Weekly Market Insight

Weekly Market Insight – 04th October 2021

04th October 2021

A tricky third quarter for investors comes to an end, energy prices squeeze the global economy and Q3 reports from Daft.ie and Myhome.ie validate our take on the Irish housing market. All these stories and more are covered in this week’s insights update from BlackBee.

Economy

The theme of rising energy costs resonated loudly across the global economy last week. Global oil prices hit a 3 year high of over $80 per barrel which appears to be having a negative impact on households. Our chart of the week this week shows that US petrol prices have recently broken through the psychologically important barrier of $3 per gallon and this was a factor in falling US consumer sentiment in September which hit a seven month low.

The consequences of rapidly rising energy demand and constrained supply was also painfully visible elsewhere. Petrol queues in the UK were commonplace last week and gas prices also continue to rise which will squeeze incomes over the winter months and as in the US, are likely to be a factor in consumer and business confidence readings over the period. Even in China we saw the impact as energy blackouts hit factory production. September’s Chinese manufacturing PMI reading illustrated the ultimate impact of this with the manufacturing sector actually contracting in the month, not a good sign for the global economy considering China is the manufacturing centre of the world.

In our view the sharp energy demand and supply imbalance underlines that energy suppliers probably weren’t expecting world economic activity to rebound as quickly and as sharply as it has. The energy squeeze on business and consumers that we’re seeing now is a short-term unintended consequence of this. Thankfully there are solutions to these energy bottlenecks –  there is plenty of spare capacity of oil and gas in particular around the world and this needs to be ramped up sooner rather than later to ease the pressure on businesses and households.

Equities

Last week marked the end of the third quarter, one which proved a challenging one in many markets. Equity markets enjoyed strong momentum for most of Q3, but this began to sag in September as many markets lost around 5%. The past week was another tricky one for equity investors as they struggled to adjust to the recent sharp rise in bond yields. In addition to this, the continued rise in energy prices is intensifying the risk that the rising inflation data of this year will continue into 2022 which could have further connotations for central banks tightening monetary policy. As well as softer than expected headline economic data, the uncertainty around another potential US government shutdown (now averted) also didn’t help investor sentiment.

Bonds

Bonds endured a miserable September and many government bond markets remained on the back foot last week, with yields holding steady or rising slightly following their recent move up. Bond investors appear to be adjusting to recent messages from key central banks that the ultra-loose monetary policies of 2020 and 2021 will reach an inflection point in 2022. Inflation data also remained elevated over the week, another big factor in keeping yields firm. Euro zone inflation reached a 13 year high of 3.4% in September while the milestone in Germany was even more significant with September inflation hitting a 29 year high of 4.1%.

Commodities

Again, the energy sector was the darling of the commodities complex last week as oil prices pushed through $80 dollars and natural gas prices (which rose by nearly 20% last week alone) also rose significantly. The combination of rapidly growing demand (as the economy reopens), the oncoming northern hemisphere winter and supply being carefully managed has led to the current situation. In the short term it looks likely that prices could continue to edge higher in the energy space in the absence of any significant moves on the supply side. In this context, investors will be keeping close tabs on this weeks OPEC+ meeting for any signs that the group is willing to add more barrels into the mix to help avoid economic damage that could be caused by another significant spike in crude.  

Sector News:

Housing – Asking prices for housing nudge higher in Q3

Last week we published a Sector Insights research note on the outlook for the Irish housing market a key message of which was that house prices are capable of grinding higher by mid-single digit percentages over the next couple of years. Against this backdrop it was heartening to see some validation of this view come in the form of the Q3 house price reports published by both Daft.ie and Myhome.ie which saw asking prices in Q3 up around 9% compared with Q3 2020. The main cyclical drivers in our report (economic growth, credit impulse and supply/demand in the market) still appeared to keep prices nudging higher although thankfully there was some early evidence of greater supply for sale which should curb inflation rates. Over the next couple of years we expect the stock of housing available for sale to rise as the supply picture normalises and as housing completions rise. This should help moderate rates of price inflation compared to the strong price gains over the past three quarters.

Commercial Real Estate – Office market activity in Dublin improves in Q3

New data published by Savills last week showed a notable and welcome acceleration in Dublin office market activity in the third quarter. Office take-up reached a total of 396,000 square feet in Q3 – although this was still short of the long term average of 668,000 square feet it still represented a near trebling of the activity in Q2 and a very encouraging development for the office market. Interestingly a lot of the transactions took place in South Dublin and in suburban areas also, a sign of robust lessor demand outside the main CBD area.

Hospitality – Dalata adding more jobs provides a strong signal on the outlook for hotels

Regular readers of our research will know that as a house we are very much of the view that the hotel sector recovery has begun and that trading this summer has been strong. In this vein we were very interested in Dalata’s announcement last week that it was planning on hiring nearly 600 staff across a number of its hotels in the UK and Ireland. Staffing is clearly a huge consideration for the hotel sector and we believe announcements like this are a strong signal of confidence in the outlook for leisure and business travel, both of which will be a massive boost in restoring the sector to full health over the next 2-3 years.

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