Weekly Market Insight

Weekly Market Insight – 16th August 2021

16th August 2021

UN Climate Change Panel issues dire warning on climate change, 50,000 houses needed per annum needed in Ireland to meet demand out to 2051 and lower unemployment and strong June spending data illustrates an Irish economy in fine fettle. All these stories and more are covered in this week’s insights update from Blackbee

Economy

Last week began with a dire warning for humanity and by extension its economy via the 2021 UN Climate Change Panel report, its first since 2013. In its most urgent call to action to date, the panel noted that even in a best case scenario of drastic cuts in greenhouse gas emissions, global temperatures are still likely to rise until 2050, temporarily reaching 1.5 degrees Celsius above pre industrial levels. In a week where temperatures in Italy hit nearly 49 degrees Celsius (120 degrees Fahrenheit), it’s clear we all have to do our bit to safeguard the planet for future generations.

In more mundane economic matters July inflation reports were filed in many parts of the world. Although investors took solace from US inflation not rising any further (5.4% headline in July, same as June) it remains stubbornly high even when energy prices are stripped out. In Ireland inflation also rose in July to 2.2%, the highest since May 2012! With housing costs also rising (Irish rents and house prices rose by 5.6% and 6.9% respectively in the year to end June according to Daft.ie and the CSO), it is becoming more visible that inflation is broadening out across the Irish and world economies

In the meantime, the global economy thankfully continues to recover. The passing of last week’s US $1.2 Trillion US infrastructure bill should boost the economy there, particularly over the medium to long term. Here in Ireland we saw even more evidence of the impact the reopening of society is having on the Irish economy – our chart of the week this week shows COVID adjusted unemployment in July falling to its lowest level since the pandemic began, largely thanks to the reopening of the hospitality sector.

Equities

Equity markets continued to inch higher last week on the coattails of the strong Q2 earnings season, decent news from the global economy (especially US inflation data for July which printed broadly in line with economists’ forecasts) and the signing of the long awaited infrastructure bill in the US. Asian markets were a little weaker compared to the US and Europe, held back by investor concerns around the COVID delta variant (which is more prevalent in Asia) and also lingering angst around increased government regulation in China. In contrast Irish equities enjoyed a very strong week on the back of good performances across the main banks AIB and Bank of Ireland.

Bonds

Government bond yields pushed slightly higher last week leading to modest losses. Although inflation readings around the world were in line with investor expectations, US yields pushed higher as a result of some ‘Fedspeak’. Specifically Mary Daly, President of the San Francisco Federal Reserve commented in an FT interview last week that in her view she could look to taper bond purchases later in 2021 such was the robust recovery in the US economy. The riskier segments of the bond market (investment grade, emerging market and high yield bonds) also sold off last week in contrast to the moves in the equity market.

Commodities

Commodities were on the back foot last week. Concerns around the growth of the COVID delta variant (particularly in developing economies) and its possible impact on demand dragged many in the sector lower. Sentiment was also hurt by news that the IEA (International Energy Agency) sharply reduced its forecasts for oil demand in the second half of 2021, mainly as a result of the impact of the pandemic on developing economies.
Sector News:
Real Estate – IIP analysis identifies what’s needed to solve Ireland’s housing crisis
We’ve long argued that the solution to addressing Ireland’s housing crisis is a simple one – build more housing stock! However last week’s report from industry body Irish Institutional Property (IIP) showed the scale of the Irish demand that needs to be sated. Its key conclusion was that housing demand could average almost 50,000 units per annum out to 2051 – over double what’s being currently built on an annualised basis in Ireland. Solving this crisis will pay numerous dividends for Ireland – as well as the positive societal impact it will cool the housing market, helping preserve Ireland’s international economic competitiveness. All this in addition to the fact that building increasing numbers of houses will add to the medium-term growth in the Irish economy! So, all in all there’s plenty to play for in solving the crisis.
Hospitality – BPFI Payment data a good omen for hospitality sector
Recent data on occupancy and daily room rates for Irish hotels has indicated a strong opening to trading for the sector as COVID restrictions have been rolled back. Based on the data on contactless spending published last week by the Banking and Payments Federation (BPFI) Irish people also look ready to spend which would represent a hugely positive omen for the second half of the year. More than 2.4 million contactless payments were made per day in June, the highest daily record since the series began in 2016. In our view there is significant ‘dry powder’ which Irish households could spend in forthcoming months. This was perfectly illustrated by further data last week showing that Irish household wealth hit an all time high in Q1 while Irish households also squirreled away another €1.5 Billion in savings in the period.
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