Commentary on financial market developments – October 2021
Highlights:
- Decline in natural gas and electricity prices
- ECB to continue quantitative easing
Commentary:
In October, US and European equity markets returned to an uptrend and erased previous losses. Nevertheless, a great deal of nervousness is still evident in the markets, stemming from uncertainty about the further development of the COVID-19 pandemic, inflation and disruptions in supply and demand chains. This, combined with high asset and energy prices, poses a risk of a trend reversal and the onset of a bear market.
Natural gas and electricity prices, after reaching their long-term highs, began to decline in October. Only the price of oil continued to rise and eventually firmed by +7.5%. Energy prices are critical for many businesses and households right now ahead of the start of the Northern Hemisphere heating season. High energy costs would affect the economic growth of northern countries.
The European Central Bank is not going to raise interest rates despite accelerating inflation driven by high energy prices. On the contrary, it will proceed with another bond-buying programme after the end of the PEPP anti-pandemic programme. It will thus continue the quantitative easing it launched in 2015. This, of course, has implications for the euro, which is trading at 14-month lows against the dollar and has weakened -6% against the dollar since the beginning of the year.