September Market Slump

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At the close of business last Friday, global equities fell this past week, with the S&P 500 Index ending a seven-month winning streak in September. A sharp backup in US yields, surging input costs, mounting profit warnings and continued bottlenecks have contributed to a reduction in risk appetites.

US 10-year Treasury note yields reached 1.56% earlier this week before easing on Friday amid weaker equities to 1.49%. That’s up from last week’s 1.45%. Volatility, as measured by the Cboe Volatility Index (VIX), rose to 22.8 from 18.2 a week ago while the price of a barrel of West Texas Intermediate crude rose to $74.50 from $73.85.



September is traditionally the most volatile month of the year and 2021 was no exception. I was asked this week if we are concerned with the potential for strong returns in the last quarter. My answer was that the global economic recovery remains on track. Bottlenecks with supply has meant that the recovery will continue well into 2022 as vaccination rates globally will relieve some of these bottlenecks with global production becoming more stable. The pace of global mergers and acquisitions hit a record $1.52 trillion in the third quarter.



In Canada, accommodation and food services continue to recover after lockdowns, up 12.5 per cent for the second straight month of double-digit increases. Reopening of places like amusement parks, gyms, and casinos helped the arts, entertainment and recreation sector rise 8.1 per cent.
On the other hand, there was a 5.5 per cent drop in agriculture, forestry, fishing and hunting. The hot weather we experienced this summer negatively affected crop yields and the summer slowdown in the housing market saw residential construction down.



US government shutdown averted, but debt ceiling unresolved
The US Congress passed a stopgap funding measure on Thursday to fund government operations through early December, but has thus far failed to raise the country’s debt ceiling. Secretary of the Treasury, Janet Yellen, thinks this will be reached around October 18th.

Given that a proposed additional $4.6 trillion in government spending is being debated on Capitol Hill, Republican lawmakers have put the onus on Democrats to raise or suspend the debt limit, which they can do without Republican support through the budget reconciliation process. President Joe Biden’s spending plans remain bogged down, with progressive and moderate Democratic legislators unable to reach agreement on the contours of his “social infrastructure” spending bill. Thus, the likelihood of a package approaching the proposed $3.5 trillion figure is dwindling, with numbers in the $1.5 to $2.1 trillion range being floated.

In testimony before US legislators this week, Fed Chair Powell conceded that inflation is likely to remain elevated in coming months before moderating toward the Fed’s 2% goal, adding that the central bank is prepared to act should sustained inflation pressures become a concern.

US initial weekly jobless total ticked higher for the third week in a row, the first three-week rise since the pandemic began.



Germany tilts left
The centre-left Social Democratic Party (SPD) earned a slight plurality in German federal elections last Sunday, giving Olaf Scholz the first opportunity to form a government. The coalition-building process is expected to take months as at least three parties will need to band together to reach a majority in the Reichstag.
It was the worst-ever result for Angela Merkel’s Christian Democrats, though the party lost out on the top spot by just 1.6% in a highly fragmented vote. Merkel will remain as caretaker while the process of trying to form a governing coalition plays out. Populist parties lost ground compared with their 2017 showings.

Eurozone inflation jumped to a 13-year high of 3.4% year over year in September, driven by soaring energy prices. European Central Bank president, Christine Lagarde, has vowed the ECB will look through the price spike as it is being driven mainly by bottlenecks. Central bankers are attempting a difficult balancing act as they navigate the crosscurrents of rising inflation and potential demand destruction from rising energy costs.

A shortage of truck drivers has led to a crunch in retail gasoline supplies in Great Britain. Prime Minister Boris Johnson has deployed the military to provide drivers, and his government has issued 5,000 temporary visas to allow foreign drivers to enter the country.


Japan’s LDP chooses new leader
Fumio Kishida was elected president of Japan’s Liberal Democratic Party this week, setting the stage for him to become the country’s prime minister when Japan’s parliament, the Diet, meets on Monday. The former foreign minister will lead the LDP into lower house elections in November. The LDP is expected to win the upcoming election as the country emerges from a coronavirus state of emergency. Kishida is expected to maintain a highly accommodative fiscal policy near term before shifting the government’s focus to tackling income inequality.

China is trying to cushion the impact of the potential insolvency of Evergrande, the embattled property developer. The government is prodding state-owned firms to buy assets from the developer while local governments are being enlisted in an effort to pave the way for further asset sales and the company’s eventual reorganization. China’s central bank has been adding large amounts of liquidity to the system daily to sooth financial market jitters.

After mandating factory shutdowns due to power shortages, China has ordered state-owned energy companies to procure the necessary supplies ahead of winter at any cost.

This week, Goldman Sachs cut its 2021 growth forecast for China to 7.8% from 8.2% due to cuts in industrial output amid energy shortages. The bank estimated forty-four percent of China’s industrial activity has been impacted by the scarcity of power,.

China’s manufacturing purchasing managers’ index fell to 49.6 in September amid electricity shortages, breaking an eighteen-month string of fifty-plus readings.

After China banned cryptocurrency trading last week, some exchanges this week began closing the accounts of Chinese residents.

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