During hard lockdowns implemented to curb the spread of the coronavirus, supply of some key items was severely restricted. Well after initial panic buying caused a shortage of essential household items in several markets, some continue to be severely impacted by other shortages as the global economy re-opens.
The ongoing supply shortage of semi-conductors making their way to export markets from China remains a frustration. The shortage has resulted in a surge in vehicle prices, with some manufacturers having to stagger production or, in some cases, shut down entire factories.
Despite such bottlenecks, corporate profits have been a boon for the equity market throughout the pandemic. Since March 2020, the S&P 500 has risen every quarter, advancing 4% on average. Within a positive scenario, pent-up demand should continue to drive revenue growth, while pricing power and operating leverage would help offset inflationary pressures.
On the negative side, energy is a commodity surging in cost due to supply constraints, especially in the European and US markets. Conversely, the rise in energy prices benefits the US – as a net fuel exporter – compared to net importers such as Asia and most of Europe.
European natural gas inventories are roughly 20% below the historical seasonal norms, and with coal inventories in China at low levels too, both economies are more vulnerable to higher fossil fuel prices than the US. According to UBS, with inventories low, the prospect of shortages in the event of a colder winter has intensified worries over stagflation.
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“To the extent that producers can pass on to consumers higher prices – which it seems like they’re able to do – we’re seeing stronger profits, which is helping to give a boost to stocks.”
– Kevin Caron, senior portfolio manager, Washington Crossing Advisors
Global News
- The US inflation rate rose to a 13-year high in September as rising costs for food and shelter pushed the rate up to 5.4%. But the biggest individual category increase was energy, the cost of which has risen by almost 25% in the past year.
- Rising energy prices, and their potential implications on global inflation and interest rates, remain the key themes on the markets. With the acceleration in oil prices, speculation is rife that central banks could embark on a tightening cycle to fend off inflation.
- Meanwhile, seniors and other Americans receiving Social Security benefits in 2022 are likely to see the largest increase in their payments in decades, reflective of the surging inflation during the pandemic. The expected 6% cost-of-living adjustment would be the largest since 1982, according to Social Security Administration data, and could well underpin continued consumer demand. The adjustment is calculated based on the Labour Department’s measure of inflation faced by blue-collar workers.
- This comes as the House on Tuesday voted along party lines to raise the US borrowing limit into December, as Democratic lawmakers wrestled with how to set a new ceiling for US debt later this year over Republican resistance. The bill would increase the debt ceiling by $480 billion, an amount the Treasury Department has said would allow the US to pay its bills through 3 December, assuming it had also exhausted all its cash-conservation strategies.
- With the risk of default deferred, the stock market had its best day since March on 11 October, but also thanks to better-than-estimated corporate earnings and economic reports, which outweighed fears that inflation pressures and supply-chain snarls could crimp growth. All major groups in the S&P 500 advanced.
- A new Guardian visualisation reveals how the “centre of gravity” of global emissions has moved over the past 200 years. The analysis shows how the geographic centre of the world’s carbon emissions used to sit directly atop the UK before being pulled westwards by the US and back towards the east by the rise of China.
- In China, LinkedIn is shutting down its professional networking late this year due to a more challenging operating environment. It will replace the service with a new app for the Chinese market focused solely on job postings. LinkedIn’s action ends what had been one of the most far-reaching experiments by a foreign social network in China, where the internet is closely controlled by the government.
- Apple may slash the number of iPhone 13s it will make this year by up to 10 million because of a shortage of computer chips amid a worldwide supply chain crunch that led the White House to warn that “there will be things that people can’t get” at Christmas. Apple was expected to produce 90 million units of the new iPhone models this year but has told its manufacturers that the number would be lower because chip suppliers including Broadcom and Texas Instruments were struggling to deliver components, Bloomberg reported on Tuesday. Shares in Apple fell 1.2% in after-hours trading on Tuesday, reflecting broader falls in the US stock market and in Asia especially because of fears that the lingering impact of Covid and supply chain problems will spark rampant inflation and hamper growth.
Local News
- Amid an ongoing copper shortage in South Africa, local producer Palabora Mining Company is set to expand its operations in a R10 billion project that will cater for growing demand. Furthermore, the company is currently benefiting from a recent price rally driven by an uptick in economic activity as major economies emerge from the pandemic.
- Local companies operating in the shipping space are increasing their prices, with containers from China increasing in volume and now costing significantly more to rent. In some ports, container rental prices are up four times in the last year alone. The worldwide Harper Index was below 500 in May 2020 and is now close to 4 000 – an eight-fold increase on the average cost per container.
- Business confidence fell to its lowest level in a year in September as firms dealt with the lagging effects of the recent civil unrest, energy and water supply concerns, as well as higher fuel prices. The latest South African Chamber of Commerce and Industry business confidence index slipped to 91 points in September from August’s 91.9 – its lowest level recorded since September 2020, when South Africa began to claw its way back from the initial effects of the coronavirus pandemic and hard economic lockdowns.
- The International Monetary Fund has raised its forecast for South Africa’s GDP growth in 2021 by a percentage point even as it pointed to risks to the global economy – not least of which is higher global interest rates as faster inflation persists – that could see the momentum stall. In its latest World Economic Outlook, released twice a year, the multilateral financier bumped up the country’s 2021 projected growth rate to 5%, a healthy increase from what it expected in July. Unfortunately though, it sees a slowdown to 2.2% in 2022.
- Pacific Investment Management one of the world’s largest global investment management firms, has extended a R3 billion loan to the Development Bank of Southern Africa (DBSA), in what is set to open the floodgates for private funding of green energy in Africa. The cash is intended for DBSA to refinance its green loan book, and in turn to make room for the state-owned financier to grow its book by extending further funds to new renewable power projects in South Africa and beyond.
- South Africans have again been warned to get used to controlled blackouts for at least the next five years. Eskom on Monday implemented stage two load shedding as it struggles to recover from several breakdowns. Supply constraints will be a drag on the level of growth that the country requires to absorb the unprecedented level of unemployment occasioned by Covid-induced lockdowns.
Sources: Dynasty, Mint, Moneyweb, Bloomberg, News24, BusinessLive, New York Times, The Guardian, EWN, etc.
