Last two months saw rising global government bond yields accompanied by a rally in oil and gas prices. Central banks have a difficult task in front of them – keep interest rates low in a rising energy prices environment, which eventually drives up most prices in the consumer basket. If energy prices hold their ground, for how long central banks will pretend that this is not a problem?
Mixed data on the economics front
U.S. manufacturing increased in September despite longer raw material delays and higher input prices. Rise in the number of COVID-19 cases has negatively affected consumer confidence in U.S., which decreased for the third straight month and was at the lowest level since February – a reading of 109.3 in September from 115.2 in August. During September the number of Americans filing new claims for unemployment benefits rose, although the four-week moving average, which excludes week-to-week volatility, decreased to the lowest level since mid-March of 2020.
European and US equity markets
Eurozone manufacturing growth during September continued but at a slower pace due to supply bottlenecks – IHS Markit final manufacturing PMI decreased to 58.6 in September from 61.4 in August. The input price index was stable in September, showing that bottlenecks continue to weigh on costs. Economic sentiment in Eurozone slightly increased in September, supported by optimism among consumers. On the other hand, Germany’s economic recovery lost its steam in September – IHS Markit Final PMI for manufacturing decreased to 58.4 in September compared to 62.6 in August. Other major economies of the block also showed a slower growth.
Elevated input prices as well as curbs on electricity use negatively impacted China’s factory activity, which decreased slightly in September. Raw materials still are a concern, as sub-index for raw material costs increased to 63.5 in September compared to 61.3 in August.
Benchmark 10-year bond yields
Mixed data on the economics front
Eurodollar is still locked in a large consolidation pattern since July 2020, even if its latest price action warns of possible problems for euro, as 1.1490 and major support level of 1.1300 are now exposed. On the upside, we watch 1.1700-30 level as the likely resistance for the pair. Dollar tends to do good when capital markets are under stress, hence, we closely watch stocks and bonds for a possible FX direction.
With dollar advancing, precious metals had another tough month. Silver saw particularly heavy selling and now is trying not to give its 21.50 lows. There are so many aspects that tell us that silver is “cheap” at current levels, but if that is the case, we would like to see market helping us with rising prices. Gold continued to form a support around XAU/USD 1700-1730 area. As long as the metal is above 1650 dollars per troy ounce, the medium term outlook remains positive.
Equities and govies
With continued rise in government yields equities experienced a significant drop in September. The yield on 10-year treasuries rose from 1.30% to 1.56% and both from a fundamental and technical point of view we are very likely to see a 1.7% yield sooner rather than later. Bearing this in mind, we might see S&P 500 trying to retest its June levels near 4160, though first it needs to clear a 4240-4260 area. As we have already mentioned numerous times both in our monthly memos and during client events, we do not expect a major sell-off yet, so our “Plan A” sees 4100 area in S&P 500 as a support level that will not be broken any time soon.