Taper, taper – no tantrum yet

Weekly update
  • Weekly market update
  • 5 minute read

A good week for

  • UK, US and European equities, adding 0.7% to 1.3%
  • Oil which advanced 3.7%

A bad week for

  • UK Linkers and Gilts, falling 1.6% and 1.1% respectively
  • EM, Asia and Japanese equities, down 0.5% to 0.8%

Turbo taper

The Federal Reserve (Fed) decided to “keep interest rates at zero and continue the current pace of asset purchases” (or QE) last week. Fed Chair Powell reiterated that economic recovery is dependent on the path of Covid-19, but still anticipates spurring employment while containing inflation - which it continues to view as the result of “transitory” forces. As a result, the Fed indicated that it may well begin to taper its QE programme as early as November, and that steady incremental interest rate increases may follow once this process is complete by the middle of next year. Overall, the Fed’s statement was more hawkish than many observers had anticipated - contributing to a slight pull back in markets last week - but financial conditions are still set to remain accommodative for the foreseeable future.

UK rates

The Bank of England (BoE) left interest rates unchanged at 0.1% last week, despite forecasts showing that inflation was expected to rise above 4% by the end of the year. Supply chain challenges apparent in shops and on petrol station forecourts are hampering the economic recovery and stoking energy costs, but the BoE’s Monetary Policy Committee (MPC) still expect factors driving higher inflation to moderate next year. Nevertheless, two of the nine members of the MPC voted to immediately end the Bank’s QE programme (due to run to the end of the year) on account of inflation concerns. Elsewhere, UK government borrowing figures came in higher than expected in August - £20.5bn versus expectations of £15bn - while retail sales fell for the fourth month in a row. The decline in retail sales was in part due to labour shortages and supply chain disruption, although it was also linked to the removal of restrictions on the hospitality sector.

Inflation and growth

The OECD raised its average inflation forecasts for the G20, expecting it to hit 4.5% in the last quarter before moderating in 2022. Shipping and commodity cost increases notably drove the forecast higher, while a surge in demand and supply constraints are expected as economies reopen. However, the OECD recognises that “sizeable uncertainty” remains: vaccines, the ending of job support schemes, the nature of the post-pandemic workforce, and the nature of consumer spending could all materially impact the path for inflation. Higher inflation is coinciding with moderating growth in many economies, with the latest flash Purchasing Managers’ Indices (PMI) suggesting growth in the US, UK and Eurozone slowed in September for the fourth consecutive month. The confluence of higher inflation and slowing growth is a headache for policymakers navigating the pandemic: persistent inflation or prolonged stagflation are two scenarios they will definitely want to avoid.

US-UK trade

Boris Johnson’s pursuit of a post-Brexit US trade deal met with a tepid response from President Biden at the White House last week. Johnson had earlier hoped to secure a landmark deal before the next General Election, but now seems to be pursuing a more incremental approach, highlighting the lifting of US bans on UK beef and lamb imports, and the suspension of US tariffs on Scotch whisky following the resolution of a long-running trade dispute over subsidies given to Airbus and Boeing. Separately, both leaders talked up tackling climate change, with Biden pledging to increase funding for developing countries to $11.4bn by 2024. Johnson commended the ‘massive contribution’ with only weeks to go before COP26.


The world’s most indebted property company failed to confirm whether a deadline to pay interest due on its dollar-denominated debt had been met last week. Speculation that the company may default had spooked markets, with investors fearing potential heavy losses on equity and bonds might spill over into broader markets and the shadow banking sector. Any failure of Evergrande, with around $300bn of short-term loans outstanding, will likely be managed closely by the Chinese state given its size and systematic importance. It may also auger an overhaul of the property development sector as President Xi Jinping pursues a wider agenda of ‘common prosperity’. Evergrande’s travails may also yet become emblematic of a slower-growth China with global repercussions for commodities and exports.


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The information contained in this article is believed to be correct but cannot be guaranteed. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Opinions constitute our judgment as at the date shown and are subject to change without notice. This article is not intended as an offer or solicitation to buy or sell securities, nor does it constitute a personal recommendation. Where links to third party websites are provided, Close Brothers Asset Management accepts no responsibility for the content of such websites nor the services, products or items offered through such websites.


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