In October, the balance of opinion seemed to shift towards markets becoming increasingly concerned that the current uptick in inflation would prove anything but transitory. Fears grew that inflation would spike higher for longer. Supply chain bottlenecks and a jump in natural gas, oil, and other commodity prices didn't help. Markets started to anticipate the Federal Reserve beginning to taper its bond-buying operation in November, and at a faster rate than previously expected. In the UK, the Bank of England signalled that it was likely to nudge rates upwards. Last week, it surprised markets by leaving rates unchanged; sterling weakened, which itself is inflationary, and the cost of government borrowing rose. The US 10 Year Treasury yield rose to levels last seen in the early summer. The 10 Year Gilt yield rose to 1.2 per cent in the UK, the highest since May 2019 – well before we had even heard of Covid-19. The price action of gold does not indicate that the market is that concerned about inflation. It was up just 0.9 per cent in October. The other explanation might be that gold does not do so well when bond yields rise or Bitcoin, up 42 per cent, is the new inflation hedge.
The Nasdaq was up 7.3 per cent, and with the S&P 500, +6.9 per cent, ended the month at all-time highs. A solid third-quarter (Q3) results season helped. In Continental Europe, the ECB continued to be very accommodating – the French CAC was up 4.8 per cent, the Italian MIB +2.9 per cent and the German Dax +2.8 per cent. The FTSE All-Share (TR) was up 1.8 per cent, driven higher by the strong performance of FTSE 100 companies – especially the banks and commodity majors. Mid and smaller companies fared less well, with the FTSE 250 up just 0.3 per cent and FTSE Small Cap and Aim down 0.5 per cent and 1.7 per cent, respectively.
Zinc was the most robust industrial metal, up 12.5 per cent over the month as higher energy prices constrained supply. Nickel gained 7.8 per cent, hitting its highest price since 2014, and copper was up 7.0% per cent. Brent oil touched its highest price since 2018, up 6.6 per cent to $83.5 per barrel. The main story in the UK was the spike in natural gas prices. The price of natural gas, having averaged around 55p per therm in the first half of 2021, started to rise, reaching 250p per therm in mid-October. It has come off a little since then, but the futures market shows prices staying above 150p per therm through the winter.