The world equity index fell this week, as investors’ attention continued to focus on central banks, looking for clues as to when bond buying programmes may be reigned in, as a precursor to interest rate rises in the future. As the week wore on, rising expectations of a slowdown in US growth, with last Friday’s new jobs created having fallen wide of the mark, led to broad weakness in US equities. Whilst the European Central Bank (ECB) on Thursday confirmed it would slow the pace of its bond purchasing programme. However, its president, Christine Laggard, did not lay out a timetable and said the programme would continue in another form in 2022 whilst “there remains some way to go before the damage done to the economy by the pandemic is undone”.
As of 12pm on Friday, US equities were down 0.9% over the week, whilst the US technology sector lost 0.8%. European equities were down 0.7% and the UK market fell 1.2%, not helped by the announcement of a hike in taxation, including on dividends, to provide further funds to the UK’s health service and social care. Japanese equities rose 3.8% after the abrupt resignation of Prime Minister Yoshihide Suga led to heightened speculation of increased economic stimulus with the advent of a successor. Australian equities dropped 1.6%. Emerging markets fell 1.2%, but Chinese equities rose 3.4% after better than expected export data for August combined with an announcement that China will further open its capital markets to foreign investors.
Despite last Friday’s US new jobs data missing forecasts by a wide margin, with 235,000 new jobs having been created in August versus forecasts of 728,000, bond yields rose at the start of the week. However, as the week wore on, bond yields between the US and Europe diverged, as expectations rose for a slowdown in the US, whilst Europe continues to benefit from a reacceleration in its economy as Covid related restrictions continue to be eased. US Treasury yields, having hit 1.38% on Tuesday, are now trading at 1.32%. Whilst German Bund and UK Gilt yields remain higher over the week, at -0.35% and 0.74% respectively.
Issues under discussion
The sharp spike in inflationary pressures looks to be peaking, as economies have reopened following Covid related lockdowns. However, looking further out, it is also increasingly clear that companies are having to offer higher wages to attract workers back. Therefore, inflationary pressures, although likely on the decline, may not return to the very low levels experienced pre pandemic. From an investment perspective, inflation caused by rising wages, rather than an increase in the price of “stuff” is very different. Companies that have pricing power and are able to pass on wage inflation cost increases to consumers, may offer much better protection than commodities. The most likely future trajectory for inflation is still unfolding but, nonetheless, careful consideration needs to be given to the possible implications.