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Please see investment bulletin below from Brooks Macdonald received yesterday – 06/10/2021

What has happened

Yesterday saw some stabilisation within equity markets however the start to the European trading session today has seen a good portion of the gains dissipate. Inflation remains the key topic and expectations increased again yesterday, catalysing weakness in bond markets.

Gas and Inflation

European natural gas futures surged by another 20% yesterday and have seen a more than six-fold increase since the start of 2021. The European natural gas market continues to have some of the most impressive price increases however US gas futures and oil also continued to rise as inflationary pressures continue in the commodity and energy space. All of this has translated into rising 10-year inflation expectations which are now just shy of 4% in the UK (using RPI) and 2.5% in the US (using CPI). Bonds yields rose in response, with the US 10-Year Treasury yield at 1.55% today and 10-year gilt yield at 1.14%, both a far cry from their levels in August. Despite this, equities rose with the technology heavyweights leading the charge after a weaker start to the week however taking the last few weeks in aggregate it is clear that these inflation concerns are weighing on risk appetite more generally.

US Politics

The US Senate will vote today on the suspension of the US debt ceiling however it is widely expected to be blocked by the Republicans given the comments on recent weeks. Senator Manchin (a key Democrat moderate) is said to be warming to a social infrastructure bill worth around $2tn (from the original $3.5tn) so there are signs that a consensus is starting to form ahead of the reconciliation bill which may need to include the debt ceiling and the ‘Build Back Better’ economic plan. Meanwhile on the race for the next Federal Reserve Chair, Senator Warren is positioning against the reconfirmation of Chair Powell with criticism that the incumbent ‘failed as a leader’. Financial betting markets are now pricing in a far more open field for this important role.

What does Brooks Macdonald think

The latest surge in energy prices puts further pressure on the transitory inflation narrative with inflation expectations increasing over the medium to longer term. Yesterday the Reserve Bank of New Zealand rose rates by 25bps joining the small, but growing, group of central banks responding to the inflationary pressures. Yesterday’s US composite PMI data was the weakest we’ve seen this year suggesting that, at the same time as we see inflation rising, growth momentum is slowing, posing further challenges to policymakers.

Bloomberg as at 06/10/2021. TR denotes Net Total Return

Another quick update from Brooks Macdonald, these regular investment bulletins help us keep up to date with what is happening in the markets.

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Charlotte Clarke