Market Insights - August 30, 2021

The eurozone’s services sector continues to pick up as restrictions are eased and economies gradually reopen. For the first time since the pandemic, business confidence is rising faster than in the manufacturing sector, where it has started to lose some steam. 

With just one month to go, Germany’s federal elections are still wide open. Several polls point to a surge in support for the SPD, which has even pulled ahead of the CDU. This is a major change of course in a campaign that had been quite uneventful. For the moment, the markets don’t seem to be too spooked about a potential shift to the left in the German government. 

Taiwan’s semiconductor heavyweight TSMC has said it plans to increase the prices of its products by up to 20%, the biggest price hike ever announced by the company. This is in response to strong demand for its custom chips, which are key components of both electronic devices and cars. It’s also another sign that inflationary pressure is mounting.

The Fed announces a gradual return to normal

This year’s gathering of central bankers in Jackson Hole, Wyoming, was once again a much-awaited event. The chair of the US Federal Reserve – the world’s most powerful central bank – often uses the occasion to outline the Fed’s monetary policy going forward, after consulting with his peers around the world. From the outset of the pandemic in Q1 2020, the Fed adopted an extremely unconventional – and at times very inventive – monetary policy. And all the other major central banks followed suit. They needed to act urgently to prevent their economies from collapsing and restore confidence on the financial markets. 

During his closing remarks this time around, Fed chair Jerome Powell was reassuring yet cautious. He welcomed this year’s significant improvement in the US and global economies. In normal times, such a sharp upturn in output – the IMF forecasts 7% growth for the US economy in 2021 – would be grounds for an immediate tightening of monetary policy, especially since inflation is rising sharply, although the Fed still says the current high inflation is transitory. 

But COVID-19 means that things are far from normal – the pandemic is still not under control and the risk of another economic downturn cannot be ruled out. That’s why Jerome Powell is getting people ready for a very gradual return to normal monetary policy. First of all, the Fed will begin tapering its asset repurchase programme before the end of the year. This means that less money will be pumped into the financial system going forward. 

But the Fed chair still says there won’t be a rate hike anytime soon. We’re not likely to see a rise in rates until 2023 at the earliest – and at that point the liquidity injections will almost certainly have stopped already. 

When the Fed announced that it would begin tapering in 2013, it sparked panic on the financial markets. But this time, things have remained calm. We think this is because investors priced this risk in some time ago. And a more predictable and less hurried Fed should mean that the current climate, which is very good for global stock markets, will last for longer. We think that the real threat lies in the bond market. We’re watching out for a rise in long-term interest rates, especially if this is caused by inflation rising more than expected.

Commodities – oil supplies will strug-gle to keep up with demand

Will oil supplies be able to keep up with strong demand? The global economy is now growing at a fast and steady pace, and the surplus inventory that built up last year has run dry. According to recent readings, crude stocks are below their early-2020, pre-pandemic levels. They’re even nearing their five-year lows, which means the market will become much tighter if economic growth keeps up with economists’ forecasts. 

On top of that, Opec members are taking a cautious approach to ramping up production.
 They are still deliberately lagging behind demand and are now meeting monthly – rather than half-yearly to adjust their output as needed. What’s more, it’s looking less likely that Iranian oil will come back on the market given the slow progress in the nuclear talks with the States. 

Lastly, the oil industry slashed investments in response to the pandemic. Within a year of opening, production at a shale gas well drops by more than 50%. This means that well development needs to remain high just to keep production stable. As the economic climate evolves, oil companies will have to scale up their investments, at a time when ESG investors – who are growing in number – are reluctant to provide the funding. 

We therefore expect oil supplies to remain inelastic over the coming quarters, with demand staying robust. Prices will likely be pushed up in order to balance out the market.