Global equity markets have felt the effect of the troubles facing Evergrande and China’s real estate sector with the risk of contagion creating jitters. The CBOE Volatility Index (VIX) rose above 25 on 20 September, its highest level since May.

Aluminium has continued to build its positive momentum in September as supply concerns are fuelling its ongoing rally. With China cracking down on its coal-intensive aluminium industry, supply is expected to remain potentially tight for years. Aluminium’s futures curve is now in backwardation through to 2025 reflecting a recognition of this tightness among market participants. 

Year on year consumer price index (CPI) inflation for the UK has spiked to 3.2% in August, up from 2% in July. Recreation, transport, and hospitality sectors were among the biggest contributors to the increase as the country has eased restrictions on domestic mobility as well as international travel. The Bank of England has already expressed its desire to reduce the size of its balance sheet, but the actions of the Federal Reserve are likely to provide a blueprint given the US is meaningfully ahead on the inflation curve. 

Year on year consumer price index (CPI) inflation for the US eased slightly to 5.3% in August compared to 5.4% in July. The Federal Open Market Committee (FOMC) is expected to meet on 21-22 September to discuss monetary policy. It is possible that we see additional guidance on when the central bank might start tapering its bond purchases. A drastic shift in policy, however, remains relatively unlikely given the central bank continues to focus on maximum employment. 

Carbon (European Union Carbon Emissions Allowances) have staged a strong rally recently benefitting from the price rally in the European gas market. The extensive damage caused by Hurricane Ida in the US is raising concerns on reduced supply of liquefied natural gas (LNG) to Europe. The supply situation on the gas market is already tight and could tighten further owing to the damage caused by Hurricane Ida. Higher gas prices raise the need to switch to produce coal-fired (emission intensive) electricity, which should subsequently push demand for allowances higher. In addition, the auction supply which tends to be low at this time of the year is also lending a tailwind to carbon prices.

Cotton prices are trading near a seven year high. The unexpected downward revision of the US cotton crop estimate by the United States Department of Agriculture (USDA) coupled with the prospect of tropical storms in key US cotton plantations is lending buoyancy to cotton prices. The impact of the lower US crop is being reflected in global figures. USDA expects the global cotton crop to total 118.8mn bales, with ending stocks set to fall to 87.2mn bales, which is 500,000 bales lower than the prior forecasts. At the same time world consumption has staged a strong comeback at 119mn bales in 2020/21 reported last month, representing a sharp rise from the prior estimates of 102.8mn bales during the pandemic levels.

Sugar prices are being driven higher by the prospect of lower sugar production in Brazil. After severe drought at the start of the year, followed by extreme frost in the Centre-South growing region in July, the volume of sugar cane in 2021/22 has been adjusted lower by the Brazilian Sugarcane Industry Association (Unica). Unica now envisages the volume of sugar cane to be around only 530mn tons compared to 605mn tons last year. Added to that, the world’s second biggest sugar producer India is considering withdrawing its sugar export subsidies from the new season beginning in October given the strong sugar prices. The lack of incentives for the next season could weigh on sugar exports from India. The International Sugar Organisation increased its sugar deficit estimate for the 2021/22 season to 3.83mn tons compared to the prior forecast of a deficit of 2.65mn tons. Global production is expected to increase marginally by 0.2% over the prior year to 170mn tons, while consumption is expected to rise by 1.6% versus last year to 174.5mn tons in 2021/22.

As of 27 August, 85% of Stoxx Europe 600 companies had reported their earnings. Earnings growth of 248% was reported beating estimates of 155% (Source: FactSet). Though European equities were starting from a lower base, given earnings contracted in the fourth quarter while S&P 500 earnings grew slightly, it is still a very positive sign and indicates that pent-up demand is helping Europe emerge from the pandemic.  Among sectors, industrials led the way, but earnings growth took place across sectors in the second quarter.

There are three key implications of this. In the short-term the ‘everything rally’ – a situation when both equities and Treasuries continue to rise in lockstep may continue. Second, the Federal Reserve (Fed) is kicking the can down the road in providing markets with clear guidance on future policy. This creates the risk of policy driving market volatility down the road. Holding all-weather core exposures like quality may prove beneficial. Thirdly, with the Fed now focused on maximum employment, there is little sense of urgency from the central bank to bring inflation in check. Investors may want to consider how they are protecting their portfolios against inflation.

A combination of improving demand outlook from China, which consumes around 60% of global refined aluminium (Citi Research), and tighter supply is helping aluminium outpace other industrial metals this year. China, also the largest producer of refined aluminium, is imposing stricter environmental restrictions on coal powered aluminium production. As producers adapt to the restrictions and switch to cleaner sources of energy, aluminium supply could remain tight for years. As of 24 August, aluminium’s price is up almost 32% year to date compared to just under 20% for the Bloomberg Industrial Metals Subindex (which also includes copper, nickel, and zinc).