rate of growth since the onset of the pandemic last year. There is no escaping the fact that limited supply and persistent inflation are now weighing on industrial activity worldwide, but the data only reflects the early stages of the energy crisis and the likelihood is that October and November will only get worse.
Industrial output is only part of the story, however, and the bigger worry is that unanticipated inflation deters consumers from spending the $2.7 trillion accumulated in savings since the pandemic began. Last week’s consumer sentiment figures for the US did not inspire confidence in this respect, falling back to levels associated with the height of the lockdowns last year. Consumer confidence is also deflating in the UK and Eurozone.
But consumer confidence is not the same as investor confidence, and the latter is sky-high. Stock markets bounced back across the board from their wobbles of the previous few weeks, and some are within spitting distance of new all-time highs. One explanation is that retail investors flush with cash are buying the dips, even as institutional investors - who tend to be more concerned with economic fundamentals - would prefer to be selling. History teaches us that amateurs can beat professionals, for a while at least.
The big US banks kicked off “earnings season” for the third calendar quarter, reporting revenues that were boosted by a frenzy of trading: only four weeks after Citigroup issued a warning on trading revenues for the third quarter, the bank was able to report trading revenues 10% above expectations. The banks aren’t taking anything for granted, however: Goldman Sachs, Bank of America and Morgan Stanley all rushed to raise money in the bond markets following their earnings announcements.
The world’s biggest aluminium producer, Alcoa, will pay its first dividend since 2016 and announced a $500 million share buy-back programme. The company’s share price has surged nearly 400% from a year ago as the price of aluminium has risen to near-record highs. And supply constraints are only likely to get worse, after the company disclosed a shortage of magnesium and silicon, both critical inputs into the aluminium-based materials used in cars and building supplies.
Microsoft is to close its successful LinkedIn service in China, affecting 52 million users. The company cited “a significantly more challenging operating environment and greater compliance requirements.” The service had stopped accepting new users in March, following a reprimand by China’s internet regulator for failing to control political content.
Virgin Galactic Holdings’ share price fell 14% closer to earth after announcing another delay to its space tourism project. A recent laboratory test revealed a potential issue with materials used to modify joints on its space vehicles. The American aviation regulator had only recently lifted a ban on the company’s test flights after an investigation into flight data.
Heard of Movember? Well, now you have “Striketober”, the month formerly known as October, which has been renamed in honour of walk-outs in America. 10,000 workers at construction equipment manufacturer Deere & Co took to the picket lines after the company failed to agree compensation terms with the formidable United Auto Workers union. Earlier in the week, a thousand workers at Kellogg Co went on strike, and 60,000 unionised TV and film workers announced plans for their first strike in a century. Strikes have affected 40 workplaces in America since the start of August.
UK GDP growth in August slightly underperformed expectations, growing by 0.4% from the previous month. Industrial production was helped by rebounds in activity in the car manufacturing and oil and gas industries, but the construction industry was held back by supply problems and rising costs. Output also fell in the health sector, primarily due to a decline in Covid vaccinations and testing. The data confirm that the Bank of England will almost certainly have to reduce its expectations for economic growth, making the chance of a rate rise in the near-term less likely.
Chinese export data was stronger than expected in September, offering the prospect of some respite for global trade from the slowdown in the Chinese economy. This optimism was offset, however, by imports that were much weaker than expected, driven by declines in the property sector and energy shortages.
UK inflation is expected to have been 3.2% in September, the same as the previous month, with faster supermarket and car-price inflation being offset by lower restaurant and accommodation costs. The impact of recent petrol price rises has yet to enter the data.
Business activity surveys for early October are expected to show a slowdown in activity from the previous month. In the UK, fuel shortages probably impacted the service sector as people preferred to stay home, and manufacturing output is also likely to have been impacted by higher energy prices, as well as supply chain problems. It’s a similar story in the Eurozone, where slower levels of activity in both services and manufacturing are expected as the rebound after the end of lockdowns continues to recede.
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