Prices & Review

Overview (August 2021)

Markets have generally been holding up in high ground over the summer months. The US and some European equity indices have edged higher to set fresh record highs. Metals prices have been oscillating side-ways at elevated levels. Gold prices have tended to lose ground, and the US dollar has been trending higher, suggesting investors are quietly confident despite the many challenges the world faces. The spread of the Delta variant of Covid-19 has further caused supply chain disruption, with Vietnam particularly hard hit, which is further disrupting and delaying shipping and causing congestion at many ports, especially in China. Geopolitical tensions and uncertainty have arisen with the chaotic American exit of Afghanistan that has left the Taliban with billions of dollars worth of armaments which are likely to only further destabilize the region. The UN’s nuclear watchdog has warned that North Korea appears to have restarted a reactor, suggesting Kim Jung Un maybe once again preparing to test the mettle of the new US President. And, abnormal weather in the Southern Hemisphere has changed weather patterns with snow and frost being seen in Brazil and an extreme drought in Chile, which as well as creating food shortages, which could be inflationary, will be another headache for miners, as their use of water is already in the spotlight.
Annualized sales in July dropped to 14.8 million units, the fourth month-on-month decline since April's 18.5 million figure, and sales in China declined for a third straight month, down 11.9 percent year-on-year. (Europe's ACEA does not publish data in August). As we move into September, we should get a better feel for whether the consolidation in markets was due to the holiday season or whether it is due to the forced slow-down in manufacturing as a result of the supply chain delays. The big picture situation is very complicated at present – markets are waiting to see if central banks start to tighten monetary policy that could start to hit corporate earnings and put the brakes on economic recovery and demand for goods and services. Inflation is picking up. For example, US inflation was 5.4 percent year-on-year in July, compared to 1.4 percent in January. But how transitory will it be? There seems no end in sight to the global shipping disruptions and delays, which is pushing up shipping costs and producer prices – PPI in China and US climbed 9 percent and 7.8 percent year-on-year respectively in July, cross the border and Covid-19 restrictions, not to mention changes after Brexit, are creating labor shortages that are evident all around and that is likely to lead to wage inflation, so inflation may not be as transitory as governments would have us believe. The University of Michigan's inflation expectations for the year ahead climbed to 4.6 percent in July from a range of between 2.2 and 3 percent between 2015 and the end of 2019. But, perhaps a period of inflation will be welcomed by governments if it reduces their debt burden, but being easy on inflation, while tempting, maybe a slippery slope as once inflation gets going, it is hard to stop. But, conversely, un-winding ultra-loose monetary policy will be fraught with risk – given the vast and costly government response to Covid-19, governments can ill afford to get their return-to-normal policies wrong. For now, markets seem to be buoyant but stable.