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Executive Summary
The month of September saw factors beyond the Covid-19 pandemic constraining the performance of the global economy. Most countries are witnessing the tail end of the waves they faced over the last few months and are now looking to brace themselves for economic recovery that is already being witnessed due to fairly successful inoculation drives with some countries even looking towards third/booster shots of the Covid-19 vaccine.
What new factors have been affecting the global economy?
Whilst global economic recovery rebounds, indications that high growth may not be sustainable for long are becoming more prominent. A key highlight of recent weeks has been the Feds decision to cut down on asset purchasing which has had trickle-down effects on global markets.
Federal Reserve’s brings forward a cut in asset allocation: Despite the US economy moving away from fears of overheating, the Fed has decided that it'll likely reduce its monthly bond purchases by November and may even cut interest rates sooner than previously anticipated. The Fed Chairman said that a reduction of its $120bn asset purchase would begin in November as long as job growth in the US is reasonably strong.
China sees growth slow down: Chinas economy slowed down in August due to strict virus controls and regulations on property, retail sales slowed to 2.5%, less than a Bloomberg estimate of 7% while construction investment has been a negative 3.2% in the last 8 months! This reflects on the constraint by the Delta variant on global economic recovery as well.
China’s Evergrande crisis poses growing risk: Stock and bond markets around the world are having a keen eye on China’s Evergrande issue as the large Chinese property developer is on the brink of missing some of its debt payments. If a default takes place some analysts are worried that a domino effect seen similar after the collapse of Lehman Brother in the US during the Financial Crisis in 2009 could come about again. China has responded to the crisis by pumping in $18.6bn into the banking system as an injection of short term cash to support the disturbed markets.
Have the fears of inflation faded?
Movements of prices and the pace of movement have been fairly varied around the world. However recent weeks have indicated that inflation may speed up given the rise in commodity prices and crude oil which has risen over the month.
Commodity prices are rising once again: Commodity prices around the world are rising once again due to a spike in global construction and manufacturing. Base metals such as aluminum and steel have seen fresh rallies while demand for European gas and power in have also seen record demand. Global economic recovery plus the growing scarcity of these resources will likely see prices continue to rise. Similarly OPEC predicts stronger demand for its crude this year and the next due to a combination of rising global fuel consumption and output disruptions elsewhere.
The UK faces the highest inflation figures in years while the US finally sees a slowing pace of price increases: US has seen inflation slowing down with consumer prices increasing at their slowest pace in 6 months this year. This implies that inflation in the US has already see its peak. The UK however has seen a 9 year high in inflation due to consumer prices rising by 3.2% last month as a result of restaurant discount schemes.
Global shipping line have been slowing down due to congestion: The Kiel Trade indicator shows that global trade has been fairly stagnant for the month of August. Bottle necks in shipping have put added pressure to already high global freight costs therefore threatening to reduce the pace of growth.
How have commodities been performing?
Oil prices rise to a 2-month high due to supply worries:
Oil prices started at $72.11 per barrel on the 1st of September rising across the month to a 2 month high of $77.25 a barrel by the 24st of September due to supply constraints such as production remaining hampered in the Gulf of Mexico after two hurricanes and the growing demand for fuel as global production rebounds.
Gold prices fall sharply:
Gold prices fell sharply to $1747.35 an ounce by the 24th of September, starting from $1817.06 an ounce at the beginning of the month. Prices fell due to anticipation and then confirmation that the US Federal Reserve was to ease its monthly bond purchases very soon.
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The latest liquidity crisis at Evergrande could spill over to affect the global economy. Investors are concerned about what the Chinese government can do to solve the crisis. Due to Evergrande’s importance, most expect China to provide some sort of a resolution and for a state owned Chinese government enterprise to take over before it could damage the Chinese economy as well as the global economy.
Compiled by: Emaad Rizwan
Disclaimer: This information has been compiled from sources believed to be reliable but Frontier Research Private Limited does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The recipient of this report must make their own independent decision regarding any securities or financial instruments mentioned herein. Securities or financial instruments mentioned herein may not be suitable to all investors.