Stock Markets

As has been the dominant strategy throughout 2021, investors acted according to the “buy the dip” mentality last week. The market pulled back by 5% for the first time during September’s trading, and now appears to have regained its momentum by responding vigorously to last week’s strong start to the corporate earnings season. 2021 began with a positive outlook which the market proved well justified. Despite this fact, nothing appears to have gone as predicted. Yet, the solid economic signals and positive earnings reports that came out during the week fueled the second consecutive weekly gain. The S&P MidCap 500 Index performed robustly and tentatively approached 0.1% of its all-time intraday high on the last day of trading. The small real estate sector outperformed the other sectors within the S&P 500 Index, during which long-term bonds slid. Consumer discretionary shares rose on Tesla’s lead, while communication shares services shares were weighed down by sell-offs in shares of traditional media providers.

U.S. Economy

The retail sales report for September showed that retail spending rose by 14.3% year-on-year. Historically this is remarkably robust and shows that the economy is poised to consider its recovery. Simultaneously, this is the slowest growth rate since March and only half of the percentage increase in May, possibly due to the slowdown in consumption as a result of the delta-variant spread.

In the labor market, last week’s initial jobless claims slid to 293,000, the first time this indicator fell below 300,000 since March of last year. Viewing the indicators in their broader context, the initial claims peaked at an astounding 6.15 million at the start of April with the unemployment rate was slightly below 15%. Since declining initial claims is a leading indicator of favorable employment conditions, this unemployment rate is an encouraging data point. Unemployment currently stands at 4.8%, which is a considerable improvement from the 6.7% unemployment rate with which 2021 started. For the year so far, the job growth has been more sluggish than had been expected initially, as highlighted by the disappointing gains in the past months. On the other hand, wage growth has been substantial than anticipated as they have risen to the highest levels in the last ten years.

Concerning the Federal Reserve monetary policy, the incoming inflation data continues to justify a possible tapering policy on bond-buying by the Fed. Last week also brought to investors’ attention the possibility of a potential shift in the Fed’s leadership in light of Chairman Powell’s end-of-term in February 2022. Powell will likely be renominated by President Biden for purposes of continuity as well as Powell’s lenient monetary approach despite the increasing inflationary trend.

Metals and Mining

The trading pattern for gold caused excitement among analysts the past week who saw the surge in the inflation rate as a game-changer for gold. It was therefore unexpected that the price of the precious metal tumbled by nearly $30 on Friday, subsequent to the release of strong U.S. retail sales numbers. The rally that began the week stemmed from the International Monetary Fund’s downgrading of its global growth forecast from 6% to 5.9%. Reasons cited were risks from supply chain bottlenecks, price pressures, and threats from the delta variant. For the U.S. the 2021 growth forecast was reduced from 7% to 6% on the back of supply constraints. Inflation is likely not only temporary since central banks will be unable to mitigate price surges without imposing stringent measures that will hurt the economy. Friday’s selloff was a reaction to the technical resistance at $1,800 per ounce. A bullish sentiment for gold is likely to prevail in the future due to the escalation of geopolitical tensions.

After the selldown, gold still ended up 0.6% for the week, closing the week with $1,767.62 per troy ounce from $1,757.13 per troy ounce the week before. Silver gained 2.78%, closing at $23.31 per troy ounce from $22.68. Platinum rose 2.92%, from $1,028.59 to $1,058.64 per troy ounce. Palladium ended only slightly down by 0.05%, closing $2.078.21 per troy ounce from $2,079.17. All the base metals were up. Copper closed 9.83% up, from $9,361 per metric tonne to $10.281. Aluminum was also up by 6.93% from $2,966 to $3,171.50 per metric tonne.  Tin gained by 2.89% from $36,156 to $37,200 per metric tonne. Outperforming among the base metals was zinc, which rose 20.42% week-on-week from $3,151.00 to $3,171.50 per metric tonne week-on-week.

Energy and Oil

The rally in natural gas prices proceeded to push the switch from gas to products and continues to push oil prices further upwards. A counter-seasonal mini-renaissance of HSFO utilization prevails in Asia. Simultaneously, the demand for crude remains robust as a week-on-week decline in OECD stockpiles is observed. Weakening Chinese imports placed added pressure on oil prices on Thursday, offset by a bullish sentiment that renewed buying interest on Friday. Meanwhile, the European Union intends to ban oil, gas, and oil exploration in the Arctic. This region is seen to be the most impacted geographical area by climate change, having warmed three times as fast as the global average over the past half-century. None of the EU members, however, have a significant footprint in the Arctic.

Natural Gas

At most locations during the report week (October 6 to October 13), natural gas spot prices fell. The Henry Hub spot price came down from $5.95 per million British thermal units (MMBtu) at the start of the week to $5.45/MMBtu by the week’s end. Forecasts have natural gas spot prices at the U.S. benchmark Henry Hub at an average of $5.67/MMBtu from October 2021 to March 2022. This represents the highest winter price since 2007-08. As production growth outpaced LNG exports growth, the Henry Hub prices is expected to decrease early next year, to average $4.01/MMBtu. Over the week, 16 LNG vessels with a combined LNG-carrying carrying capacity of 50 billion cubic feet (Bcf) left the U.S. between October 7 to October 13,

 World Markets

European shares surged as optimism greeted the likelihood of continued economic recovery and strong corporate earnings. The pan-European STOXX Europe 600 Index gained 2.65%. The major European indexes were mostly higher. France’s CAC 40 Index surged by 2.55%, Germany’s Xetra DAX Index climbed 2.51%, and Italy’s FTSE MIB Index rose by 1.68%. The UK’s FTSE 100 Index advanced 1.95%. The core eurozone bonds ended the week of volatile trading down. Yields moved higher due to concerns of inflation pressures, although high-quality government bonds were met with higher demand by the week’s end. Investors feared that the central banks would make the mistake of raising interest rates and adopting more restrictive monetary policies too aggressively. Peripheral eurozone bond yields as well as the UK gilt yields followed the direction taken by the core markets. Due to supply chain bottlenecks and slowing global trade, Eurostat data showed that industrial production fell in the Eurozone in August.  

In Japan, the stock market returns remained in positive territory despite the dissolution of Japan’s powerful lower house of parliament. This move set the stage for a general election on October 31, and reassured investors that the new Prime Minister Fumio Kishida will continue to follow the policies of his predecessors. There will likely be no increase in the country’s capital gain tax, a possibility of which initially caused some nervousness among investors. The Nikkei 225 Index advanced 3.64% and the broader TOPIX Index rose 3.16%. The yen descended to JPY 114.3 against the dollar, its lowest level in three years. The drop prompted Finance Minister Shunichi Suzuki to declare the importance of currency stability, sending signals that the government will closely monitor the currency market and its economic impacts. The yield on the 10-year Japanese government bond remained unchanged at 0.08%.

The Chinese market moved sideways ahead of the quarterly GDP report due to be released next week. The large-cap CSI 300 Index inched slightly up by 0.3% while the Shanghai Composite Index slid by 0.6%. Premier Li Keqiang announced ahead of Monday’s GDP release that China’s third-quarter economic expansion slowed down; however, he did not elaborate further. Investors have been generally concerned about the worsening energy crisis in the country as heightened energy demand is expected to meet with the power supply shortage during the coming cold months. Fuel prices are further escalating as power plants scramble to stock up on coal. Energy importers are likewise worried about the rising oil and natural gas prices which have risen to their highest level in years. Many Chinese energy companies are in advanced negotiations with U.S. exporters to recure long-tern LNG supplies. Natural gas prices have surged more than fivefold in Asia this years, further driving the anticipation of power shortages in the coming winter.

The Week Ahead

The LEI index, Industrial Production, and PMI index are among the important economic data being released in the coming week.

Key Topics to Watch

• Industrial production
• Capacity utilization rate
• National Association of Home Builders index
• Building permits (SAAR)
• Housing starts (SAAR)
• Beige Book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Philadelphia Fed manufacturing index
• Existing home sales (SAAR)
• Leading economic indicators
• Markit manufacturing PMI (flash)
• Markit services PMI (flash)

Markets Index Wrap Up

Stock Markets

Equities recovered some of the previous weeks’ losses as most of the major indexes recorded week-on-week gains. The S&P 500 Index gained back some of the value lost the week earlier with energy stocks leading the way. Crude prices reached a seven-year high on Monday in light of the decision by oil exporters not to increase their production levels by more than the modest amount previously agreed upon. In Europe meanwhile, natural gas prices reached record highs. Lagging behind other sectors with modest losses was the small real estate sector. There is a sense of anticipation as investors look forward to the unofficial start of the third-quarter earnings reporting season. Some important bank announcements are expected in the coming week. On the downside, however, investment sentiment was dampened by news that another Chinese property developer may succumb to its debt problems, simultaneous with increasing tensions between China and Taiwan.

U.S. Economy

The week started off on a pessimistic note as President Joe Biden announced that he could not guarantee that the U.S. would not default if the debt ceiling could not be raised. Worries among social media users ensued when Facebook, Instagram, and other related web services went offline due to technical problems. Furthermore, St. Louis Federal Reserve President Jim Bullard commented that he was “concerned that inflation risks are to the upside” due to the spike in oil prices. Before the week ended, however, a temporary deal to raise the debt ceiling until December was reached, alleviating the prospects of default until the year’s end.

• The rise in oil prices to its highest in seven years and the spike in natural gas prices to its 2008 level coincided with the rise in coal prices to record highs. The volatility in energy costs sent Europe and China into an energy crunch, impacting factory outputs and worsening the already long list of supply chain problems. These developments are further holding back the global economic recovery. The impending commodity inflation could not solely be blamed, however, on the energy crunch.
• Among other factors is the pent-up demand that is gradually returning as pandemic restrictions are slowly being eased. Consumption patterns away from services and towards goods are shifting worldwide as an offshoot of the COVID lockdowns, translating to higher energy consumption among the manufacturing companies. Concerning the supply side, production has been constrained by several developments including the output limits from OPEC and its allies, extreme weather events and natural disasters, the transition towards renewables and away from fossil fuels – thereby impacting energy investments – and other geopolitical developments.
• While high energy prices, acting much like a tax on the consumer, has the potential to curtail consumption and, consequently, economic growth.  Current developments, however, do not appear to lead to sustained inflationary pressures since the U.S. and global economies are less reliant on oil than they did in the past. The impact on the economy, therefore, remains manageable. The worsening labor shortages may present a problem. The reported 194,000 jobs added in September was the smallest gain this year. The unemployment rate fell more than expected to 4.8%, a new post-pandemic low. This was driven by an unexpected exodus of workers from the labor force, prompting employers to boost pay in an effort to attract workers.

Metals and Mining

The gold market appears to struggle as it fails to hold gains above $1,750 per ounce, following the second month of pessimistic labor-market data. Gold briefly rallied to test the $1,780 resistance level, but quickly retracted. Investors generally remained too focused on the U.S. monetary policy in light of the current inflationary pressures. The Federal Reserve is poised to taper their monthly bond purchase by this year’s end, which continues to weigh on the price of precious metals. The potential global energy crisis looms as the prices of oil and gas rise to record highs, possibly causing inflation to be more of a problem than analysts previously estimated. This fact has uncharacteristically not converted into buying interest for gold and precious metals.

This past week, gold spot price slid from $1,760.98 per troy ounce, its close a week ago, to $1,757.13, dipping slightly by 0.22%. Silver appreciated marginally by 0.62% to close at $22.68 from a week-ago close of $22.54 per troy ounce. Platinum climbed by 5.27% from $977.11 to $1.028.59 per troy ounce. Palladium also gained from $1.921,82 to $2.079.17 per troy ounce, increasing 8.19% week-on-week. The base metals sector did better, with copper prices gaining 2.55% from $9,128 to $9,361 per metric tonne. Zinc gained 5.65%, closing the week at $3.151 from the previous week’s close at $2.982.50 per metric tonne. Aluminum rose by 3.82%, from $2.857 to $2,966 per metric tonne. Tin increased by 6.86% to close at $36,156 from $33,835 per metric tonne.

Energy and Oil

The energy and oil crunch took center stage for the week as pricing fundamentals indicating the likelihood of a prolonged period of high gas and coal prices. The rising electricity generation costs raised concerns across the Atlantic Basin and Asia. At the same time, European gas futures have surged beyond a crude oil equivalent of $200 per barrel, triggering gas-to-oil possibilities wherever they remain available. Gas-to-coal switching economics have likewise boosted coal prices as producers are compelled to produce more despite tightness in the global supply. Brent futures traded around $82.5 per barrel during Friday’s transactions as WTI neared $79 per barrel.

Natural Gas

For the sixth straight consecutive week, international natural gas prices rose together with the entire energy industry. At the Title Transfer Facility (TTF) in the Netherlands, Europe’s most liquid natural gas spot market, the average day-ahead price for the report week was $32.38 per million British thermal units (MMBtu). This is the highest weekly average recorded since September 2007, a gain of $7.05/MMBtu from the previous week’s average of $25.23/MMBtu. Last year’s corresponding weekly average (October 7, 2020) prices were $5.06/MMBtu and $4.39/MMBtu in East Asia and at TTF, respectively.

Natural gas spot prices increased during the report week from September 20 to October 6. The Henry Hub spot price ended at $5.95/MMBtu from $5.63/MMBtu at the beginning of the week. The price of the November 2021 New York Mercantile Exchange (NYMEX) contract rose by $0.20 to $5.675/MMBtu from $5.477/MMBtu week-on-week, after reaching a high of $6.312/MMBtu on Tuesday. The price for the 12-month strip averaging November 2021 through October 2022 futures contract rose by $0.16 to $4.665/MMBtu. The U.S. supply of natural gas was unchanged for the report week, but its natural gas consumption increased week-over-week due to a substantial increase in power generation. The U.S. LNG exports likewise increased over the report week.

World Markets

Shares in the European market were volatile for the week but, in the end, closed higher. The pan-European STOXX Europe 600 Index gained 0.97% with the financial sector outperforming the rest of the market. The anticipation of a higher interest-rate monetary policy and steepening yield curve may have fueled the buying interest as both would help to boost the banks’ net interest margins. Germany’s Xetra DAX Index rose by 0.33%, France’s CAC40 Index climbed 0.65%, and Italy’s FTSE MIB Index rose by 1.70%. The UK’s FTSE 100 Index gained 0.97%. The core eurozone bond yields went higher on inflationary worries as a result of the increase in the prices of natural gas. They further increased in tandem with U.S. Treasury yields after the U.S. Senate agreed to raise the U.S. debt ceiling until December to prevent a government default. The peripheral eurozone bond yields and UK gilt yields followed the core markets. The gilt yields gained upward momentum after the new Chief Economist of the Bank of England, Huw Pill, expressed concerns that the high inflation may become more persistent than earlier expected.

In Japan, responding to concerns of global inflation, oil prices, and a possible bubble burst in the Chinese property market, equities fell for the third week in succession. The Nikkei 225 Index fell 2.51% while the broader TOPIX Index likewise lost 1.23%. Investors’ concerns also drove share price declines in light of the prospective policies of the newly inaugurate Japanese Prime Minister, Fumio Kishida. The new prime minister had previously announced that he would support a capital gains tax increase, primarily perceived as a step backward from Japan’s efforts to become more shareholder-friendly. The yield on the 10-year Japanese government bond tracked U.S. Treasury yields, rising to a multi-month high of 0.08% from 0.05% week-on-week. The yen devalued against the U.S. dollar, to JPY 111.88 from JPY 111.08 the week earlier, due to the sudden increase in Treasury yields.

Following the Golden Week holidays, Chinese equities surged Friday. The CSI 300 Index rose 1.31% and the Shanghai Composite Index gained 0.67%. Investors appeared to discount the government’s regulatory crackdown, property sector uncertainties, and the nationwide energy crunch and looked instead at the optimistic economic data. Friday’s data release drew attention to the Caixin/Markit services Purchasing Managers’ Index which increased to 53.4 from August’s 46.7, the lowest level during the worst of the 2020 pandemic. The 50-point mark demarcates the monthly growth from contraction. During the Golden Week, tourism revenues plunged 5% year-on-year, indicating a weak outlook for the October retail sales. In response to China’s power shortages, Beijing ordered on Friday an immediate increase in coal output. The bid to mitigate the nationwide power crunch is expected to help alleviate production problems in industries in several regions of the Chinese economy, the second-largest in the world.

The Week Ahead

The PPI, unemployment rate, and retail sales growth are among the important economic data expected to be released in the coming week.

Key Topics to Watch

• NFIB small-business index
• Job openings
• Consumer price index
• Core CPI
• FOMC minutes
• Initial jobless claims (regular state program)
• Producer price index
• Retail sales
• Retail sales ex-autos
• Import price index
• Empire state index
• Consumer sentiment index
• Business inventories

Markets Index Wrap Up

Stock Markets

The Nasdaq Composite index and the other large-cap benchmarks have registered their most significant intra-week drop since February, despite Friday’s rally, which recovered some of the week’s losses. This week’s performance concluded what turned out to be the worst monthly declines since the pandemic began, mainly on the back of inflation worries and rising interest rate concerns. Ending the week with only moderate losses are the S&P MidCap 300 and small-cap Russell 2000 indexes. Within the S&P, declines were felt among all the sectors except for energy stocks which slight gained. Value shares fared better than growth stocks, evidenced by the underperformance of the technology-dominant Nasdaq Composite Index.

Stock performance activity is historically weakest during the month of September out of the entire year. This year was no exception, with the S&P declining 4.8%, marking only the second monthly loss for the year and performing at its worst since March 2020. While investors are wary of an upcoming Fed tapering stimulus that may usher in some volatility, it is still premature to consider the likely market pullback to be a significant change in the long-term trend. It is likely that volatility may be prolonged but nevertheless temporary, after which the long-term uptrend will resume.

U.S. Economy

The forecasted economic expansion and ensuing bull market will eventually end in a high-interest rate regime, as have all bull markets. At present, however, the interest rates are still relatively low and will continue to remain so in the near future. The developing inflationary pressures may appear to speed up the rise in interest rates, but this is not likely to happen for at least a year. It will take a protracted cycle of tightening monetary policy before rates accelerate to levels that will make borrowing costs restrictive for consumers and businessmen. Only at this point will economic growth be curtailed and a recession potentially developed, which is a distant possibility.

• Over the past week, political risks intensified over the looming debt limit, potentially leading to a government default. The stopgap spending bill that provided funding for the government until early December has eased some of the tension for the moment, but the markets remain uneasy. The alleviation of a government shutdown last week was nevertheless a most welcome development. It is a sign that both sides of the aisle are keenly aware that the debt ceiling needs to be raised. Federal debt is currently at $28 trillion, and neither political party is eager to be the proponent in increasing the burden of this debt. Therefore, it is likely that the debt ceiling will be considered as a last resort to sustain the government’s operations.
• The yield on the benchmark 10-year U.S. Treasury note surged to its highest in three months at the middle of the past week before receding once more to its previous level. With the stabilization of yields, there was improved buying activity, particularly in bonds with long-term maturities and higher-yielding segments like airports and toll roads. Bond prices recede when yields increase, possibly fueling the buying interest.

Metals and Mining

Investor apathy dominated the whole of the precious metal market, but this is likely to turn in October due to the rising uncertainty and perceived risk in the global financial markets. A developing credit crisis persists in threatening the U.S. government despite the passage of legislation to extend funding until December 3. The debt ceiling will need to be raised, a highly unpopular move that neither party wishes to be identified with in light of the coming 2022 election cycle. Natural gas prices have also ascended to peak levels, increasing inflationary pressures than most central banks will likely respond to with more restrictive policies.

Gold and silver prices remain low, and silver’s intra-week dip below $22 was seen as a buying opportunity. Week-on-week, precious metals came under pressure but gold and silver remained resilient. Gold increased 0.60% from $1,750.42 to $1,760.98 per troy ounce, and silver likewise rose 0.54% from $22.42 to $22.54 per troy ounce. Platinum and palladium slid in value; platinum lost 0.84% to close at $977.11 from $985.36 per troy ounce. Palladium fell by 2.59%, closing at $1,921.82 from the previous week’s $1,972.96 per troy ounce.

Base metals suffered heavier losses than precious metals. Copper spot lost 2.19% from $9,332.50 to $9,128.00 per metric tonne. Zinc underperformed copper with a 4.67% price decline ending at $2.982.50 from $3,128.50 per metric tonne. Aluminum ended 2.01% down, closing the week at $2,857.00 from $2,915.50 per metric tonne. Finally, tin underperformed the rest, falling 7.40% from $36,539.00 per metric tonne to $33.835.00.

Energy and Oil

Speculation is rife for the next OPEC+ meeting next Monday about the group’s decision to increase its crude production and release it into the market. Prices remain approximately $80 per barrel as Brent trades at $78 per barrel and WTI slightly lower at $74.5 per barrel. Some downside for the prices looms as Russia and Kazakhstan ramp up supply, and the first U.S. inventory stocks build-up since July. Simultaneously, extremely high gas prices pushing Asia to switch from gas to oil and the U.S dollar weakening are factors that largely offset the supply increases.

Natural Gas

The U.S. supply of natural gas rose for this report week (September 22 to September 29) due to increasing imports from Canada. The average total supply of natural gas rose by 0.5% from the previous week, while dry natural gas production decreased by 0.1% during the same period. The decline was more than offset by the 12.2% increase in average net imports from its neighbor to the north. Meanwhile, U.S. consumption declined for the second consecutive week due to reduced fuel use in the electric power sector. This week, U.S. natural gas consumption fell by 5.7%. The consumption of natural gas for power generation slowed by 13.1% due to weather temperatures being cooler than normal.

In the meantime, spot prices for liquid natural gas continue to surge as China’s demand for power meets a tight supply. LNG prices reach $34.5 per million British thermal units (MMBtu) in Asia, an all-time record high. Natural gas spot prices increased at most locations during the report week. The Henry Hub spot price climbed from $4.83/MMBtu to $5.63/MMBtu. The October 2021 NYMEX contract expired on Tuesday at $5.841/MMBtu, up by $1.04/MMBtu from the week previous. The November 2021 NYMEX contract price ascended to $5.477/MMBtu for an increase of $0.62/MMBtu. The price of the 12-month strip averaging November 2021 through October 2022 futures contracts increased by $0.34/MMBtu to $4.507/MMBtu.

World Markets

European equities plummeted due to investor fears that the economy was entering a low growth and high inflation phase. The pan-European STOXX Europe 600 Index closed the week 2.24% below last week’s close. Major markets in the region also chalked up losses for the week. Italy’s FTSE MIB Index slid 1.36%, France’s CAC 40 Index fell 1.82%, and Germany’s Xetra DAX underperformed the rest, closing lower by 2.42%. UK’s FTSE 100 Index declined by 1.36%. The core eurozone bond yields climbed in reaction to a sell-off in global developed market bonds. Expectations of a tightening of the U.S. monetary policy were fueled by Federal Reserve pronouncements hinting at forthcoming restrictions. The inflation rate in Germany was announced to reach 4.1%, the highest in 29 years. Peripheral and UK government bonds largely tracked the uptick in core bond yields. 

In Japan, the stock market followed the direction of U.S. equities as the latter declined sharply during the week. The Nikkei 225 Index fell 4.89%, with its deepest drops seen occurring on Wednesday and Friday, although it still realizes year-to-date gains. The broader TOPIX Index also lost 5% week-on-week. In the currencies market, the Japanese yen lost value against a stronger-performing U.S. dollar from the beginning of the week to Thursday, regaining some of its value on Friday. By the week’s end, the yen traded at about 111.20 versus the dollar.

China’s holiday-shortened trading week ended mixed. The large-cap CSI 300 Index inched higher even as the Shanghai Composite Index moved lower from their respective closes during the previous week. Markets were closed on Friday for the National Holiday that will last one week starting October 1. Yields on Chinese government bonds remained unchanged from the past week for the broader market. In the currencies market, the renminbi (RMB) gained strength against the U.S. dollar by 0.3% to 6.447 per dollar. Investor sentiment turned optimistic on positive news surrounding the Evergrande Group, China’s heavily indebted property developer. Evergrande announced the sale of 20% of its stake in Shengjing Bank Co. to a state-owned enterprise for U.S.$1.5 billion that would effectively reduce its debt load.

The Week Ahead

Investors may look forward to important economic data such as the unemployment rate, the PMI composite, and the trade deficit expected to be released this week.

Key Topics to Watch

• Factory orders
• Trade deficit
• Markit services PMI (final)
• ISM services index
• ADP employment
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Consumer credit
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings

Markets Index Wrap Up

Stock Markets

The past week’s trading again assumed a heightened level of volatility as different news stories provided investors causes for concern, despite six months of listless trading. An early 5% sell-off based on intraday prices dominated the major benchmarks. Still, in the end, the market proved resilient as the indexes recovered lost ground to move sideways to slightly higher. The week began with the S&P 500 plunging to its greatest intraday loss since May 12 and slipped momentarily below the index’s 100-moving day average, a closely monitored indicator of technical movement. Over the week, the longer-term bond yields sharply increased, promising an improvement in banks’ lending margins and thus propping up financial shares. Utility shares lagged, although energy stocks outperformed, together with financials, within the S&P 500. The week’s opening sell-off appears to have been influenced by several factors. The most prevalent was speculation that Evergrande, China’s second-largest real-estate developer, could default. Evergrande is also the most heavily leveraged company in the world, such that a likely default could trigger a global financial contagion can take place, reprising the September 2008 collapse of Lehman Brothers. By Wednesday, however, equities recovered much of their losses. News of a restructuring plan for the beleaguered Evergrande perked up investor sentiment, together with the report of a substantial capital infusion into the Chinese banking system.

U.S. Economy

The possibility of softening in the housing market constituted another dampener in China’s economic growth prospects, adding to the lethargy created by restrictions to halt further COVID-19 case outbreaks. Credit growth slowdown and regulatory crackdowns affecting several sectors further weighed in on the economic recovery. However, despite the bad news, the market still showed some resilience, a signal that much of the anticipated adverse developments have already been discounted, and a policy stimulus is likely to be adopted.

• Industries that correlate more closely with the economy rallied despite this week’s precipitous trading. The financial and energy sectors as well as small-caps and value-style investments overperformed in the market, consistent with their cyclicality. These sectoral strengths associated with the broad economy are signs of a resilient market that has already considered possible adverse developments.
• The yield on the benchmark 10-year Treasury bonds rose to its highest level since the start of July. This is due to signals from the Fed of the impending tapering of the bank’s bond purchases. The policy change will likely be announced at the November meeting, to be concluded by the middle of 2022. The optimism in equities and steepening of the yield curve are signs of investor confidence that economic growth will be strong next year, enough to sustain the gradual elimination of the Fed stimulus.
• For S&P listed companies, profit margins rose much faster than costs during the second quarter, attributed to the strong underlying economy. Soon the third-quarter earnings report season may show a slowdown in companies’ profits due to the slower pace in revenues increases and input-cost increases catching up as a result of labor and materials supply shortages. The recent peak in the ISM manufacturing Purchasing Managers’ Index suggests that companies may incur difficulties passing production costs to consumers, further slowing earnings growth. These problems may prove transitory with the easing of supply-chain disruptions in the succeeding quarters, but some market volatility is reasonable to expect.  

Metals and Mining

The precious metals sector is returning to some normalcy as investors met in person at the prestigious Denver Gold Forum for the first time in almost two years. Until now, there had been lackluster interest and bearish price movements in the precious metals sector. Analysts attribute the market’s bearishness to the plans of the Federal Reserve to gradually taper its monthly bond purchases and adopt further tightening in monetary policy. The prevailing pessimism sets up the current environment for investors to adopt a profitable contrarian position. Despite gold prices coming down from last year’s record highs, the mining sector continues to hold plenty of value. Gold still holds promise as an excellent long-term investment.

The precious metals sector ended mixed the past week. Gold slid 0.22% from $1,754.34 to $1,750.42 per ounce. Silver gained a slim 0.13% to close at $22.42 from $22.39 per ounce. Platinum also gained, closing at $985.36 from $942.79 per ounce, up 4.52%. Palladium lost 2.18% to close at $1.972.96 per ounce from the previous week’s close at $2.017.00.

According to some analysts, the base metals sector shows promise of taking off on a good, long run. Copper gained marginally, rising 0.22% from $9,312.00 to $9,332.50 per metric tonne week-on-week. Zinc spot price rose 1.31% to $3,128.00 on Friday’s close from $3,088.00  per metric tonne a week earlier. Aluminum closed at $2.915.50 from the week-ago $2,885.50 to $2.915.50 for an increase of 1.04%. Tin gained a substantial 7.03%, from $34.140.00 to $36,539.00 per metric tonne for the week.

Energy and Oil

Last week was the third straight week of oil price gains despite a slight correction on Friday. The price increases of late are due to the current supply disruptions in the United States and failure among some OPEC+ members to increase production consistent with their stated production targets, including Nigeria and Angola. Last week’s optimism surrounding the speculated Chinese SPR sale lost steam this week as discussions now focus on the capabilities and willingness of oil-producing countries to meet the robust worldwide demand for oil. The global benchmark Brent price hovered around $77 per barrel last Friday, as WTI was assessed more recently at $73 per barrel. Discounting the period when Hurricane Ida took place, the difference between the Brent and the WTI Crude Oil Spot Prices is now at its broadest since March of this year.   

 Natural Gas

The liquid natural gas imports into Brazil are rising to a record high for September, at one million tons LNG). Petrobras and others continue to purchase US cargoes. In other news, Mark Gyetvay, who holds the position as deputy head of Russia’s lead LNG producer NOVATEK, was arrested in the U.S. on tax charges involving $93 million in offshore Swiss accounts. Gyetvay holds both Russian and U.S. passports. Also in the LNG sector, Gulfport Energy, a U.S. natural gas upstream-focused company, is considering a possible sale. Control of the firm has been transferred to creditors months earlier as part of its completion of a Chapter 11 bankruptcy process. The current market value of Gulfport is approximately $1.6 billion. U.S. natural gas spot prices fell at most locations over the past report week (September 15 to 22).

The Henry Hub spot price descended from $5.60 per million British thermal units (MMBtu) to $4.83/MMBtu. The price of the October 2021 NYMEX contract fell $0.66 from $5.460/MMBtu to $4.805/MMBtu for the same report week. The price of the 12-month strip averaging October 2021 through September 2022 futures contracts dipped by $0.41/MMBtu to $4.258/MMBtu. Natural gas futures prices have descended from last week’s multi-year highs. Only the January futures contract settled above $5.00/MMBtu, at $5.04/MMBtu on the week’s end.

World Markets

European equities began to surge on heightened optimism that the economic expansion would continue with enough strength to balance off the impending elimination of the central bank’s accommodative monetary policies. However, there remain ongoing concerns about the giant Chinese property developer, Evergrande, that somewhat offset the gains in the market. The pan-European STOXX Europe 600 Index closed 0.31% up this past week over the previous week. The major indexes followed suit, with Germany’s Xetra DAX Index gaining 0.27%, Italy’s FTSE MIB Index rising 1.01%, and France’s CAC 40 Index climbing 1.04%. The UK’s FTSE 100 Index gained 1.26% for the week. The major European markets appeared poised to absorb the central bank’s monetary tightening after Norway became the first Group of Ten (G10) country to raise its key short-term lending rate by 25 basis points to 0.25%, with the possibility of a further rate increase in December. The Bank of England maintained its rate at 0.10% even as two policymakers opted to end the quantitative easing program earlier.

In a holiday-shortened trading week, Japanese stocks closed lower on volatile trading. The stock markets were closed on Monday and Thursday in commemoration of Respect for the Aged Day and Autumnal Equinox Day, respectively. The Nikkei 225 Stock Average ended the week at 30.248.81, a slight margin down for the week and a minor correction off the index’s 31-year high attained earlier this month. The yen traded close to JPY 110 against the U.S. dollar. The yield of the 10-year Japanese government bond settled at 0.55% at the week’s end. The OECD adjusted Japan’s GDP forecast to 2.5% in 2021, but revised it further to 2.1% in 2022. This represents the slowest growth rate among all the major developed economies. The global GDP growth rate was revised downward to 5.7% in 2021, reflecting the rise in inflation and supply chain disruptions.

Chinese stocks closed a holiday-shortened trading week sideways from the previous week’s close. The stock markets were closed for trading on Monday and Tuesday in celebration of the Mid Autumn Festival. Comparatively, Hong Kong’s Hang Seng Index plunged more than 3% on Monday due to the rising debt crisis revolving around the Evergrande Group of China. Helping to ease worries over a disorderly debt resolution for Evergrande was the series of large cash injections by China’s central bank during the week. However, some of Evergrande’s offshore bondholders did not receive their share of the USD 83.5 million in interest payments in compliance with the Thursday deadline. Evergrande is now on a 30-day grace period. If the period passes without payment, the company will be considered in default. In the bond market, amid concerns over the cost to Beijing should it need to rescue Evergrande, the yield on the 10-year Chinese government bond rose two basis points to 2.92%. The renminbi remained unchanged against the U.S. dollar, trading at 6.463 per dollar in Shanghai by late Friday afternoon.   

 The Week Ahead

Among the reports to be released this week on important economic data are consumer confidence, personal income, and personal consumption.

Key Topics to Watch

• Durable goods orders
• Core capital goods orders
• Trade in goods, advance report
• S&P Case-Shilller home price index (year-over-year)
• Consumer confidence index
• Pending home sales index
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Real gross domestic product (revision)
• Chicago PMI
• Real disposable income
• Real consumer spending
• Core inflation
• Market manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Consumer sentiment index (final)
• 5-year expected inflation rate (final)

Markets Index Wrap Up

Stock Markets

Most of the major equity indexes ended slightly lower, although the small-cap Russell 2000 Index managed to eke out a slight increase. This is a sign that investors appear unsure about the future direction of the market and the economy in general due to the conflicting signals they are receiving from environmental sentiment, policy statements, and emerging economic indicators. Although the economic data being released appear encouraging, concerns remain unabated regarding supply chain challenges, elevated valuations, and the market’s response to the eventual tightening in monetary policy. Within the S&P 500, energy shares rose because of the rising oil prices even as resilient auto-related shares lifted stocks in the consumer discretionary sector. Meanwhile, the small materials and utilities sectors underperformed. For most of the week, trading volumes were restrained, although the expiration of options and futures contracts were expected to lift transactions on Friday. The sluggishness earlier in the week was attributed in part to weakening hopes that a stimulus package is forthcoming.

U.S. Economy

The recent Consumer Price Index (CPI) released during the week appears to indicate that inflation may be on the rise, impacting everything, including consumer goods, commodities, houses, and other durables. Notwithstanding the CPI report, inflation appears to have slowed down in August due in part to the transition of the base effects, referring to the year-on-year comparisons moving past the lowest points of the pandemic. The slowdown of inflation is also due somewhat to the alleviation of the mismatches between supply and demand. While core inflation remains high, it eased last month to 4%, down from June’s 4.5%. The markets should welcome this as a sign that the rise in consumer prices is indeed temporary, as announced by the Fed. Monetary policy may thus remain to be accommodative, fending off speculations of eventual tightening.

• Over the past year, there has been an almost 20% increase in housing prices due to demand overtaking supply. New buying trends have been fueled by the pandemic, with the work-from-home trend driving preference for suburban locations and remote work spaces. The robust demand for housing combined with the recovering economy and consumers’ healthy financial condition will continue to support the housing market. Consumers have enough credit capacity to drive home purchases, with the household debt-service ratio remains close to record lows. Current debt costs as a percentage of disposable income stand at only 8%. Supply will eventually catch up with demand for housing and ease the rising home price increases.
• Corporations are expected to realize more robust earnings growth over the next four quarters. In the second quarter, corporate profits grew year-on-year by 92%, and expectations are for the average annual earnings growth rate to be 22% for 2021 and another 9% in 2022. Furthermore, although long-term interest rates are forecasted to gradually rise as the economic expansion gains momentum, at present, interest rates still remain at their historic lows. For the coming year at least, the Fed is unlikely to adopt any monetary tightening that would increase interest rates. Therefore, the above-average equity market valuations will continue to be supported by the continuing low0interest -rate regime. If the economy continues to expand, monetary policy remains accommodative, and corporate earnings growth is sustained, it is likely that the pre-pandemic bull market will resume its course.

Metals and Mining

The price of gold fell by $40 during the week, seeming to affirm a bearing market for gold in the coming week. Gold hit its lowest in four weeks, descending from a high of $1,790 per ounce to $1,750 per ounce following more solid U.S. retail indicators. This news has captured investors’ attention because of the possibility that tapering may be adopted sooner than expected, depending upon the Fed’s interest rate announcement next week. Analysts observe that a short-term downtrend is in place and gold, together with the other precious metals, does not seem to be responding to the usual drivers and is instead focused on the macro indicators.

Gold closed the week at $1,754,34, down 1.86% from $1.787.58 per ounce week-on-week. Silver dropped 5.69%, from the previous week’s close at $23.74 to yesterday’s close at $22.39 per ounce. Platinum ended the week at $942.79 from the earlier week’s close at $960.75 per ounce, registering a 1.87% loss. Palladium ended in the same direction, losing 5.68% when it closed this week at $2.017 per ounce from the previous week’s $2.138.37 close.

Base metals generally went in the same direction as precious metals. Copper spot price fell 3.95%, closing this week at $9,312.00 per metric tonne from the earlier week’s close at $9,694.50. Zinc lost nearly 1% from the previous week’s close of $3.119.00 per metric tonne to this week’s close at $3.088.00. Aluminum slid 1.32% to close this week at $2.885.50 per metric tonne from the previous $2,924.00 close. Tin outperformed the rest, gaining 1.66% week-on-week from $33,583.00 per metric tonne to $34,140.00 this week.

Energy and Oil

Slowly the U.S. Gulf of Mexico is one more opening up and restoring production that was temporarily interrupted. At present, approximately 25% of oil output remains offline. However, speculation of further supply draws in the U.S. has turned market sentiment negative, bringing Brent prices down to the $75 per barrel level. Further supply disruptions will only worsen the market constraints in the next few weeks. The growing oil demand of the recovering economy may continue to outpace incremental supply, although the OPEC+ continues to increase their production output and add more barrels to the market. Meanwhile, China’s oil consumption is forecasted to peak at 16 million barrels per day (mbpd) at around 2026.

Natural Gas

If China’s natural gas consumption is an indication of the future market for natural gas, it appears that increasing demand may continue for almost two more decades. Consumption of natural gas in China is expected to reach its maximum level much more gradually than oil, at about 2040, according to China’s leading refiner, Sinopec. For this report week beginning September 8 and ending September 15, natural gas spot prices rose at most locations. The Henry Hub spot price ascended to $5.60 per million British thermal units (MMBtu) by the week’s end from its beginning at $4.78/MMBtu, indicating a narrowing supply situation in the natural gas market. Internationally, prices are surging, with swap prices for October LNG cargos rising to an average of $18.69/MMBtu for the week in East Asia. This exceeds the previous record high arrived at in January 2021. At the most liquid European natural gas spot market,, the Title Transfer Facility (TTF) in the Netherlands, prices averaged $17.96/MMBtu over the week, the highest weekly average on record since September 2007. It is higher by $2.56/MMBtu from the previous report week’s average price of $15.40/MMBtu. During the same period, average prices were $4.34/MMBtu and $3.11/MMBtu in East Asia and the TTF, respectively.

World Markets

European equities slumped as continuing worries about COVID-19’s delta variant and its impact on the global recovery superseded expectations that the central bank continues its supportive policies. The pan-European STOXX Europe 600 Index closed the week lower by 0.97% in listless trading, although major indexes were mixed. Germany’s Xetra DAX Index dipped 0.77%, and France’s CAC 40 Index slid 1.40%. Italy’s FTSE MIB Index, on the other hand, realized modest gains. The UK’s FTSE 100 Index followed the direction of Germany and France with a 0.93% loss. Core eurozone bond yields rose as it took its cue from U.S. Treasuries, together with a report by the Financial Times that the European Central Bank (ECB) will be meeting its 2% inflation target by 2025. So far, it is on target to raise interest rates over the next two years, which is significantly ahead of consensus expectations. UK gilt yields rose on reports that inflation rates rose in August, igniting worries that further movement in this direction will likely prompt the Bank of England to raise interest rates ahead of expectations.

Japanese stocks surged over the week, posting their fourth weekly gain in a bid to catch up with the world’s bourses. The Nikkei 225 Index ended 0.39% higher, and the broader TOPIX Index climbing 0.41%. The increasingly enlivening political market is gaining traction with the start of campaigning for the presidential race for the ruling Liberal Democratic Party (LDP). The winner will succeed Yoshihide Suga as Japan’s next Prime Minister. Regarding the pandemic, Shigeru Omi, the country’s top coronavirus adviser, declared that the peak of the 5^th COVID-19 wave has mostly passed.

Nevertheless, he warned that a close watch should be maintained over Japan’s medical system. The coronavirus restrictions are expected to be loosened in November, when a majority of the population would have been vaccinated. With this optimism, the yield on the 10-year Japanese government bond rose to 0.05%. There was little change in the yen’s exchange rate to the dollar, remaining at JPY 109.9.

China’s stock market fell precipitously for the week as investor sentiment was weighed down by lackluster August economic data, combined with a new outbreak of COVID-19 in Fujian province, a worsening debt crisis for property developer China Evergrande Group, and speculation of constricting gaming regulations in Macau. The CSI 300 Index of large-cap stocks lost 3.1% of its value while the Shanghai Composite Index fell 2.4%. The sell-off may be partly due to players closing their positions ahead of a shortened trading week. China’s stock markets are closed on Monday and Tuesday in celebration of the Mid-Autumn Festival. Trading resumes on Wednesday. Yields on China’s bonds remained unchanged for the week. The renminbi (RMB) lost 0.2% against the U.S. dollar.

The Week Ahead

In the week ahead, criticaleconomic data expected to be released are the Fed Funds Target upper bound, the PMI composite, and Housing Starts, among others.

Key Topics to Watch

• National Association of Home Builders Index
• Building permits (SAAR)
• Housing starts (SAAR)
• Current account
• Existing home sales (SAAR)
• FOMC statement
• Fed Chair Jerome Powell news conference
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• Leading economic indicators
• Real household net worth (SAAR)
• Real nonfinancial debt (SAAR)
• New home sales (SAAR)

Markets Index Wrap Up

Stock Markets

Stock exchanges retreated over the shortened trading week since markets were closed on Monday due to the Labor Day holiday. Equities signaled caution as the S&P 500 experienced its first five-day losing streak since the middle of February. In this index, the small real estate sector led the declines in response to the increase in long-term interest rates, while consumer staples and utilities sector proved to have greater resilience among all the sectors. The small-cap Russell 2000 Index underperformed among all the indexes after two consecutive weeks of chalking up gains over the large-cap benchmark indexes, while value stocks lagged behind growth stocks. Although there was an increase in volatility, trading volumes continued to remain low, partly due to the shortened week. Historically, however, September is a low period for stocks, even as the missed payroll report figures in August appeared to carry over to the investor sentiment in this succeeding month. The past week’s developments gave little comfort as delta variant coronavirus worries once more arose. On Thursday, President Biden announced a new vaccine mandate, that all large employers must require their workers to either be fully vaccinated or subject themselves to weekly testing. The announcement also covered mandatory testing for all federal workers and contractors.   

U.S. Economy

There is increasing global concern in the face of rising uncertainty as central banks are beginning to loosen their restrictive monetary policies and markets continue to remain relatively calm. In the past two weeks, there have been several downgrades economists have made to forecasts for third-quarter returns and 2021 GDP growth. The consensus is that economic growth is now expected at 6% for the year, which is below the 7% projected as of the end of July. Even at the adjusted forecast, this would still be the fastest pace of GDP growth since 1984, not surprisingly due to the recovery from the pandemic recession. Reasons for the downgrade include the slowing consumer demand due to continued COVID-19 delta variant restrictions and supply-chain disruptions that continue to hinder production.

• The positive outlook relative to this downgrade is that growth and economic output will not be entirely foregone but are likely to shift from the third to the fourth quarter and next year in a best-case scenario. The GDP growth forecasts for next year have increased as the estimates for the remainder of 2021 have declined. Caution is advised, however, as markets are more prone to reward growth at present rather than in the future because of its greater uncertainty.
• Vaccinations and COVID-19 cases are likely to peak soon, thus the reopening of the economy is more likely to be merely delayed rather than derailed. As face-to-face classes are imminent and the enhanced unemployment benefits are soon to expire, the labor supply situation will improve with labor shortages easing. The supply-chain disruptions that have hampered productivity will soon be alleviated, building up the currently lean inventories as a result of the supply chain problems. These processes are expected to contribute to further economic growth. Consumers will continue to drive higher than average consumption growth, the engine that fuels the U.S. economy. These developments will be complemented by rising wages, a robust labor market, rising personal savings, and higher net worth as a result of fast-rising house valuations.

Metals and Mining

After the remarkable performance of gold prices in mid-July when the metal tested the $1,830-per-ounce resistance level, it failed to hold to its gains, and the disappointing employment numbers of the previous week drove gold to its one-month high. Immediately after, however, gold corrected, opening lower on Tuesday and continuing its downtrend for the week. As a result, the precious metal is concluding the trading week at below the $1,800 support. There is growing concern that the inability of gold to maintain an upward momentum may attract the attention of short-sellers which could push prices further down to their lows in August, treading $1,700 an ounce. In the shortened trade week, gold lost 2.2% off its earlier close of $1,827.74, ending the week at $1,787.58.

Other precious metals also followed the lead of gold. The spot price of silver lost 3.96%, closing at $23.74 from the previous week’s $24.72 per ounce. Platinum price plunged by 6.43% to end the week at $960.75 per ounce from its former close at $1.026.76. Palladium underperformed the three above precious metals, losing 11.65% of its value as it closed the week at $2,138.37 per ounce compared to the earlier week’s close at $2,420.45.

Base metals fared better than their precious counterparts. Copper spot prices gained 2.79% from the previous week’s close of $9,431.00 per metric tonne, to close this week at $9,694.50. Zinc rose 4.09% to close at $3,119.00 per metric tonne from the earlier week’s $2,996.50. Aluminum climbed 7.22% from $2,727.00 in the week previous to close this week at $2,924.00 per metric tonne. Finally, tin inched up 1.6% over the week to close at $33,583.00 per metric tonne compared to the earlier week’s close at $33.055.00.    

Energy and Oil

Last week, category 4 Hurricane Ida ploughed into Louisiana from the Gulf of Mexico, affecting the price movements of oil and other commodities. It comes at a time when three-quarters of oil crude production in the Gulf of Mexico is still shut. Aside from a tight supply situation in the U.S., the Energy Information Administration (EIA) reported a 1.5 million barrels per day (bpd) drop in total production week-on-week. Also for the first time in history, the Strategic Reserves Administration of China is set to hold an auction on Strategic Petroleum Reserve (SPR) volumes that will be supplied to integrated refiners and state-owned chemical plants. As of Friday, Brent traded at $73 per barrel as the West Texas Intermediate (WTI) remained just short of $70 per barrel.

Natural Gas

U.S. natural gas futures surged this week on expectations that demand for air conditioning will rise in the short term. The anticipated weather conditions are expected to be warmer which coincides with production outages resulting from the disruptions induced by Hurricane Ida. October delivery prices surpassed the $5 per metric million British thermal units (MMBtu). This is the first time that prices have increased to this level since February 2014. Natural gas spot prices increased in most locations for this report week, September 1 to September 8. The Henry Hub spot price climbed to $4.78/MMBtu at the end of the week from $4.46/MMBtu. The October 2021 New York Mercantile Exchange (NYMEX) contract price rose by $0.30 to $4.914/MMBtu at the week’s end from $4.615/MMBtu at the start of the week. This was the highest close since late February 2014 for a NYMEX futures front-month contract. The price of the 12-month strip averaging October 2021 through September 2022 futures contracts rose by $0.25/MMBtu to $4.315/MMBtu. The average includes futures contracts for December 2021 and January 2022 delivery. Both of these closed above $5.00/MMBtu.

World Markets

European equities pulled back amid economic uncertainties, concerns of the COVID-19 pandemic, and worries about the direction of central bank policy. The pan-European STOXX Europe 600 Index closed the week 1.19% lower, in line with the major stock indexes. Italy’s FTSE MIB Index underperformed with a loss of 1.45%, Germany’s Xetra DAX Index followed with a drop of 1.09%, and France’s CAC 40 Index dipped by 0.39%. The FTSE 100 Index of the UK eroded by 1.53%. The core eurozone bond yields inched higher, shaving earlier gains caused by the European Central Bank’s decision to reduce its emergency bond purchases; ECB President Christine Lagarde stated, however, that such reduction was not considered tapering. The ECB decided to move to a “moderately lower pace” of bond purchases for the rest of the year in line with its Pandemic Emergency Purchases Programme after a rebound of European growth and inflation. UK gilt yields increased on expectations that the Bank of England (BOE) may commence raising short-term interest rates.

Japan’s stock market saw an extension of their earlier gains throughout the week, encouraged by prospects of a fresh political start and expectations of a new fiscal stimulus under their new prime minister. Current Prime Minister Yoshihide Suga has decided to step down to give way to a new mandate. The Nikkei 225 Index gained 4.3% while the broader TOPIX Index increased by 3.78%. Despite the government extending its coronavirus state of emergency measures, investor sentiment was elevated by the announcement that restrictions are expected to be eased around November when it is estimated that the majority of the population would have been vaccinated. The heightened optimism did not impact the 10-year Japanese government bond which remained unchanged week-on-week at 0.04%. The yen weakened slightly to JPY109,97 against the U.S. dollar, compared to JPY109.92 in the previous week.

 For the past three consecutive weeks, Chinese stocks rose on strong trade data and rising investor sentiments following the reported candid telephone call between the U.S. and Chinese presidents. The Shanghai Composite Index climbed 3.4% and the large-cap dominated CSI 300 Index rallied 3.5%. The yield on the Chinese 10-year government bond rose to end the week at 2.89%; meanwhile the renminbi currency increased by 0.2% against the U.S. dollar to settle at 6.4423 per dollar, its strongest level since the middle of June. The favorable trade data involved the 25.6% increase in China’s merchandise exports in August. Imports ascended 33.1% as reported by China’s statistics office. The report exceeded forecasts, despite renewed lockdowns in response to a renewed coronavirus outbreak. The country’s monthly trade surplus grew to $58.34 billion in August, an improvement over the July figure of $56.58 billion.

The Week Ahead

Reports on important economic data scheduled for release in the coming week include Inflation,          Retail Sales growth, and the Michigan Sentiment index.

Key Topics to Watch

• Federal budget
• NFIB small business index
• Consumer price index
• Core CPI
• Import price index
• Empire State index
• Industrial production
• Capacity utilization
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Retail sales
• Retail sales ex-autos
• Philadelphia Fed manufacturing survey
• Business inventories
• UMich consumer sentiment index (preliminary)

Markets Index Wrap Up

Stock Markets

Volatility dominated to cause the major indexes to close mixed. The S&P MidCap 400, the S&P 500 and the Nasdaq Composite Indexes broke out in new intraday highs on Thursday, with the small real estate sector within the S&P 500 surging but the financials underperforming the other sectoral averages, In what is widely deemed the last week of the summer vacation season, trading volumes were mostly subdued. Contributing to the end-of-week listlessness is the foreseen market closure on Monday in observance of Labor Day. Over the week, the investing sentiment was largely overshadowed by investors’ anticipation of the closely watched monthly payroll report released by the Labor Department. Although the news was expected to come way below expectations, the silver lining is that the Federal Reserve would be less likely to commence their tapering of asset purchases this year if the report is so disappointing. The negative and positive aspects contributed to the market’s mixed reaction and volatility for the week.

U.S. Economy

The release of the official August report on Friday indicated that a slowdown in unemployment gains was confirmed. Nonfarm payrolls, an indicator which was expected to gain by 750,000, grew only 235,000, disappointing for being far below consensus expectation. A bright spot in the report, however, is that the previous months’ gains were revised higher and the unemployment rate was adjusted lower to 5.2%, a new low during the pandemic era. Part of the poor payroll figures was due to the negative effect of the delta variant particularly with regard to hiring in the leisure and hospitality sectors. Analysts, however, noted that rather than lower demand, a more significant cause in the slump was due to reduced labor supply rather than lower demand.  This is evident from the weekly jobless claims released on Thursday which again dipped to their lowest level since March 2020, while average hourly earnings climbed by 0.6% in August, which is approximately double the forecasted figure.

• Recent economic data appears to indicate that a slowdown in economic growth may be more likely moving forward to the end of the year. This is not entirely negative news, and may even be appropriate since the economy has been surging for much of the year. Since the recovery period after the worst of the pandemic appears to have achieved the peak in U.S. GDP growth, a slowdown in that rate of growth is likely as the delta variant continues to fuel concerns that the recovery may be waning. This may be temporary, however, and economic growth may resume its upward trend next year.
•  While the slowdown projected in Friday’s August employment report was significantly against expectations, it does not signal a sustained change in the direction of the labor market or the overall economic recovery. However, it may result in a potential weakness in consumer spending for the third quarter of this year. The continued economic expansion, however, will continue to rely on a strengthening labor market. What has taken place is just a small glitch in the overall trend. As concerns for the delta variant come to an inevitable resolution, the opening up of the hospitality and leisure industries will create greater demand and the labor supply will return to the market in a big way to meet this demand, creating a solid backbone for the economic growth in the next year.

Metals and Mining

Coinciding with the miss in the U.S. labor market resulting from lower job creation in August, the gold market appears poised to move higher in the coming weeks. Some economists observe that, despite upward revisions in previous reports’ job numbers, this is not enough to offset the negative perception regarding the last report about the labor market performance. In reaction to this, the gold market responded with higher prices for precious metals overall as investors resorted to low-risk assets in a flight to safety. Gold prices gained 0.56% week-on-week, closing at $1,827.74 per ounce from last week’s $1,817.57. Gold futures went up almost 1% on Friday alone after the jobs report was made public. Silver went up 2.87%, closing at $24.72 per ounce from the earlier week’s $24.03. Platinum also climbed 1.41% to $1,026.76 from the previous $1,012.53 per ounce. Palladium bucked the trend, losing 0.11% to close at $2,420.25 per ounce on Friday compared to the previous Friday’s close of $2.423.00.

Compared to precious metals, the base metals were mixed in the past week’s trades. Copper began the week at $9,410.00 and rose to $9,431.00 per metric tonne for a gain of 0.22%. Zinc, previously at $3.002.00 per metric tonne, ended at $2,996,50, shaving 0.18% in value. Aluminum outperformed with a 2.93% price increase, closing at $2.727.00 this week from the earlier week’s close of $2.649.50 per metric tonne. Finally, tin saw a price depreciation of 1.62% this week, ending at $33,055.00 per metric tonne from the previous week’s close at $33,600.00.

Energy and Oil

This week was marked by constricting developments in the oil market, with an improving demand situation due to the post-pandemic expanding economy on the one hand, and a slowdown in the rate of recovery in the supply situation due to a natural disaster on the other. Hurricane Ida battered offshore platforms and flooded refineries as it trekked through much of Louisiana’s refining industry during the week, keeping oil prices elevated due to supply constraints. There remain 1.7 million barrels per day of offshore production still to come back on stream, and the flooding in the refineries is bound to significantly reduce U.S. crude and product stockpiles. These developments are likely to put upward pressure on oil prices. The situation is not likely to be alleviated despite the OPEC+ member states confirming their commitment to the 400,000 barrel-per-day increase until the end of 2021.

Natural Gas

In the U.S., the price of natural gas soared to its highest level since November 2018. U.S. gas prices surged to $4.73 per million British thermal units (MMBtu) when word spread that the latest reported gas storage build of the International Energy Agency (IEA) storage build came in at 20 billion cubic feet (BCf), a figure much lower than expected for the week ended August 27. This would create a likely squeeze on the supply of natural gas as the country faces strong demand for heating capacity in the coming winter months.

Due to the supply constraints, natural gas spot prices went up for most locations. During the past report week (August 25 to September 1), the Henry Hub spot price ascended from $4.01/MMBtu to $4.46/MMBtu. The September 2021 New York Mercantile Exchange (NYMEX) contract expired on Friday at $4.370/MMBtu, an increase of $0.47/MMBtu from the previous Wednesday. The October 2021 NYMEX contract price rose to $4.615/MMBtu, higher by $0.69/MMBtu from last Wednesday. The price of the 12-month strip averaging from October 2021 through September 2022 futures contract increased by $0.41/MMBtu to $4.066/MMBtu. 

World Markets

European shares moved sideways for the week in listless trading as investors sought to weigh the signs of slowing economic momentum. The pan-European STOXX Europe 600 Index closed the week flat while most major indexes were mixed. France’s CAC 40 Index was relatively unchanged, Italy’s FTSE MIB Index rose by 0.22%, and Germany’s Xetra DAX Index fell by 0.45%. Higher-than-expected eurozone inflation and negative commentary from certain European Central Bank policy formulators brought the core eurozone government bond yields higher. The ECB members called for a reduction in the purchase pace of the Pandemic Emergency Purchase Program, causing the rise in government bond yields. The core markets were mostly tracked by the peripheral eurozone and UK government bond markets.

 In Japan, a strong rally in the bourses was the main reaction to news of Prime Minister Yoshihide Suga’s resignation. The positive reaction was in light of the elimination of political uncertainty surrounding the tenuous situation in the country and raised expectations of increased economic stimulus. The stock market surge was also driven by the good news of Japan’s accelerating COVID-19 vaccination roll-out. The Nikkei 225 Index gained an impressive 5.38%. The broader TOPIX Index followed suit with a gain of 4.49%, during which it attained a 30-year high. The yield on the 10-year Japanese government bond rose from 0.02% at the end of the preceding week to 0.04% at the end of this week. Concerning currencies, the yen weakened marginally to JPY 109.98 from JPY 109.83 against the U.S. dollar in the week prior.

The Chinese stock market climbed on its second-straight week, with the Shanghai Composite Index rising 1.7%. The SCI outperformed the large-cap CSI 300 Index which rose by 0.3%. Listed Chinese companies registered strong earnings for the second quarter, posting a 36% annual increase in earnings per share. The strongest earnings growth was realized by companies in the upstream resources sectors, with the semiconductors and new energy vehicles sectors coming in second. Sectors that lagged included the consumer, pharmaceutical, and telecom companies. The net profits, reckoned on a two-year basis to adjust for the impacts of the pandemic, grew by 10% over the second quarter of 2019. The yield on the 10-year Chinese bond dropped by four basis points to end at 2.85%. In the currencies market, the renminbi rose in value to close at 6.451 against the U.S. dollar, or 0.5% higher.

The Week Ahead

The week ahead is shortened due to the labor day holiday, but important economic data scheduled for release during the week are consumer credit and the producer price index.

Key Topics to Watch

• Job openings in July
• Beige book
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Producer price index, August
• Wholesale inventories (revision), July

Markets Index Wrap Up

Stock Markets

Impressive stock market gains were garnered in the just-concluded trading week as investor sentiments rose on the news that full Food and Drug Administration (FDA) approval was granted to the Pfizer-BioNTech COVID-19 vaccine. This signaled the strong possibility that the economic recovery will continue unabated and that the worst of the pandemic is over. The broad-market S&P 500 Index and the large-cap Dow Jones Industrial Average were outperformed by the tech-heavy Nasdaq Composite index, and the Russell 2000 Index of small-cap stocks surged on strong gains. As crude oil prices rose 10% for the week, stocks in the energy sector jumped commensurately. Despite the strong price performance, volumes were generally very light, consistent with the seasonal variations. The week was not without its worries; an attack at the Kabul airport in Afghanistan that resulted in casualties in the midst of the U.S. military’s withdrawal from the country. Sentiments were also weighed down by speeches delivered by three regional Federal Reserve (Fed) presidents in support of a more expedient commencement of the tapering of the central bank’s bond purchases. The stock market will continue its alternate optimism-caution rotation in line with local and foreign developments.

U.S. Economy

The economic data released during the week was generally positive, with July’s existing home sales beating consensus expectations by rising 2% from June. This is a signal that more inventory became available on the housing market. New home sales are still down 27% from July 2020, but rose 1% from June. The weekly initial jobless claims remained near their lowest levels during the pandemic although this indicator did rise slightly. The steady labor market performance is indicative that despite the continued spread of the delta variant, the labor sector continues to strengthen. The revised estimate of second-quarter gross domestic product (GDP) growth by the U.S. Commerce Department saw the economy expand at a seasonally-adjusted annual rate of 6.6%, slightly higher compared to the initial estimate of 6.5%.

• Despite increasing anticipation for the Fed to start its winding down or tapering of bond purchases, interest rates continue to remain at historic lows. Even though unemployment has fallen and yields have not made significant progress through the summer, GDP has returned to and even exceeded pre-pandemic levels. Also coinciding with these developments are the rise in inflation together with rising wages and supply shortages. What is likely to take place is a combination of continued economic growth, the start of the Fed taper, and stickier inflation that may drive longer-term rates higher.
• Restrictions attributed to containing the spread of the delta variant have muted consumer spending at restaurants and retail establishments. Economic indicators over the past week suggest the emergence of spending fatigue. A modest 0.3% increase in spending was indicated by the July personal-spending report, a level significantly weaker than the corresponding June indicator as well as a deceleration over the 1.6% average for the last six months. The observation is consistent with last month’s weaker retail sales report and triggers worries concerning the sustainability of the economic recovery.

Metals and Mining

Investor worries are focused on the impending Fed tapering of bond purchases that will signal a tighter monetary policy. While this has not yet taken place, however, the continued inflationary pressures have gold spot prices gaining 2.05% over the past week, from a previous close of $1,781.11 to $1,817.57 per ounce. This development could lead gold prices to the $1,900 per ounce level by the end of 2021, according to the forecast published by the Bank of America last Thursday, August 26. While it may test this resistance level, it is more likely that gold prices may settle around $1,800 per ounce during the final quarter of this year. This may be the highwater mark for the yellow metal as prices hold steady at around $1,800 through the first semester of 2022. One bright note for gold is the growing inflation rate as gold provides a low-risk safe haven for investments, however, the increasingly tighter monetary stance of the Fed may cause gold to look unattractive for the moment.

Other precious metals saw price increases consistent with the gold surge. Silver outperformed the yellow metal, rising 4.34% from $23.03 to $24.03 per ounce over the past week. Platinum gained 1.55%, from $997.10 per ounce to $1,012.53. Palladium outperformed the other precious metals week-on-week, climbing 6.43% to $2,423.00 from its previous close at $2.276.57. Base metals also rose over the week. Copper ended at $9,410,00 per metric tonne, 4.13% higher than its previous week’s close at $9.037.00. Zinc rose 2.53% to $3.002.00 per metric tonne from $2.928.50. Aluminum prices surged by 4.04% from $2,546.50 to $2.649.50 per metric tonne, and tin ended at $33.600.00 from $32.237.00 per metric tonne for a gain of 4.23%.

Energy and Oil

The fundamentals this week remained largely as they were last week. Nevertheless, oil prices continue to ascend, posting significant gains. West Texas Intermediate (WTI) spot price increased to a shade below $69 per barrel while the global benchmark Brent rose above $72 per barrel. What triggered the increase was the blaze at the Ku-Maloob-Zaap offshore Mexico platform, for the moment reducing supply by some 400,000 barrels per day of crude in the market. Further, the forced evacuation of personnel from the production platforms in the Gulf of Mexico prior to the arrival of Tropical Storm Ida contributed to the supply disruption. These issues overshadowed COVID worries and physical market weakness. In the meantime, the supply side may be buttressed by offers from the Venezuelan state oil company PDVSA of 20 million barrels (MMBbls) of heavy crude for September lifetime. Prices range from $35 to $41 per barrel. Venezuela seeks to increase oil exports in light of July outflows totaling 520 thousand barrels per day (kbpd).

Natural Gas

India is making a bid to boost its liquid natural gas (LNG) potential with the commissioning of a 5 million tonnes per annum (mtpa) liquid natural gas (LNG) import terminal scheduled for next year. The terminal will be located in the western state of Gujarat, with private investor Swan Energy targeting completion by March. State companies IOC, Bharat Petroleum, and ONGC each have leased 1mtpa of Swan’s capacities per year.

For this report week (August 18 to August 25), natural gas spot prices rose at most locations. The Henry Hub spot price climbed from $3.86 per million British thermal units (MMBtu) at the beginning of the week to $4.01/MMBtu by the end of the week. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract increased by $0.04 to $3.897/MMBtu pm August 25 from $3.852/MMBtu on August 18. The price of the 12-month strip averaging September 2021 to August 2022 futures contracts rose $0.04/MMBtu to $3.709/MMBtu

World Markets

In Europe, central banks’ accommodative policies continued to provide buying incentive. Shares rose as investor sentiments are buoyed by strong signs of continued economic growth, with higher vaccination rates dispelling pandemic worries of rising case counts. The STOXX Europe 600 Index gained 0.75%. The country-specific indexes followed the same trend; France’s CAC 40 Index gained 0.84%, Italy’s FTSE MIB Index rose 0.34%, and Germany’s Xetra Dax Index inched up 0.28%. The UK’s FTSE 100 Index increased by 0.85%. Meanwhile, the core and peripheral eurozone bond yields also gained ground this week, mirroring the developments in U.S Treasuries. The UK gilt yields also followed suit.

The Japanese bourse also gained ground over the week. The Nikkei 225 Index rose 2.31% and the broader TOPIX Index increased 2.01%, notwithstanding more negative news regarding the coronavirus situation. The yields on the Japanese government bond rose to 0.02% from 0.01% the week previous. The yen, on the other hand, fell to JPY 109.9 against the U.S. dollar, from its previous exchange rate of JPY 109.7. The COVID-19 state of emergency was extended to eight more prefectures, imposing restrictions until September 18. In most regions, infections are said to be spreading on an unprecedented scale, according to Prime Minister Yoshihide Suga. The country continues to speed up its vaccination roll-out, with 60% of the population expected to be fully vaccinated by the end of September.

In China, stocks continued their recovery from the lows encountered in late July. The Shanghai Composite Index climbed 2.8% and the large-cap CSI 300 Index rose 1.2%. The China Securities Regulatory Commission committed to cooperate with the U.S. SEC concerning the auditing of Chinese companies that trade in the U.S. bourses. This resolves a years-long dispute with the U.S. wherein China refused to provide full access to the financial data of Chinese Companies trading in the U.S. on the grounds of national security. In the bond market, the yield edged up two basis points on the 10-year central government bond, to 2.89%. In currencies, the renminbi gained slightly against the U.S. dollar, closing at 6.480.

The Week Ahead

Important economic reports scheduled for release in the coming week include Unit Labor Costs, Hourly Earnings, and Consumer Confidence.

Key Topics to Watch

• Pending home sales
• Case-Shiller home price index (year-over-year)
• Chicago PMI
• Consumer confidence index
• ADP employment report
• Markit manufacturing PMI (final)
• ISM manufacturing index
• Construction spending
• Motor vehicle sales (SAAR)
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Trade balance
• Productivity (revision)
• Unit labor costs (revision)
• Factory orders
• Core capital goods orders (revision)
• Nonfarm payrolls
• Unemployment rate
• Average hourly earnings
• Markit services PMI (final)
• ISM services index

Markets Index Wrap Up

Stock Markets

The S&P 500 reached a new record high of 4,480 on Monday, which is more than double its March 23^rd intraday low of 2,192. However, stocks pulled back for the rest of the week, with small-cap stocks lagging and the Russell 2000 Index briefly correcting, down by more than 10% from its recorded peak in March 2021. Among the S&P 500 listings, energy shares underperformed the other sectors while a wide range of health care counters lifted the index. Volumes were at their highest monthly level, signaling a retail trading rebound. Sentiments that weighed the market down during the week included signs of an emerging economic slowdown in China, prompting advice from the Securities and Exchange Commission for investors to exercise caution when taking positions in Chinese stocks due to disclosure issues and regulatory uncertainties. Also causing headwinds are signs that the Federal Reserve may soon adopt a policy of tapering in the central bank’s monthly asset purchases. Midweek, the Fed released the minutes of its latest policy meeting wherein several members signified that they expected tapering may begin by the year’s end. By the end of the week, however, such worries were dispelled by Dallas Federal Reserve President Robert Kaplan when he expressed favor in delaying the tapering should the effects of the delta variant further proliferate in the economy.

U.S. Economy

There were also concerns that indicators released during the week were showing signs of a slowing down of the anticipated economic recovery. On Tuesday, stocks fell after an announcement by the Commerce Department of a 1.1% retail sales slump in July, despite an upward revision in the June base figure. The decline was concentrated on auto sales, which dipped 3.9% due to negative reaction to high prices and automakers dealt with supply shortages of semiconductor chips and other components. However, due to an increase in industrial production by 0.9% in July, automakers moderated or canceled plans to shut down production lines. Home Depot fell short of its sales expectations, causing stock prices to correct sharply even as sales fell on furniture and online purchases. Restaurants and bars experienced a resurgence in sales, however, as this sector opened up further with the lifting of pandemic mandates. Signals were mixed in the housing sector with building permits rising higher than forecasted but July housing starts falling 7%, more than consensus expectations. Labor and building supply worries hampered builder sentiment, a measure of which fell to its lowest level over the past year.  

• The results of the last Federal Reserve meeting show that reducing bond purchases has increasingly gained favor among the Fed members. Thus, it is only to be expected that the Fed may begin to gradually firm up its plans for the tapering, the timeline of which may be expected to be announced during the September meeting. It is expected, however, that the Fed has learned from its prior experience in 2013 and would take care to be more communicative and transparent.
• The taper is not expected to become an event risk because it is likely to be better managed. It may, however, reduce the buffer against the disappointments over uncertainties concerning economic growth and policy over uncertainties concerning economic growth and policy adjustments. The relative tranquility in the markets in 2021 was partly due to the high level of monetary stimulus. With a gradual reduction in the amount of monetary accommodation, equities will likely experience a greater degree of short-term volatility and occasional pullbacks.
• The inevitability of the necessity to wind down Federal support becomes more evident as the economy moves farther away from crisis conditions. The recovery is well underway with unemployment at 5.4% and trending downward while GDP growth is on pace to exceed the growth of the past four decades Credit conditions are robust and inflation, though heating up, remains moderate. The prospects of moves towards further normalization are therefore reassuring, even if it may entail tapering policies.

Metals and Mining

A return of investors to gold is possible in light of the recent volatility in cryptocurrencies. Although bitcoin is seen as digital gold and a possible hedge against inflation, it does not have the longevity and security that gold has proven to have. Furthermore, a massive amount of speculative money is required to maintain a viable position in cryptocurrencies. Therefore, it is reasonable to expect that those who fled to bitcoin will eventually return to gold as inflation rises. Any decline in the price of gold should therefore be seen as a buying opportunity. Over the past week, gold moved sideways, marginally increasing by 0.08% from $1,779.75 to $1,781.11 per ounce. This exhibited the resiliency of the yellow metal at this price, since other precious metals succumbed to significant corrections. Silver lost 3.03%, closing at $23.03 from $23.75 per ounce. Platinum closed at $997.10 per ounce, 3.39% lower than the previous week’s $1,032.08. Palladium suffered the greatest weekly loss of 14.09%, closing at $2.276.57 per ounce from the previous week’s close at $2,649.96.

Base metal prices also underwent major corrections over the past trading week. Copper spot prices lost 5.57% of their value, ending the week at $9.037.00 per tonne from the previous week’s closing price of $9.570.00. Zinc fell 3.46% from $3.033.50 one week ago to $2,928.50 per tonne in this week’s close. Aluminum corrected by 2.06% to close at $2,546,50 per tonne at the close of the week from $2.600.00 last week. Finally, tin ended the week at $32.237.00 per tonne, a drop of 8.74% from the previous week’s close of $35,324.00.

Energy and Oil

The downward trend in oil prices continued over the past trading week, declining by 7% week-on-week. Concerns about the proliferation of covid variants and the continued strengthening of the U.S. dollar coincided with the Federal Reserve cutting its stimulus measures for the year. The ICE Brent fell below $66 per barrel on Friday while WTI prices fell to $63 per barrel. With respect to production, OPEC compliance in July stood at 109%. The OPEC’s Joint Technical Committee reported that July’s production quotas were down 3% from June, and OPEC members’ compliance likewise dropped to 116% due to Saudi Aramco’s rollback of its unilateral supply cut. In another part of the world, the Nord Stream-2 Gas Pipe, which is to bring Russian gas to Germany from along the Baltic Sea, is reported to be 99% complete, and is set to meet its construction deadline set for the end of August. The NS2 is likely to be brought onstream before the end of the year.

Natural Gas

For this report week (August 11 to August 18), natural gas prices lost ground in most locations. The Henry Hub spot prices declined from $4.07 per million British thermal units (MMBtu) at the start of the week to $3.86/MMBtu at the week’s end. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract fell by $0.21, from the week-earlier price of $4.059/MMBtu to $3.852/MMBtu a week later. The price of the 12-month strip-averaging September 2021 through August 2022 futures contracts also fell by $0.15/MMBtu to $3.668/MMBtu.

World Markets

The stock market benchmarks indexes in Europe lost steam and succumbed to global worries regarding the spread of the coronavirus’ delta variant, the political upheaval in Afghanistan, and the economic slowdown in China. In the first two weeks of August, the STOXX Europe 600 Index reached a series of record highs, but finally declined 1.48% at the end of the past trading week. The country stock markets followed the trend, with France’s CAC 40 Index dropping 3.95%, Italy’s FTSE MIB dipping 2.78%, and Germany’s Xetra DAX Index sliding 1.14%. The core eurozone bond yields also declined in the past trading week due to investors fleeing to lower-risk assets. Compared with highs of -0.456% on Monday, Germany’s 10-year bund yield closed the week at around -0.495% on Friday. In the currencies market, the euro and the British pound both weakened against the greenback. The risk-off environment apparently benefitted the U.S. dollar,

In Japan, stocks plunged during the week as the Nikkei 225 Index dropped sharply by 3.45%, closing at its lowest level for the year. The broader TOPIX ended 3.03% lower, partly on news that Japanese automotive company Toyota Motor will cut production for September by 40% from its earlier plan. The announcement heightened concerns that the country’s economic recovery was not proceeding as anticipated. A sell-off followed in the shares of car manufacturers’ stocks and companies along its supply chain, including steel and rubber manufacturers. Also contributing to the negative sentiment was the government’s decision to extend the coronavirus state of emergency to September 12 over Tokyo and five other areas, also while expanding coverage of the state of emergency to seven other prefectures. Even with positive economic data releases that signaled Japan’s return to economic growth in the second quarter, market losses continued. The yield on the 10-year Japanese government bond descended to 0.01% while the yen remained unchanged at JPY 109.7 versus the U.S. dollar. Japan’s gross domestic product (GDP) grew in the second quarter of 2021 by 1.3% annualized, still ahead of consensus estimates – a positive sign since it follows a 3.7% contraction in the first quarter.

China’s stocks, like the rest of the world’s bourses, also suffered weakness in part due to Beijing’s regulatory pressures on companies in the technology sector. Investors feared that other sectors may soon follow, thus losing buying interest in the counters. After state media reported that the State Administration for Market Regulation was contemplating new regulations for liquor companies, the liquor stocks suffered a sell-off. Health care companies also dipped on fears that the profits gained by the industry are likely to be tempered by new regulations. During the past trading week, the Shanghai Composite Index pulled back by 2.5% and the CSI 300 Index of large-cap stocks gave up 3.6% of its value, ending at its lowest close since the end of July. Hong Kong’s Hang Seng Index fell into bear market territory, diving by 20% from its peak earlier in 2021. At the close of the past week, China and Hong Kong lost more than $560 billion in market value combined. The renminbi touched 6.5059 against the dollar, a three-week low for the currency. The yield on the 10-year government bond fell three basis points to close at 2.87%.

The Week Ahead

Among the important economic data to be released in the coming week are initial and continuing jobless claims as well as personal income and consumption.

Key Topics to Watch

• Markit manufacturing PMI (flash)
• Markit services PMI (flash)
• Existing home sales (SAAR)
• New home sales (SAAR)
• Durable goods orders
• Nondefense capital goods orders, excluding aircraft
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• GDP revision (SAAR)
• Personal income
• Consumer spending
• Core PCE price index
• Trade in goods, advance
• UMich consumer sentiment index (final)

Markets Index Wrap Up

Stock Markets

Investors generally discounted news of the continued spread of COVID-19 and its impact on future economic expansion. Equities climbed, with value stocks listed in the S&P 500 Index outperforming the growth stocks. Materials led other sectors in their advance, while energy stocks dipped on worries that oil producers may break ranks on the supply side and demand may be ill-affected by the continuing global coronavirus lockdowns. Information technology stocks also slumped due to the potential weakness in memory prices exerting downward pressure on the semiconductor and semiconductor-equipment industry. Much of the attention of players was on the latest inflation numbers from the Bureau of Labor Statistics, together with the release of other U.S. economic data announcements. The consumer price index (CPI)) rose by 0.5% in July, which is a drop from June’s 0.9% CPI growth; it is also the smallest monthly percentage growth rate registered since March. The gradual drop in the inflation rate appears to confirm the speculation that consumer price increase will only be temporary and will ease as the economy adjusts its supply chain bottlenecks caused by the pandemic. There is some concern, however, that the producer price index (PPI) grew by 1.0% sequentially for the second month in a row, which is higher than most economists anticipated.

U.S. Economy

The data released by the Bureau of Labor Statistics in the past week revealed a record high in job openings, higher than the number of unemployed. Nevertheless, more than 3 million people have exited the labor pool from the beginning of the coronavirus pandemic. It is expected that with the accelerated vaccine roll-out, the reopening of face-to-face classes, and the expiration of enhanced unemployment benefits in the fall, the labor-force participation rate will return to pre-pandemic levels and a return to full employment will be expedited by record job gains.

• The 2020 bear market and economic recession were triggered by a public health crisis that, unfortunately for analysts, does not have a precedent upon which to base a comparative study. The financial crisis brought about by the pandemic triggered speedier and bigger fiscal and monetary support compared to earlier recessions. The Fed promptly provided funding and liquidity to businesses and consumers alike, at the same time expanding its balance sheet over four months by more than $3 trillion. By comparison, during the global financial crisis of 2008, the Fed likewise added the same amount to its balance sheet, but over a four-year duration.
• During the time of the pandemic, almost $6 trillion of financial aid was released by the government. In the past week, the Senate passed the much-awaited bipartisan infrastructure bill. If the Democrat-led $3.5 billion reconciliation package, which is focused on human infrastructure spending, will push through as proposed, government expenditure will expand further and add to GDP growth. If the pattern set by the global financial crisis is any indication, increased government spending may drag economic growth down as it did during the early years of post-financial crisis economic recovery.  

Metals and Mining

Early in the week, gold prices plunged to a four-month low but recovered in the latter part of the week, ending at $1,779.75, 0.95% higher than its previous close at $1,763.03 per ounce. The volatility of gold prices was attributed to a stronger-than-expected U.S. jobs report and the investors’ rush to buy the dollar in reaction to the job report release. This is consistent with the inverse relationship that exists between the dollar and gold prices. When the dollar strengthens against other currencies, gold tends to recede because it becomes more expensive in other currencies, pushing demand down. The recovery from the early weakness showed the resiliency of the metal, as analysts attributed the sell-off to the buying of U.S. dollars and selling of gold in the Asian market in response to the strong U.S. payrolls for July. It is possible for gold to trend lower in the future, however, because a gradual increase is expected in U.S. 10-year real yields, the opportunity cost of holding gold, a non-yielding asset, increases. Investors would not forego interest earnings in high-yielding assets by continuing to hold onto gold, and so a sell-off is likely.

Although gold retained its positive gains, silver fell by 2.38% from its previous close of $24.33 per ounce to end the week at $23.75. Other metals still registered gains for the week. Platinum gained 4.93%, rising from $983.58 to $1.032.08 per ounce for the week. Palladium closed at $2,649.96 per ounce this week, up 0.80% from last week’s close at $2.628.80. Base metals did relatively well for the week. Copper closed up 1.08% at $9,570.00 per tonne from its earlier close at $9,468.00. Zinc likewise gained, moving up 1,68% from $2,983.50 per tonne to $3.033.50. Aluminum rose 0.85% from $2,578.00 to $2,600.00 per tonne. Finally, tin gained 1.65% to close the week at $35,324.00 per tonne from the previous week’s close at $34,750.00.

Energy and Oil

Crude prices performed remarkably well over the past week. Brent remained above the $70 per barrel support even as covid fears continue to rise in the U.S. and China. The rising crude prices were of sufficient concern for the U.S. such that President Joe Biden called on OPEC+ to drill more and increase production to arrest the further rise in oil prices. The IEA downgraded its demand forecast for the rest of 2021, aware that the economic recovery in Asia may not be as robust as previously expected. But other analysts foresee crude prices to continue their ascent, possible to average $80 per barrel by the fourth quarter of this year, optimistic that the impact of the Delta variant will be short-lived and the demand and supply well-balanced until the year’s end.

 Natural Gas

In this report week (August 4 to August 11), natural gas spot price movements were mixed and volatile. The Henry Hub spot price dropped from $4.12 per million British thermal units (MMBtu) to $4.07/MMBtu through the week. The price of the September 2021 New York Mercantile Exchange (NYMEX) contract lost $0.10, ending at $4.059/MMBtu from the previous $4.158/MMBtu. The price of the 12-month strip averaging September 2021 through August 2022 futures contracts dipped $0.04/MMBtu to $3.819/MMBtu

World Markets

Trading in European shares was robust and the indexes rose in response to investors’ optimism in the recovering economy. Overall, concerns about impending surges in the coronavirus Delta strain infections and the slowing economic response in Asia appear to have been discounted. The pan-European STOXX Europe 600 Index rose 1.25% for the week. Italy’s FTSE MIB Index surged 2.51%, the German Xetra DAX Index climbed 1.37%, and France’s CAC 40 Index ascended 1.16%. The UK’s FTSE 100 Index gained 1.34% on the back of strong corporate earnings and the decline of the British pound against the U.S. dollar. The tendency is for U.S. stocks to rise as the pound descends since many companies whose stocks are listed in the index are multinationals earning revenues in overseas markets.

The core eurozone bonds moved sideways, climbing midweek and dropping on signs that the European Central Bank may remain dovish in the short term. The peripheral eurozone bond yields mirrored the core eurozone bond movements but were slightly weaker. UK gilt yields were relatively unchanged, rising toward the week’s end on the emergence of strong second-quarter economic data. This drove speculations that the Bank of England may withdraw its stimulus sooner than expected.

The Japanese stock market charted modest gains through the trading week. The Nikkei 225 rose 0.56% while the broader TOPIX Index ended with a gain of 1.40%. Investors continued to shy away on prospects that Japan’s coronavirus situation may deteriorate further, thus magnifying economic risks as the government imposed tighter restrictions. The second-quarter economic growth data is expected to be released soon, highlighting expectations that Japan is likely to have avoided a contraction due to its slow vaccination drive. The yield on the 10-year Japanese government bond climbed to 0.02% as the yield remained unchanged at JPY 110.29 against the U.S. dollar.

In China, stocks gained modestly even as worries continued to prevail regarding the government’s increasing oversight. The government’s regulatory pressure over the country’s technology and private education industries are feared to likely spread over the other sectors. The large-cap CSI 300 Index gained 0.5% for the week, while the benchmark Shanghai Composite Index rose by 1.7%. The yield on the 10-year government bond increased 6 basis points to 2.90% in China’s bond market. The renminbi remained unchanged versus the U.S. dollar. The official trade-weighted currency index was close to a five-year high. The index measures the renminbi’s value relative to a basket of foreign currencies.

The Week Ahead

Among the important economic data to expect this week are Housing Starts, Retail Sales Growth, and the Leading Indicators Index.

Key Topics to Watch

• Empire State manufacturing index
• Retail sales
• Retail sales ex-autos
• Industrial production
• Capacity utilization
• Business inventories
• NAHB home builders’ index
• Building permits (SAAR)
• Housing starts (SAAR)
• FOMC minutes
• Initial jobless claims (regular state program)
• Continuing jobless claims (regular state program)
• Philadelphia Fed manufacturing index
• Index of leading economic indicators

Markets Index Wrap Up