Stocks Slide in September as Supply Shortages Boost Oil & Gas
Stock markets were able to maintain their footing in August despite being temporarily shaken by volatility. However, September was a different story. The S&P 500 recorded its first negative month of 2021, dipping 4.76%. Canada faired better with oil and financials showing some strength, limiting the TSX decline to 2.5%. The MSCI World Index registered losses that mirrored the US benchmark.
While equities were weak, commodities seemed to have re-ignited as the Bloomberg Commodity Index rose 3.6%. The energy complex paced gains with natural gas up 26.6% in September (up 105% YTD), and WTI crude oil posted a 9.8% jump, bringing its year-to-date vault to 44.3%. While US natural gas price gains have been impressive, the soaring prices across the pond are truly unprecedented. Dutch and UK natural gas prices reached an all time high on 27-Sep-21. Environmental regulations implemented years ago have severely impacted supply, the mandated switch from coal to natural gas has further stressed the situation and governments have not adequately adapted for the intermittency of renewable energy. Further, local supply constraints have been compounded by Russia curtailing distributions to Europe, while demand has also increased 7.6% in the first quarter of 2021. China has experienced similar energy dynamics. The combination of increased prices of coal and natural gas and capped carbon emissions have forced regulators to implement rolling brownouts across the country. At this point, many will hope to avoid a cold winter as any fundamental boost to demand can not be met in the current supply environment.
Outside of energy, grains bounced from its post-April lows, and even lumber, the star of the early 2021 commodity rally, woke up with a 23% leap in September. Counterintuitively, these gains were made while the U.S. Dollar (USD) broke above its 2021 high to advance 2.1%. Since commodities are generally priced in USD, they typically move in opposite directions.
Notably, in a risk-off backdrop, it is typical for the USD to rise when stocks fall. Commodities will also sink in this scenario. As such, the strength in the resource sector was uncharacteristic and it is potentially explained by Fed Reserve Chairman Powell’s comments about inflation and the timing of tapering. Tapering is the reduction in central bank asset purchases and it is positive for the US dollar and negative for equities. Meanwhile, the omission of “transitory” from the Federal Reserves meeting minutes, supports higher commodity prices.
Bond yields broke out to the upside in September. The U.S. Treasury 10 and 30-year yields rose 0.22% and 0.13%, to 1.50% and 2.05%, respectively. Some have tried to justify the rise in rates to the U.S. debt ceiling, which if triggered, would potentially lead to a default on their debt. Treasury Secretary Janet Yellen has told lawmakers the U.S. will not have money to pay its bills by about 18-Oct-21. However, if we zoom out, we see similar yield increases across Europe and even into Asia. If the US yield increase has anything to do with default, then likely this would be a more isolated event and not global in nature. Concurrently, equity leadership has shifted to businesses associated with the re-opening themes; such as Booking Holdings Inc., energy stocks, consumer discretionary companies and financial names. Perhaps these occurrences hint at a more robust economy as 2021 winds down and delta COVID case counts subside. Despite the September equity pessimism, in the absence of a surprise taper and/or Fed rate increase, we are not exceptionally concerned about sustained weakness in stocks to end the year.