US equities have hit new record highs making strong gains in October after a disappointing month in September. According to FactSet (as of 25 October), S&P 500 companies with a more global exposure, i.e., more than 50% revenue from outside the US, have performed even better in the latest earnings season so far than companies with a more domestic focus, i.e., more than 50% revenue from within the US. Energy sector companies continue to deliver strong results while automobile manufacturers, notably Tesla, have leapt up in the last month.

US Treasury yields have continued to rise in recent days with the 10-year yield breaching 1.6% for the first time since June. The US dollar basket has pulled back slightly after peaking at 94.5 earlier in October. In the meanwhile, US inflation rate edged higher slightly in September to 5.4% - up from 5.3% in August. Third quarter US gross domestic product (GDP) growth, expected to be announced on 28 October may prove to be pivotal in determining risk sentiment and alleviating concerns about stagflation (stagnating growth amid rising levels of inflation). 

The European Union’s Emissions Trading System (ETS), the European marketplace for the trading of carbon emission allowances and the EU’s market-based solution to climate change, already sits as the centrepiece of the EU’s strategy on limiting climate change. In June 2021, the EU adopted a European Climate Law, establishing the aim of reaching net zero greenhouse gas emissions (GHG) in the EU by 2050. The law sets an intermediate target of reducing GHG by at least 55% by 2030 compared to 1990 levels. The ‘Fit for 55’ package is a set of policy proposals by the European Commission to achieve this 55% reduction target. In the absence of this legislative package, EU expects to only reduce GHG by 40%. This legislative package announced in July 2021 will be the subject of intense and complicated negotiations in the EU’s lawmaking institutions – the Council of the EU representing national governments and the European Parliament – well into 2022. The final content might also be influenced by the upcoming international climate change negotiations, COP 26, in Glasgow in November this year.

The industrial metals sector has recently faced pressure from an appreciating dollar and lukewarm Chinese economic data. Aluminium has been a notable bright spot in the sector lately as the metal continues to extend its strong run this year. With China cutting its aluminium production since the start of this year to reduce greenhouse gas emissions from its coal-intensive aluminium industry, the metal has been among the top performing commodities this year as a result. Similarly, tin’s falling inventory levels and persistently backwardated futures curve suggest the metal remains undersupplied.

Cotton prices attained a 10-year high at the start of October. Cotton’s price rally is being driven by unfavourable weather events in the key US growing areas coupled with strong demand from China. Added to that, rising crude oil prices are making synthetic fibres more expensive than cotton. The US Department of Agriculture (USDA) estimates a global supply deficit of 4.6mn bales for the 2021/22 crop year after a deficit of more than 7mn bales in the previous crop year. Demand has now recovered from its pandemic-related slump in 2019/20 and is expected to exceed its pre-crisis level this year.

After gaining some ground towards the end of August, gold fell again over September. Despite persistently elevated inflation prints across major economies including the US, Eurozone, and the UK, gold has struggled to build positive momentum this year. This is likely due to a combination of two things. First, inflation expectations have moved largely sideways (as illustrated by 10-year US breakeven rates) since the start of June. This suggests that markets have not yet internalised the notion that higher levels of inflation may persist for longer. If inflation prints remain elevated in the coming months, we may see more investors look to add inflation protection. Second, while gold awaits support from rising levels of inflation, it has faced headwinds from rising yields and an appreciating dollar.

Platinum and palladium have recently faced headwinds due to both demand and supply factors. Supply from South Africa has started to recover following Covid-induced outages last year. On the other hand, the automobile industry – which is the biggest driver of the two metals – continues to face challenges due to semiconductor chip shortages, which may persist until next year. The two metals have also received little respite from their correlation with gold, as the yellow metals remains under pressure from rising yields. Investors looking beyond the ongoing challenges in the auto industry may view the recent decline in prices as creating an attractive entry point for palladium and platinum.

Amid rising prices in the energy sector, crude oil prices are trading around their highest level in three years. Brent oil prices breached $80/barrel on 28 September while West Texas Intermediate (WTI) oil prices traded just under $76/barrel.

With the US Federal Reserve expected to start tapering later this year and potential rate increases on the cards next year, 10-year US Treasury yields have experienced upward pressure since the recent Federal Open Market Committee meeting on 21-22 September. Similarly, the dollar basket has reached its highest level since November last year.

After a slight retreat at the start of the month, the US dollar has made gains in September. The dollar index, a measure of the currency against a basket of world currencies, is now above 93, compared to under 90 at the start of June. In the meanwhile, US Treasury yields have largely been steady despite the recent nervousness in equity markets.