US prices continue to rise, with the US consumer price index (CPI) for October coming in at its highest in three decades. President Biden made a boldly worded response as inflation becomes a growing focus among politicians with their eyes fixed on next year’s midterm elections. Oil prices fell on investors’ expectations that the US could free up strategic reserves to combat energy inflation.

Last week, the US GDP growth figure for Q3 came in lower than expected, while prices moved higher than anticipated and the US Employment Cost Index update rose at its fastest pace in 31 years. The headline increase was driven by the biggest surge in wages since 1982, up 1.5% in the third quarter.

After September’s negative performance, last week proved one of the strongest in a while for equity markets. This rebound followed news that the Biden administration will start to tackle the supply-chain and logistics issues that have been preventing deliveries.

China’s high-yield bond crisis continued last week, with yields on the ICE BofA index of Chinese high-yield US dollar bonds moving above 18% at one stage last week, the highest level in a decade. Further nervousness was caused by one real-estate issuer’s decision not to reimburse USD200 mn of offshore bonds–despite having USD4 bn in cash on its balance sheet.

As expected, last week the European Central Bank hinted at a “moderate” reduction of the bond buying it undertakes as part of its Pandemic Emergency Purchase Programme (PEPP). But ECB president Christine Lagarde refrained from providing a precise timeline and she was adamant that a reduction in PEPP purchases did not mean the ECB would tighten financing conditions.

The rosy US employment picture helped push equities to a new high as US inflation moderated in July. Those looking to fill roles now exceed those looking for work, compelling some small and mid-sized companies to raise wages. Higher prices seem to be keeping the US consumer in check, however, with consumer sentiment hitting its lowest level in a decade.

M&A (mergers and acquisitions) activity is on the rise, as companies coming out of the pandemic with strong balance sheets shop for buying opportunities. Last week ACS, a Spanish construction group, approached Italian transport company Atlantia to buy Italy’s largest motorway network. Two big funds are also eyeing Dutch telecommunications company KPN as a potential acquisition target.

Signs from last week’s SURE programme to finance partial unemployment schemes are highly encouraging for the EU’s plans for recovery fund issuance which could start, we believe, in mid-2021. Last week’s SURE issue was close to 14 times oversubscribed at a rate lower than that for French government bonds of comparable duration.

Donald Trump’s poll numbers were looking increasingly unhealthy at the time of writing, but at least the cocktail of drugs administered to the coronavirus-stricken President appears to have worked.

The impact of political tensions on business is ever more apparent: LVMH of France will not, after all, proceed with the purchase of Tiffany of the US. If, as seems likely, the hand of the French government was involved, this is solid evidence that political sensitivities are increasingly influencing cross-border deals – something that is likely to remain the case just as M&A in general has been declining.

The sell-off in stocks last week showed a certain nervousness about the sharp run-up in tech stocks and the role of big option bets. Indeed, prices in some instances had risen too fast. But this was a technical correction. With the US tech titans generating free cash flow, we do not believe we are facing a repeat of the bursting of the dot-com bubble in 2000. 

The CIO office’s view of the week ahead.We are in the midst of a decisive elections season, from the surprise, poll-defying victory of the conservative coalition in Australia and Indian general elections last weekend to the European parliament elections in the week ahead.

All kinds of reasons can be advanced for the tit-for-tat closure of the Chinese consulate in Houston and its US equivalent in Chengdu. These range from a dispute over quarantine requirements for US diplomats returning to China to an attempt by the Trump Administration to distract from troubling virus news and a real threat to American intellectual property and privacy.

Coronavirus cases in the US are rising and high frequency data in the US such as retail foot traffic and employee working hours have flatlined. Meanwhile, in Q2 results, USD36 bn in trading and fixed-income revenues managed to make up for higher loan provisions for US banks.

In spite of renewed fears of coronavirus clusters in Beijing, data last week suggested the more consumer-oriented sides of the Chinese economy were tracking improvements in industry, with a year-on-year increase in auto sales in May. UK retail sales were also encouraging, but the biggest surprise came from the US where May’s 18% rise in retail sales month on month was double analysts’ expectations.

The short-term pull-back in stock prices last week on the back of persistent virus concerns in the US and elsewhere shows the market remains jittery despite the massive run-up in prices since late March. May data from China showed a relatively fast rebound on the supply side of the economy, but a much slower take-off in consumption, suggesting a ‘reverse square root’ kind of recovery for economies rather than the ‘v’-shaped one markets have been pricing.

Last week, German chancellor Merkel delivered a surprise about-face when she and French president Macron announced a proposal for a EUR 500bn recovery fund in the wake of the coronavirus crisis. The unprecedented plan involves the distribution of grants, rather than loans, to member states in economic need.