Weekly Market Insight

Weekly Market Insight – 27th September 2021

27th September 2021

The Irish hotel recovery is off to a strong start this summer, the hawks are gathering at the US Federal Reserve and is the bond market about to intimidate the equity market again? All these stories and more are covered in this week’s insights update from BlackBee.

Economy

Last week the US Federal Reserve’s (Fed) latest monetary policy meeting was at front and centre of everything in terms of the global economy and market movements. The Fed’s latest ‘dot plot’ (which summarises its outlook for US interest rates) showed a big change from its last outlook in June. Its median expectation interest rates implied a good chance of one rate increase in 2022 followed by three rate hikes in 2022. During the accompanying press conference Chair Powell also hinted that the taper of its bond purchases could begin in November and could be wrapped up by mid 2022. A lot for investors to digest!

Overall we were a little surprised to see equities rally hard on the back of the news. Regular readers will know that we’re sceptical that risk assets (equities, credit and commodities) will be able to continue to perform as strongly in 2022 and beyond facing a headwind of rising interest rates. Furthermore, our Chart of the Week also shows that market implied forecasts for US interest rates suggest that interest rates will trend higher than even the US Fed expects over the next two years. So even more to contend with for markets if these forecasts are correct.

Interestingly, in the aftermath of the Fed meeting government bond markets sold off fairly sharply, perhaps a delayed realisation of the impact of the taper and rate hikes will have on bond markets.  Through time we’ve seen a clear pattern of bond market volatility becoming a forerunner of equity market volatility. In fact former adviser to President Bill Clinton James Carville once quipped that if he was ever reincarnated that he’d like to come back as the bond market because “you can intimidate everybody”. So we’ll see whether the selloff in bonds late last week continues and whether this begins to negatively impact on other investment markets.

Equities

Global equity markets had something of a rollercoaster week. Most markets came under severe pressure on foot of the continued uncertainty around a possible debt default at Chinese real estate firm Evergrande. Nervousness grew as the week moved on, particularly since a deadline on an $84m bond interest payment was apparently missed on Thursday with investors wondering what contagion effect a default could have on borrowing markets as well as on banks and insurers in the region. As the week progressed focus turned to the Fed meeting with the initial reaction being a positive one, US markets in particular recouping some of their early week losses.

Bonds

As we noted earlier the Fed’s monetary policy meeting was a key one for bond markets last week. The immediate reaction to the meeting and subsequent press conference was a muted one however this stability didn’t last as government borrowing costs in many parts of the world moved sharply on Thursday with not even the uncertainty around Evergrande easing the upward pressure on yields. Borrowing costs in the credit spaces also unsurprisingly pushed higher on foot of the events surrounding Evergrande, particularly among emerging market bonds which suffered over the week.

Commodities

On the whole commodities saw a slightly weaker performance last week with slightly stronger energy returns offset by some falls across the metals complex. The US dollar strengthened and real bond yields on foot of the Fed meeting which helped exert some downward pressure on precious metals like gold and silver in particular.  Meanwhile oil prices remained firm as US stocks remain tight, adding to the recent theme of supply being relatively disciplined in the face of the demand recovery as the global economy reflates.

Sector News:

Hospitality – Irish hotel recovery very much on track!

In our sector insights piece on the hospitality sector in May we outlined our view that Irish hotels could recover back to pre pandemic trading levels by 2024 and that the recovery would begin this summer as the economy reopened. The latest data from STR published last week showed that the strong start to the summer season very much continued into August. Overall occupancy at Irish hotels in August came in at 63% compared to 47% for the same month in 2020, all the more noteworthy since COVID restrictions had been eased during 2020’s summer season. We also saw that performances were stronger in provincial hotels compared to Dublin with occupancy coming in at 75% and 54% respectively, helped by the trend towards staycationing this year. So although it’s early days for the recovery, the data show that it’s been a great start so far.

Forestry – Carbon ownership becomes a hot topic

Over the past few months we’ve seen carbon prices rise dramatically in Europe, one consequence of which is that this could add to the value of existing forests. In the context of this development, Minister for Agriculture Charlie McConalogue made some controversial comments last week saying that farmers that planted forests and took advantage of state funding did not own the carbon credits which might accrue from these forests. In our view if carbon prices continue to rise, this looks like a debate that could heat up, particularly for farmers that signed forestry contracts without any mention of the ownership of carbon.

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