As expected, the US Federal Reserve decided to start reducing its monthly bond purchasing program by US$15bn, which should trigger a moderate rise in long-term yields. On the other hand, other major central banks are expected to keep their target rates unchanged till the end of next year. We note global economic activity has been improving. In the US, the services Purchasing Managers’ Index (PMI) surprised to the upside, reaching a record-high level of 66.7 in October. In China, exports surged 28.1% YoY to US$305.7bn in September. So far, Evergrande’s partial default has been contained by the Chinese regulator and the PBoC and we believe a widespread contagion to other sectors of the economy is unlikely. Strong global demand has been driving commodity prices up, with oil prices rising another 10% in October and 70% in 2021, while natural gas prices doubled in 2021. On the pandemic front, we note the Delta variant has only had a moderate impact on global economic growth, which contributed to improved market sentiment.

The US Federal Reserve is already communicating about potential rate hikes in 2022 and a reduction in US Treasury bond purchases, which should result in higher long-term yields. The Fed is expected to announce the start of its tapering this week, while other major central banks are expected to keep their target rates unchanged till the end of next year

The US economy only added 194k jobs in September, the lowest in 2021 and below market expectations of 500k. Meanwhile, commodity prices surged, with oil prices up 10% in September and 55% in 2021, and natural gas prices have doubled year to date, as demand for energy rebounded sharply. Inflation may stay longer than expected, which is likely to affect consumer spending. In China, Evergrande’s partial default on its US$90bn debt and the ongoing regulatory tightening on the tech and education sectors have temporarily scared foreign investors away from Chinese assets. We believe those economic headwinds will be conducive to global market volatility in the coming months. Nonetheless, central banks continue to be accommodative, which, combined with strong economic growth, will support global equity markets in the longer term.

Economic headwinds ahead of Q4. Read the full SystematicEdge October 2021 Monthly FX Commentary for more information about currency drivers and their trends set by fundamental economic data.

The proportion of vaccinated people continues to rise around the world while the number of deaths is decreasing rapidly despite the Delta variant. The global economy is normalizing with key unemployment figures improving, albeit not yet at pre-pandemic levels. Expected growth for 2021 remains strong, led by China. We also note corporate earnings have beaten expectations in major economies. As anticipated, inflation appears to be transitory, with China’s annual inflation rate at 0.8% in August, below market consensus (1.0%), thus easing the pressure on central banks to hike their short-term rates.